Principles of Management

Introduction to business and management J. Timms MN1107, 996D107, 2790107

2011 Undergraduate study in Economics, Management, Finance and the Social Sciences This subject guide is for a 100 course offered as part of the University of London International Programmes in Economics, Management, Finance and the Social Sciences. This is equivalent to Level 4 within the Framework for Higher Education Qualifications in England, Wales and Northern Ireland (FHEQ). For more information about the University of London International Programmes undergraduate study in Economics, Management, Finance and the Social Sciences, see: www.londoninternational.ac.uk

This guide was prepared for the University of London International Programmes by: J.N. Timms, BA, MSocSci, Researcher at the Centre for the Study of Global Governance, London School of Economics and Political Science. The 2006 and 2009 editions of this guide were amended and updated by A.E. Benjamin, BSc, MA, Dip Stats, previously at Imperial College Business School. This is one of a series of subject guides published by the University. We regret that due to pressure of work the author is unable to enter into any correspondence relating to, or arising from, the guide. If you have any comments on this subject guide, favourable or unfavourable, please use the form at the back of this guide.

University of London International Programmes Publications Office Stewart House 32 Russell Square London WC1B 5DN United Kingdom Website: www.londoninternational.ac.uk Published by: University of London © University of London 2002, reprinted August 2005, October 2005, and 2006 and 2009 with amendments. Reprinted with minor revisions 2012. The University of London asserts copyright over all material in this subject guide except where otherwise indicated. All rights reserved. No part of this work may be reproduced in any form, or by any means, without permission in writing from the publisher. We make every effort to contact copyright holders. If you think we have inadvertently used your copyright material, please let us know.

Contents

Contents Introduction ............................................................................................................ 1 Aims of the course......................................................................................................... 2 Learning outcomes ........................................................................................................ 2 Reading and learning resources ..................................................................................... 2 Online study resources ................................................................................................... 6 Developing a glossary .................................................................................................... 7 Hours of study and using this subject guide.................................................................... 8 The structure of this course .......................................................................................... 10 Examination advice...................................................................................................... 11 Section 1: The development of business and management ................................. 13 Chapter 1: Concepts, definitions and origins ....................................................... 15 Aims of the chapter ..................................................................................................... 15 Learning outcomes ...................................................................................................... 15 Essential reading ......................................................................................................... 15 Further reading............................................................................................................ 16 Beginning your study ................................................................................................... 16 1.1 The importance of key concepts ............................................................................. 16 1.2 A closer look at business and organisations............................................................ 17 1.3 A closer look at management................................................................................. 19 1.4 The evolution of business and management studies................................................ 21 Chapter review ........................................................................................................... 25 A reminder of your learning outcomes.......................................................................... 26 Sample examination questions ..................................................................................... 26 Advice on answering a question .................................................................................. 26 Chapter 2: Understanding the business organisation – a multidisciplinary approach............................................................................................................... 29 Aims of the chapter ..................................................................................................... 29 Learning outcomes ...................................................................................................... 29 Essential reading ......................................................................................................... 29 Further reading............................................................................................................ 30 Introduction ................................................................................................................ 30 2.1 A multidisciplinary view of business and management ............................................ 30 2.2 Sociological perspectives ....................................................................................... 31 2.3 The anthropology of organisations ......................................................................... 33 2.4 The contributions of psychology ............................................................................. 34 2.5 Economic approaches to organisations................................................................... 36 2.6 The stakeholder model of the firm .......................................................................... 38 Chapter review ............................................................................................................ 39 A reminder of your learning outcomes.......................................................................... 40 Sample examination questions ..................................................................................... 40 Advice on answering a question .................................................................................. 41 Section 2: Decision making .................................................................................. 43 Chapter 3: The management role ......................................................................... 45 Aims of the chapter ..................................................................................................... 45 i

107 Introduction to business and management

Learning outcomes ...................................................................................................... 45 Essential reading ......................................................................................................... 45 Further reading............................................................................................................ 46 Introduction ................................................................................................................ 46 3.1 Organisational goals and objectives ....................................................................... 46 3.2 What is a manager? .............................................................................................. 47 3.3 What do managers do? ......................................................................................... 50 3.4 Decision making and effectiveness ......................................................................... 53 3.5 Planning role ......................................................................................................... 55 3.6 Leadership role ...................................................................................................... 56 3.7 Motivating role ...................................................................................................... 61 3.8 Controlling role ..................................................................................................... 63 Chapter review ........................................................................................................... 64 A reminder of your learning outcomes.......................................................................... 65 Sample examination questions ..................................................................................... 65 Advice on answering a question .................................................................................. 66 Chapter 4: Theoretical approaches to strategic decision making and organisational change .......................................................................................... 67 Aims of the chapter ..................................................................................................... 67 Learning outcomes ...................................................................................................... 67 Essential reading ......................................................................................................... 67 Further reading............................................................................................................ 68 Introduction ................................................................................................................ 68 4.1 Decision making in business .................................................................................. 68 4.2 Theories and models for making decisions .............................................................. 71 4.3 Strategy................................................................................................................. 84 4.4 Analysing the environment..................................................................................... 88 4.5 Organisational change and development ............................................................... 91 4.6 Managing the change process ............................................................................... 93 4.7 Managing resistance to change ............................................................................. 95 Chapter review ........................................................................................................... 97 A reminder of your learning outcomes.......................................................................... 97 Sample examination questions ..................................................................................... 97 Advice on answering a question .................................................................................. 98 Chapter 5: Managing the main functional areas .................................................. 99 Aims of the chapter ..................................................................................................... 99 Learning outcomes ...................................................................................................... 99 Essential reading ......................................................................................................... 99 Further reading.......................................................................................................... 100 Introduction .............................................................................................................. 100 5.1 Functional areas of business organisations ........................................................... 100 5.2 Finance ............................................................................................................... 103 5.3 Human resource management ............................................................................. 108 5.4 Production and operations ................................................................................... 111 5.5 Marketing ........................................................................................................... 113 5.6 Communications ................................................................................................. 117 Chapter review ......................................................................................................... 119 A reminder of your learning outcomes........................................................................ 120 Sample examination questions ................................................................................... 120 Advice on answering a question ................................................................................ 120 ii

Contents

Section 3: Business and the environment .......................................................... 123 Chapter 6: Key internal elements of the firm ..................................................... 125 Aims of the chapter ................................................................................................... 125 Learning outcomes .................................................................................................... 125 Essential reading ....................................................................................................... 125 Further reading.......................................................................................................... 126 Introduction .............................................................................................................. 126 6.1 Organisational dynamics ...................................................................................... 126 6.2 Type, ownership, strategy and size ........................................................................ 128 6.3 Organisational structure ..................................................................................... 131 6.4 New technology and business organisations ........................................................ 140 6.5 Understanding organisational culture................................................................... 143 Chapter review ......................................................................................................... 147 A reminder of your learning outcomes........................................................................ 148 Sample examination questions ................................................................................... 148 Advice on answering a question ................................................................................ 149 Chapter 7: Key external elements of the business context ................................ 151 Aims of the chapter ................................................................................................... 151 Learning outcomes .................................................................................................... 151 Essential reading ....................................................................................................... 151 Further reading.......................................................................................................... 152 Introduction .............................................................................................................. 152 7.1 Studying business within its external environment ................................................ 152 7.2 The economic environment .................................................................................. 154 7.3 The political environment ..................................................................................... 157 7.4 The technological environment ............................................................................. 161 7.5 The cultural environment...................................................................................... 162 7.6 Analysing the business environment ..................................................................... 167 7.7 Summing up ....................................................................................................... 168 Chapter review .......................................................................................................... 169 A reminder of your learning outcomes........................................................................ 169 Sample examination questions ................................................................................... 170 Advice on answering a question ................................................................................ 170 Chapter 8: The diverse and dynamic nature of the business context ................ 173 Aims of the chapter ................................................................................................... 173 Learning outcomes .................................................................................................... 173 Essential reading ....................................................................................................... 173 Further reading.......................................................................................................... 174 Introduction .............................................................................................................. 174 8.1 The international context .................................................................................... 175 8.2 Globalisation and business .................................................................................. 176 8.3 Management of multinational companies (MNCs) ................................................ 181 8.4 Small business organisations ............................................................................... 187 Chapter review ......................................................................................................... 190 A reminder of your learning outcomes........................................................................ 190 Sample examination questions ................................................................................... 191 Advice on answering a question ................................................................................ 191

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Section 4: Contemporary issues in business and management ......................... 193 Chapter 9: Contemporary issues; knowledge management, learning organisations, e-business .................................................................................. 195 Aims of the chapter ................................................................................................... 195 Learning outcomes .................................................................................................... 195 Essential reading ....................................................................................................... 195 Further reading.......................................................................................................... 196 Introduction .............................................................................................................. 196 9.1 Dynamics of business and management ............................................................... 196 9.2 Knowledge management ..................................................................................... 197 9.3 The learning organisation..................................................................................... 203 9.4 Electronic business (e-business) ........................................................................... 207 Chapter review ......................................................................................................... 211 A reminder of your learning outcomes........................................................................ 211 Sample examination questions ................................................................................... 212 Advice on answering a question ................................................................................ 212 Chapter 10: The social responsibilities of business organisations ..................... 215 Aims of the chapter ................................................................................................... 215 Learning outcomes .................................................................................................... 215 Essential reading ....................................................................................................... 215 Further reading.......................................................................................................... 216 Introduction .............................................................................................................. 216 10.1 Business in society ............................................................................................. 216 10.2 Business ethics and managerial integrity ............................................................ 217 10.3 Business and social responsibilities .................................................................... 223 10.4 Corporations as good citizens ............................................................................ 231 Chapter review ......................................................................................................... 235 A reminder of your learning outcomes........................................................................ 235 Sample examination questions ................................................................................... 235 Advice on answering a question ................................................................................ 236 Appendix 1: Sample examination paper ............................................................ 237 Appendix 2: Sources and references ................................................................. 239

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Introduction

Introduction Welcome to 107 Introduction to business and management. You have chosen to study a dynamic subject that will stretch your knowledge and challenge your ideas. This is an introductory course, which is designed to engage you with the key concepts, models, debates and problems in the study of business and management. Developing this foundation will be beneficial to your subsequent study of specialised subjects, because you will be able to make connections between different issues. This introductory course is also a chance for you to develop your academic skills, in particular your critical approach to the ideas you are presented with. Studying at this level means actually engaging with what you are reading: considering what is being said in relation to other theories, practical examples, and your own reflections. The subject of business and management offers an ideal opportunity to develop this academic approach, as a wide variety of groups, individuals and organisations offer diverse opinions and theories regarding the workings of business and successful management. Throughout the course you will be taking an active part in your learning, developing your own responses to what you read and so building a deeper appreciation of issues concerning business and management. It is therefore helpful to view this introductory course as an opportunity to develop a solid framework of knowledge, as well as a critical academic approach. Together these will make your work on this course engaging and stimulating, and will equip you with the tools needed to do well in your future studies. In the remainder of this introductory chapter you will be given advice and guidance on the following: • the course aims and learning outcomes • the reading system • your role in using the subject guide • the structure of the course • preparing for the assessment. It is important to understand all of these at the beginning to ensure that you are able to get the most out of the course. The subject of business and management is an important and exciting one. You will learn about the workings of business organisations, how they function, and how they interact with the environment. The subject also includes how these business organisations are managed, including the strategies used to guide them and the decisions involved in the role of the manager. Studying these issues by following the course as it is designed should ensure that although challenging, it will also be an enjoyable and satisfying experience.

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Aims of the course This course has three main aims, and these directly relate to the major themes that will be emphasised throughout. The course aims to: • provide a comprehensive introduction to the key elements of the business organisation, and to competing theories and models of the firm and its environment, and to provide a critical perspective on the main functional areas of management • build a foundation of knowledge on the different theoretical approaches to management and decision making • develop analytical skills to identify the links between the functional areas in management, organisations, management practices and the business environment.

Learning outcomes On completion of this course, you should be able to: • understand the evolution of the business organisation and management thought, identifying the interconnections between developments in these areas • evaluate alternative theories of management critically, recognising the centrality of decision making and strategic thinking to the managerial role and functions • discuss and compare different models and approaches to understanding the firm, evaluating these in the context of the business environment • explore the impact of key environmental factors on decision making and organisational behaviour • evaluate the significance of contemporary issues in business and management.

Reading and learning resources A vast array of material has been written about business and management, and this is a major reason for the subject being such an interesting one. Many different people, organisations and groups hold widely differing views on issues in this area. You are going to be taking an academic approach to the subject, and this needs to be reflected in your reading. Reading is a vital and central part of your work and successful progress in this course. It is important that you make use of your academic and study skills handbook Strategies for success. This will really help you, because it includes guidance on reading technique. It is possible for everyone to develop their reading skills, and consciously working on this will be of great benefit to you. This subject guide is designed to guide you through academic material in the major areas of business and management, as set out in the syllabus. It is important at this stage to understand the reading system, for this will ensure that you cover all the necessary elements of the main topics in a comprehensive way. The reading system that will be employed consists of three elements, which are explained below.

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Introduction

Essential reading For each topic you are required to study some readings that are essential and compulsory. It is from this material that the majority of your knowledge will be gained. It is therefore vital that you do all the Essential reading specified. All the Essential reading will be listed at the beginning of each chapter. However, it is best to study these readings and the guide in parallel. Therefore you will work from the guide and, at the most relevant points in each chapter, you will be advised which is the relevant reading and when to read it. Please note that when you are advised to read certain pages in a chapter, this will usually refer to the section that starts and finishes on those pages rather than all the text on them. It will be clear from the subject matter of the section which passages you are intended to read. If you flick through one of the chapters of the guide now, you will see how this will work. Key texts One main key text has been selected for this course: Mullins, L.J. Management and Organisational Behaviour. (Essex: Pearson Education, 2010) ninth edition [ISBN 9780273728610].

One secondary key text has been selected to supplement this, because not all topics are covered by Mullins (2010) and this will also offer you an alternative perspective. This is: Daft, R.L. New Era of Management. (Mason, Ohio: South Western: Cengage, 2008) second edition [ISBN 9780324537772].

Detailed reading references in this subject guide refer to the editions of the set textbooks listed above. New editions of one or more of these textbooks may have been published by the time you study this course. You can use a more recent edition of any of the books; use the detailed chapter and section headings and the index to identify relevant readings. Also check the virtual learning environment (VLE) regularly for updated guidance on readings. In the past, Daft’s text (initially titled Management and then New Era of Management) has not changed substantially, apart from updating of case studies, etc. There may be a reordering of chapters. Both of the key texts have new editions produced on a regular basis, but the content of the Essential readings should be clear enough for you to use older versions if necessary. An alternative text which covers the course syllabus in most areas is: Boddy, D. Management: An Introduction. (Harlow: FT Prentice Hall, 2008) fourth edition [ISBN 9780273711063].

Readings in this text will be listed in the Further reading sections at the beginning of chapters.

Further reading Please note that as long as you read the Essential reading you are then free to read around the subject area in any text, paper or online resource. You will need to support your learning by reading as widely as possible and by thinking about how these principles apply in the real world. To help you read extensively, you have free access to the VLE and University of London Online Library (see below).

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At the beginning of each chapter, a list of possible Further readings will be offered. A selection is always presented, but none of them is compulsory. You can select from the list for each chapter when you come to it, if you wish to. Therefore you should not be worried that this list is long: it is only to give you a choice should you want one! You may find it helpful to look at these readings if you are particularly interested. As much reading as possible is always to be encouraged. Again, however, it should be noted that it is the Essential readings that make up the course, and your efforts of analysis and evaluation should be concentrated on these first and foremost. Journal articles Alvesson, M. and D. Karreman ‘Odd couple: making sense of the curious concept of knowledge management’, Journal of Management Studies 38(7) 2001, pp.995–1018. Barlett, A. and S. Ghoshal ‘Matrix management: not a structure, a frame of mind’, Harvard Business Review 68(4)1990, pp.138–45. Beugre, C.D. and O.F. Offodile ‘Managing for organisational effectiveness in sub-Saharan Africa: a culture-fit model’, International Journal of Human Resource Management 12(4) 2001, pp.535–50. Easterby-Smith, M., M. Crossan and D. Nicolini ‘Organisational learning: debates past, present and future’, Journal of Management Studies 38(7) 2001, pp.783–96. Gordan, G.G. and N. Ditomaso ‘Predicting organisational performance from organisational culture’, Journal of Management Studies 29(6) 1992, pp.783–98. Hales, C. ‘Leading horses to water? The impact of decentralisation on management behaviour’, Journal of Management Studies 36(6) 1999, pp.831–51. Jackson, T. ‘Management ethics and corporate policy: a cross cultural comparison’, Journal of Management Studies 37(3) 2000, pp.349–69. Lowe, J., J. Morris and B. Wilkinson ‘A British factory, a Japanese factory and a Mexican factory: an international comparison of front-line management and supervision’, Journal of Management Studies 37(4) 2000, pp.541–62. Nutt, P. ‘Decision-making success in public, private and third sector organisations: finding sector dependent best practice’, Journal of Management Studies 37(1) 2000, pp.77–108. Porter, M. ‘What is strategy?’, Harvard Business Review 74(3) 1996, pp.61–78. Scholte, J.A. ‘Globalisation, governance and corporate citizenship’, Journal of Corporate Citizenship 1, Spring 2001, pp.15–23. Shimomurs, M. ‘Corporate citizenship: Why is it so important?’, Journal of Corporate Citizenship 1, Spring 2001, pp.127–30. Swan, J. and H. Scarborough ‘Knowledge management: concepts and controversies’, Journal of Management Studies 38(7) 2001, pp.913–21. Tsoukas, H. and E. Vladimirou ‘What is organisational knowledge?’, Journal of Management Studies 38(7) 2001, pp.974–93.

Books Agmon, T. and R. Drobnick Small Firms in Global Competition. (New York: Oxford University Press, 1994) [ISBN 9780195078251]. Boddy, D. Management: An Introduction. (Harlow: FT Prentice Hall, 2008) fourth edition, [ISBN 9780273711063]. Cole, G.A. Management Theory and Practice. (London: DP Publications, 2003) sixth edition [ISBN 9781844800889]. Douma, S. and H. Schreuder Economic Approaches to Organizations. (London: Prentice Hall, 2008) fourth edition [ISBN 9780273681977]. 4

Introduction Grint, K. Management: A Sociological Introduction. (Cambridge: Blackwell, 1995) [ISBN 9780745611495]. Grint, K. The Sociology of Work. (Cambridge: Polity Press, 2005) third edition [ISBN 9780745632506]. Held, D., A. McGrew, D. Goldblatt and J. Perraton Global Transformations: Politics, Economics and Culture. (Stanford: Stanford University Press, 1999) [ISBN 9780804736275]. Hofstede, G. Culture’s Consequences: International Differences in Work Related Values. (London: Sage Publications, 1980; abridged edition, 1984) [ISBN 9780803913066]. Huczynski, A. and D. Buchanan Organisational Behaviour: An Introductory Text. (London: Prentice Hall, 2008) sixth edition [ISBN 9780273708353]. Johnson, G. and K. Scholes Exploring Corporate Strategy. (London: Prentice Hall Europe, 2005) seventh edition [ISBN 9780273687399]. Mann, C., S. Eckert and S. Knight The Global Electronic Commerce. (Washington DC: Institute for International Economics, 2000)[ISBN 9780881322743]. Massie, J.L. Essentials of Management. (Upper Saddle River, NJ: Prentice Hall, 1987) fourth edition [ISBN 9780132863377]. Miller, G. Managerial Dilemmas: the Political Economy of Hierarchy. (Cambridge: Cambridge University Press, 1997) [ISBN 9780521457699]. Mintzberg, H. The Nature of Managerial Work. (Upper Saddle River, NJ: Prentice Hall, 1990) [ISBN 9780060445553]. Needle, D. Business in Context: an Introduction to Business and its Environment. (London: Business Press, 2004) fourth edition [ISBN 9781861529923]. Pearson, G. Integrity in Organisations: an Alternative Business Ethic. (London: McGraw-Hill, 1995) [ISBN 9780077091361]. Perman, R. and J. Scouller Business Economics. (Oxford: Oxford University Press, 1999) [ISBN 9780198775249]. Robbins, P. Greening the Corporation: Management Strategy and the Environmental Challenge. (London: Earthscan Publications, 2001) [ISBN 9781853837715]. Scholte, J.A. Globalization: a Critical Introduction. (Basingstoke: Palgrave, 2005) second edition [ISBN 9780333977026]. Senge, P. The Fifth Discipline: the Art and Practice of the Learning Organization. (New York: Doubleday, 1990; second edition, 2005) [ISBN 9780385517256]. Sklair, L. The Transnational Capitalist Class. (Oxford: Blackwell, 2001) [ISBN 9780631224624]. Stonehouse, G., J. Hamill, D. Campbell and T. Purdie Global and Transnational Business: Strategy and Management. (Chichester: John Wiley and Sons, 2000; second edition, 2004) [ISBN 9780470851265]. Tissen, R., D. Andreiseen and F. Deprez The Knowledge Dividend: Creating High-Performance Companies Through Value-Based Knowledge Management. (London: Pearson Education, 2000) [ISBN 9780273645108]. Waters, M. Globalization. (London: Routledge, 1995; second edition 2001) [ISBN 9780415238540]. Wright, S. The Anthropology of Organizations. (London: Routledge, 1994) [ISBN 9780415087476].

Supplementary literature As well as the readings that will be specified within each chapter, you will find it helpful to read up on current issues in major journals, specialist magazines and the business sections of newspapers, etc. Below is a selection of journals which could be useful, and it is recommended that you familiarise yourself on a regular basis with the type of articles and current topics covered by them: • Journal of Management Studies 5


• Asia-Pacific Business Review • European Business Review • The Harvard Business Review.

Other learning resources Gathering case material on particular companies and countries will also help you to develop a critical approach to the theories as you relate them to practice. Building up this material and your knowledge of current business debates, familiarising yourself with key journals, improving your reading skills and developing a systematic approach to your reading are all things that you can begin to do now, today. Remember that reading is key to progress on this course. Also, friends, contacts in business and family members who are active in business can be a useful and relevant resource, because it is very useful to talk to people with practical experience. As well as this, if you know other people studying the subject, it is very helpful to talk through your ideas and to discuss what you are learning. Finally, do not forget your brain – and your capacity to think critically: you will not get far without this!

Online study resources Another additional learning resource for this course is the internet. If you have access to this, you should start to collect relevant websites and become familiar with searching for company information on them. At certain points in the guide you will be directed to internet sites that are relevant to your studies. Unless otherwise stated, all websites in this subject guide were accessed in 2009. We cannot guarantee, however, that they will stay current and you may need to perform an internet search to find the relevant pages. In addition to the subject guide and the Essential reading, it is crucial that you take advantage of the study resources that are available online for this course, including the VLE and the Online Library. You can access the VLE, the Online Library and your University of London email account via the Student Portal at: http://my.londoninternational.ac.uk You should receive your login details in your study pack. If you have not, or you have forgotten your login details, please email uolia.support@ london.ac.uk quoting your student number.

The VLE The VLE, which complements this subject guide, has been designed to enhance your learning experience, providing additional support and a sense of community. It forms an important part of your study experience with the University of London and you should access it regularly. The VLE provides a range of resources for EMFSS courses: • Self-testing activities: Doing these allows you to test your own understanding of subject material. • Electronic study materials: The printed materials that you receive from the University of London are available to download, including updated reading lists and references.

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Introduction

• Past examination papers and Examiners’ commentaries: These provide advice on how each examination question might best be answered. • A student discussion forum: This is an open space for you to discuss interests and experiences, seek support from your peers, work collaboratively to solve problems and discuss subject material. • Videos: There are recorded academic introductions to the subject, interviews and debates and, for some courses, audio-visual tutorials and conclusions. • Recorded lectures: For some courses, where appropriate, the sessions from previous years’ Study Weekends have been recorded and made available. • Study skills: Expert advice on preparing for examinations and developing your digital literacy skills. • Feedback forms. Some of these resources are available for certain courses only, but we are expanding our provision all the time and you should check the VLE regularly for updates.

Making use of the Online Library The Online Library contains a huge array of journal articles and other resources to help you read widely and extensively. To access the majority of resources via the Online Library you will either need to use your University of London Student Portal login details, or you will be required to register and use an Athens login: http://tinyurl.com/ollathens The easiest way to locate relevant content and journal articles in the Online Library is to use the Summon search engine. If you are having trouble finding an article listed in a reading list, try removing any punctuation from the title, such as single quotation marks, question marks and colons. For further advice, please see the online help pages: www.external.shl.lon.ac.uk/summon/about.php

Developing a glossary A glossary is an alphabetical listing of all the words and phrases that you come across that relate to one subject. In this course you are going to come across a lot of new words and ideas. It will be helpful for you to keep a record of these in the form of a glossary. This should keep expanding as you go through the course, so think carefully about how you are going to record them and the best way for you to add in additional entries. Mullins (2010) provides a glossary, as do Daft (2008) and Boddy (2008). These will be helpful to you in this course. If a word is not listed, look in other books or in a dictionary. You might buy one of the dictionaries of business or commerce available (for example, those published by Collins or Penguin). Your own glossary is very helpful for reference throughout your studies and also for your examination revision. In Chapter 1 we will discuss further the main terms and the need for definitions. However, it will be helpful for you to get started with your glossary now, in preparation. Below are some initial definitions (taken from the Concise Oxford Dictionary (1995) (ninth edition) – ‘COD’ for short). You can use these to 7


start your glossary. They are purposely kept short because you need to add to them as you study. You will find lots of definitions in books and, when you do, add good ones to your glossary. Reference the definition so that you know where you found it. You can start this process immediately by looking in your own dictionary and adding to these definitions from there.

Samples for your own glossary • Behaviour – COD: the way one conducts oneself; manners. The treatment of others; moral conduct. The way in which [something] acts or works. [Psychology] the response (of a person or animal, etc.) to a stimulus. (Mullins has a number of entries for the adjective ‘behavioural’: copy these in now.) • Business – COD: many different meanings here; one’s regular occupation, profession, or trade. Buying and selling. A structure. A series of things needing to be dealt with. A commercial house or firm. Something that involves dealing, operations, undertakings. In Chapter 1 we develop the definition: a commercial enterprise or establishment that makes and/or trades in goods or services. • Businessman and businesswoman – COD: people engaged in trade or commerce, especially at a senior level. • Business organisation – This definition is the one we develop in Chapter 1: an organisation (see below) that is both commercial and social, which provides the necessary structures to achieve the central objective of trades in goods or services. • Concept – COD: a notion or an idea that helps us understand some subject. For instance, the concept of motion helps us understand moving objects. (See what Mullins has in his glossary for ‘conceptual ability’. Another common term is ‘conceptual framework’. Add this to your glossary when you come across it.) • Discourse – COD: a dissertation or treatise on an academic subject. (This word is used a lot in sociology and also in literary criticism. In economics and business studies it is hardly mentioned.) • Manage – COD: organise; regulate; be in charge of (a business, household, team, a person’s career, etc.). To meet one’s needs with limited resources (for example, ‘just about manages on a pension’). To take charge of or control (for example, an animal, especially cattle). We will return to many of these terms, so do not worry if you have not fully understood them from this. The idea here is that you have a growing record of useful terms and that you start the habit of adding to this from 1 the very beginning of the course.

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Have a look at the

Glossaries in Mullins

Hours of study and using this subject guide The period of study for a course of this nature is about eight months. You should spend at least seven hours on this course each week. You are about to begin a journey of learning and development, with this subject guide to direct and steer you. This subject guide has been designed to help you to work through these topics in a systematic and thorough manner. It is vital to remember that what you are reading here is not the course in itself, but a guide through the course, which also consists of the reading and your own critical thinking. It is essential that studying this guide is done in conjunction with the reading system outlined above. It is also essential that you develop your 8

(2010) and Daft (2008) now, and then make a start on developing your own.

Introduction

own set of notes as you work through the subjects, and that you engage with the material in a critical way. Your role and the design of the subject guide are explained further in this section. However, it is important for you to have familiarised yourself with your academic and study skills handbook Strategies for success before you embark on the first chapter.

Your role and academic development You have an active role to play as you work through this course. It is not sufficient to view each topic in an isolated way and only to be able to describe what you read about. It is essential that you make a conscious effort to identify links, make comparisons and consider the implications of the different issues as you progress through the course. This will make the issues come to life. Thinking critically is an essential part of this course, and although nobody is born with this skill, it is one that everyone can develop and improve. Remember that there is rarely one correct answer or approach to a question. It is likely that you will be presented with a variety of theories, models or definitions, all trying to explain similar phenomena. Your role is, first, to grasp what each source is saying, but then to question, evaluate and compare it to alternative explanations. Thinking critically is also not just about developing criticisms, but is a process of evaluation, where both the positive and the negative aspects of a theory, study or model are considered. You can begin to develop these skills as soon as you start the first chapter. As you read, ask yourself what you think, how it relates to what you already know, your experience, and what others claim. Actually building into your notes your own reflections and your own responses can be a useful method of developing this skill, and will also be valuable when you come to revise. It can be helpful to make a clear separation between your own thoughts and the notes you take on the main points of the reading, perhaps by highlighting them with a different colour, dividing up the page, or boxing them off. You should note that there is further guidance on thinking critically in Strategies for success.

Chapter structure Every chapter includes a number of consistent features, designed to assist you in your progress through the module. • Each chapter begins by setting out what it aims to achieve, so that it is clear what you should learn. • This is followed by the learning outcomes, so that you know what knowledge you should develop. • The Essential reading is then set out. • Suggestions for Further reading will also be given at this point. • There is a chapter review section at the end of each chapter, including: • the key points that have been made in the chapter • a range of sample examination questions to help test what you have learnt • suggestions as to how one of the examination questions could be answered. You should study this review section to be certain that you have grasped everything you are supposed to have learnt from that chapter, and that you are at the right level to move on to the next chapter. 9


Interactive format In addition to these key features of every chapter, exercises have been provided throughout the guide to help you engage and interact with the material you are studying. Although these are not assessed, the more involved you get, the deeper the understanding you will develop. Different activities have been designed, each with a specific purpose, as follows: • questions, to test your understanding of what you have read • readings, to direct you to relevant sections of the Essential reading and instruct you when to do your reading, as well as sometimes offering questions to ensure that you understand the texts • case studies, to encourage you at specific points to learn about the case of a particular business or to think about the ones you know. There are case studies in both the subject guide and the key texts. It is strongly recommended that you complete these activities as you work through the course. The work you do for some activities will be developed further at later points in the course. Take an active role from the beginning and develop this active learning throughout. This will give you confidence in your knowledge, ability and opinions.

The structure of this course It is important to understand how your course is structured, so that it is easier for you to navigate around the topics and this guide. The syllabus consists of four sections, designed to introduce you to the main theories, debates and issues relating to the study of business and management. Each section deals with several major topics and an indication is given below of the elements that each will include. However, this course deals with a dynamic topic, so it is important to recognise the interrelationships between these themes. Section 1: The development of business and management Concepts, definitions and origins; understanding the business organisation – a multidisciplinary approach. Section 2: Management and decision making The management role; theoretical approaches to strategic decision making and organisational change; also managing the main functional areas. Section 3: Business and the environment Key internal elements of the firm; key external elements of the business environment; the diverse and dynamic nature of the business context. Section 4: Contemporary issues in business and management Business development and information technology; the social responsibilities of business organisations.

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Introduction

Examination advice Important: the information and advice given here are based on the examination structure used at the time this guide was written. Please note that subject guides may be used for several years. Because of this we strongly advise you to always check both the current Regulations for relevant information about the examination, and the VLE where you should be advised of any forthcoming changes. You should also carefully check the rubric/instructions on the paper you actually sit and follow those instructions. Remember, it is important to check the VLE for: • up-to-date information on examination and assessment arrangements for this course • where available, past examination papers and Examiners’ commentaries for the course which give advice on how each question might best be answered. The assessment for this course is via examination, and the guide aims to offer assistance in your preparation for this. It is essential that you make use of your academic and study skills handbook Strategies for success, which gives vital information about the examination process and guidance on preparing for all your examinations. It will really help you to study this now, before you begin, as well as at the time of the examination. In addition, guidance for the examination for the 107 Introduction to business and management course has been built into this subject guide. Each chapter ends by offering four sample examination questions and suggestions of how at least one of these could be approached. At the end of the guide, in Appendix 1, you will also find a sample examination paper. Have a look at this now to understand what you will need to do and what your examination paper will look like. It is important to remember that the examination is the end-method of assessment, rather than the focus of the course. Concentrating on engaging with the issues, building up your knowledge, and developing an academic approach, will not only be more satisfying but will also ensure that you are fully introduced to the subject of business and management.

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Notes

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Section 1: The development of business and management

Section 1: The development of business and management Chapter 1 focuses on the concepts, definitions and origins of the subject you are studying. The chapter aims to act as an introduction to the content that you will be studying and so is a distinct part of the course. Each of the sections will represent a different focus, and so the introductions to each section are designed to prepare you for this change. However, it is also important to recognise the links and connections between these sections, as well as the issues in the chapters within them. The first section will serve two purposes: • The first is to equip you with the understanding you will need of the main key terms you are going to be working with. However, you are not just given definitions. The idea is to offer you a way of developing your own understanding of key concepts and to be able to evaluate the meanings others attach to the terms you will meet. • Secondly, Section 1 discusses the background to the subject so that you can appreciate why and how it has developed. The different influences on its development are important. At first it may be difficult to see how this is relevant to your wanting to understand business and management today, but the developments of today emerge from this background and are often influenced by the major events and theories of the past. Therefore this section is a foundation for the rest of the course. In Chapter 2, we look at different approaches to understanding the business organisation. Several different disciplines are considered; it can be seen from this that the business organisation is an integral part of our social lives and can be studied in many different ways. We will be focusing on how different disciplines have contributed to the field of business and management.

13


Notes

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Chapter 1: Concepts, definitions and origins

Chapter 1: Concepts, definitions and origins Aims of the chapter Each chapter has specific aims. The aims of this chapter are to: • identify the key terms and help you to consider why it is so important to explore them • examine alternative definitions • review different ways in which the concepts are understood and used • explore how business and management emerged as fields of study • enable you to recognise business and management as a dynamic subject, continually changing and adapting.

Learning outcomes By the end of this chapter, and having completed the Essential readings and activities, you should be able to: • define and evaluate the concepts: management, business organisations and organisational behaviour, and appreciate the variety of possible meanings • develop an understanding of the subject’s origins, including the key stages of evolution and the work of the main contributors • identify and evaluate the influence of the subject’s historical context on contemporary developments.

Essential reading This is the first set of Essential readings that make up part of your course. Start by reading the subject guide and you will be directed to the readings listed below at the appropriate stage in the chapter. The main readings are taken from your key text: Mullins, L.J. Management and Organisational Behaviour. (Essex: Pearson Education Limited, 2010). ‘About this book’, pp.xix–xxiv. Read this section now, before you continue, because it provides important advice on using the key text. Also familiarise yourself with the features and resources of the book, such as the useful ‘critical reflections’ at the end of each chapter. Chapter 1 ‘The nature of organisational behaviour’, pp.2–8, ‘The meaning and study of organisational behaviour, Influences on behaviour’, and pp.12–14, ‘Management as an integrating activity’. Chapter 2 ‘Approaches to organisation and management’. Chapter 3 ‘The nature and context of organisations’, pp.77–81, 94–96, ‘Perspectives of the organisation’, ‘Formal and informal organisations only’. Chapter 11 ‘The role of the manager’, pp.426–36, From ‘The meaning of management’ up to and including ‘Management in private enterprise and public sector organisations’.

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You will be using the secondary text in some of the chapters that follow, and you may find it useful to familiarise yourself with its layout now. The structure of the book is explained in its Preface: Daft, R.L. New Era of Management. (Mason, Ohio: South Western: Cengage, 2008).

Further reading The following are the texts which you may like to refer to for additional material. They are not an essential part of the course and should not be the focus of your studies. Boddy, D. Management: An Introduction. (Marlow: FT Prentice Hall, 2008) Chapters 1 and 2. Cole, G.A. Management Theory and Practice. (London: DP Publications, 2000) Chapters 1 and 2. Daft, R.L. New Era of Management. (Mason, Ohio: South Western: Cengage, 2008) Chapters 1 and 2. Massie, J.L. Essentials of Management. (Upper Saddle River, NJ: Prentice Hall, 1987) Chapters 1 and 2.

Beginning your study An important starting point for your study of this course is to identify and understand the main concepts used. This is where we shall begin. As this is the first chapter, there are two general aims: 1. To help you discover a pattern of working that suits you best. Try different approaches: reading for an hour, and then thinking for 15 minutes, for instance. Also try moving between this study guide and the textbooks you have obtained. We all learn in our own way, so use this introductory chapter to find what suits you best. 2. To help you get to grips with the textbooks. Since they have an important role in the course, now spend 15–30 minutes looking through the books. The texts are quite substantial – but do not be apprehensive, since we only use some sections. When there is an Essential reading from, say, pp.10–20, always have a glance at pp.5–10 and 20–25 as well. That way you’ll see more clearly what the author is saying.

1.1 The importance of key concepts The course you are studying is made up of two major concepts: business and management. A concept is a notion or an idea, and in this context it refers to the key terms used to describe our subject. The central concepts that are relevant here include management, business, organisation and organisational behaviour. Beyond these major concepts many others exist, and you will be continually meeting new ones.

Key concepts and your glossary In the Introduction we looked at the value and importance to your study of keeping a glossary of key concepts. Go back to p.6 of the subject guide if you need to refresh your understanding. One of the aims of this chapter is to provide you with the tools for understanding and evaluating the different concepts you come across, both in this course and elsewhere. It is likely that you do have some ideas 16


about what the major terms ‘business’, ‘organisation’ and ‘management’ mean, but it is vital to recognise that competing definitions of these concepts exist. By the end of the course you may well have quite widely differing definitions recorded in your glossary. How we define a term has significant implications for how we understand it, discuss it and research it. Before evaluating a theory or putting forward your own view, it is important to question how the key terms are being used. This can be one of the questions that you ask of the sources you read: are they clear about what the concepts mean? Likewise it is important for you to be clear and to choose the most appropriate meaning for your purpose. For example, how would you construct an entry in your glossary for ‘Production manager’? First, make sure you have the noun ‘product’ and both the noun ‘management’ and the verb ‘to manage’ in your glossary. Then add definitions of production and manager. Finally, enter a definition for a production manager. It is important to remember that each of these words has: • a wide meaning, explained in a dictionary • narrow meanings, particularly when used as part of a phrase selected by writers (such as Mullins and Daft) from the wide meaning. As you can see, a glossary is going to be an important learning tool for you, because understanding the key concepts and being clear about how you use them is vital. Now, before you go any further, make sure you have set up your own glossary! Remember also that the books by Mullins, Daft and Boddy have useful glossaries.

1.2 A closer look at business and organisations Definitions Let’s think about the concept of ‘organisation’. Many definitions are possible, but most of these include the characteristics of people, goals and structures. People are social beings and, by and large, tend to cooperate in interdependent relationships to achieve common aims. Originally people formed simple family and tribal structures. Today we have evolved into a complex society characterised by large, formal and increasingly global structures. For our purposes, then, we can define an organisation as: a social entity that provides the necessary structures to achieve specific aims.

Now take a look in several dictionaries to find variations in the way the term ‘business’ is defined, and be sure to add all your definitions from this section to your glossary. A further point to consider is whether organisations that do not aim to make a profit, e.g. in the voluntary sector, including charities, are included in a discussion of businesses. From your investigation do you think that they should be included? Are organisations that do not aim to make a profit (e.g. charities) also business organisations? For our purposes in this subject guide, we will understand the term business to mean: a commercial enterprise or establishment that trades in goods or services.

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However, the complication of using a general definition emerges again. For instance, the objective of ‘trading’ does not have to be for profit. Therefore the argument can be made that non-profit making organisations can also be regarded as businesses, at least a certain type of business. This would include public sector organisations, since there is increasing demand for these organisations to perform and be managed like profit-making businesses (see Mullins, 2010, pp.82–83, ‘Private and public organisations’ and pp.435–36, ‘Management in private enterprise and public sector organisations’ for further debate on this). Pulling together aspects of different definitions, we can again devise a meaning to suit our needs. Therefore we can define the business organisation as: an entity that is both commercial and social, which provides the necessary structures to achieve the central objective of trades in goods or services.

Activity 1.1 Reading Read the following sections of your key text, making notes as you read: • Mullins (2010) Chapter 1 ‘The nature of organisational behaviour’, pp.2–8. • Mullins (2010) Chapter 4 ‘The nature and context of organisations’, pp.77–81, 94–96. Look at the first reading from ‘The meaning of organisational behaviour’, up to and including ‘Influences on behaviour’ on pp.3–7. Note the term ‘behavioural approach’ and add it to your glossary. The second reading is an explanation of organisations to be found in the sections entitled ‘The context of organisations’; ‘perspectives of the organisation’; ‘the formal organisation and basic components of an organisation’ on pp.77–81, and ‘the informal organisation’ on pp.94–96 in Mullins’ book. Look out for the following as you read: how organisations differ; factors they have in common; the importance of the ‘hidden’ informal organisation; the functions and the basic components. Boddy (2008) Chapter 1, pp.6–9 discusses management and organisations. Activity 1.2 Now try to classify the following as (a) business organisations, (b) non-business organisations, and (c) non-organisations: 1.

a multinational company

2.

the ministry of health in your country

3.

a local football supporters club

4.

a man who issues tickets for an airline

5.

a religious group who worship together.

Feedback Here is the answer: a. 1 b. 2, 3, 5 c. 4. Can you see the reasons for this? If not, go back to the definitions in your glossary.

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Increasingly, in practice, the line between a business and a non-business becomes harder to draw. Many non-business, social organisations also raise money, hire workers and have finance and marketing activities. Also, some government departments have business activities, which may be run as separate business organisations. Organisations of all kinds have functioned for thousands of years – think of some examples. It was not until about 100 or so years ago that people started writing about how to manage them. For the purposes of this guide, we focus on business organisations that aim to make a profit. However, the principles discussed are mostly relevant to not-for-profit business organisations as well. When studying business organisations, a particular interest is the behaviour of these organisations – check now that you have the definition in your glossary.

1.3 A closer look at management The importance of management to organisational performance is generally acknowledged; however, its definition is widely contested. The term is used in many different ways by people from a wide variety of backgrounds. Also, the subject is dynamic and changes over time. The result is that no one accepted definition of management exists, but many of the definitions do include similar elements. Therefore it is again important to investigate different definitions to gain an understanding of the term. Often writers try to capture the dynamic element of management in their definition. A few such definitions are listed below.

Different definitions of management Managing is deciding what should be done and getting other people to do it. (Stewart, 1986, p.12) The first definition of management is therefore that it is an economic organ, indeed the specifically economic organ of an industrial society. Every act, every decision, every deliberation of management has as its first dimension an economic dimension. (Drucker, 1955, p.6) The word ‘management’ identifies a special group of people whose job it is to direct the effort and activities of other people towards common objectives. (Massie, 1987, p.2) Management is a process which exists to get results by making the best use of the human, financial and material resources available to the organisation and to the manager. (Armstrong, 1995, p.1) To administrate is to plan, organise, command, coordinate and control. (Fayol, 1930, p.9)1

Do you see any common elements in these definitions? Read Mullins (p.78) for inspiration. Do you agree with him (see p.2) that ‘it is important to recognise the role of management as an integrating activity in an increasingly global business environment’?

1

All recommended

reading.

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From administrator to manager We can use the last definition, by Henri Fayol, to illustrate the problems that can be encountered when defining key terms, and the importance of ensuring you know how an author uses a concept. The title of his original work was Administration industrielle et générale. In the 1930s translation of his work, referred to in the quote above, administration was seen to be the key concept. In 1949 a new translation changed the word administration in the quote to management, and the title to General and Industrial Management. The reason for this was a fear that using the term ‘administration’ would result in Fayol’s work only being seen as relevant to industry rather than a wider audience, including government. This decision can be seen to reflect a narrowing of the meaning of administration, while the concept of management was seen to have wider application. However, read and consider the following quotation taken from the 1930s translation. It is important not to confuse administration with management. To manage an undertaking is to conduct it towards its objective by trying to make the best possible use of all the resources at its disposal; it is, in fact, to ensure the smooth working of the six essential functions [administration, planning, organizing, commanding, coordinating, controlling]. Administration is only one of these functions, but the managers of big concerns spend so much of their time on it that their jobs sometimes seem to consist solely of administration. (Fayol, 1930, p.9)

In the 1930s translation Fayol saw these two concepts of management and administration as having different meanings, despite one later being used as a direct translation of the other, owing to changing usage. This example therefore vividly demonstrates the need for you to evaluate how key concepts are used.

Defining management Activity 1.3 Reading Read the following sections of your main key text: • Mullins (2010) Chapter 1 ‘The nature of organisational behaviour’, pp.12–14, ‘Management as an integrating activity’. • Mullins (2010) Chapter 11 ‘The nature of management’, pp.426–36, ‘The meaning of management’ up to and including ‘management in private enterprise’ and ‘public sector organisations’. • See also Boddy (2008) Chapter 1, pp.9–11 for a discussion of meanings of management. Now that you appreciate the importance of definitions, see how well you can compare and contrast different ones. As you go through these readings, as part of your note taking, make a list of all the definitions of management you come across. From the list you draw up and the definitions you have read above, what common elements can you identify, and are any of the definitions conflicting? So, concepts are contested and usage can change. All of this can make debates very interesting, but how is it possible to study or employ a concept if defining it is such a problem? This is something which all writers and students face, and recognising that this is an important issue is the first step in getting to grips with a concept. 20


Study tip For your study of business and management, a number of steps can be useful in overcoming this; here is a recap. Step 1 When trying to understand the use of a concept by a particular author, it is important always to look for a definition. How does the author define their concept? How useful is their definition? What criticisms can you see? If an author does not provide a definition, then this can be an important flaw to identify in their work. It can also be helpful to consider how an author uses a concept in comparison to the definition employed by others. Again, this is a good focus for your evaluation of their work. Step 2 When trying to understand a concept in general use, it is important to remember that there is no correct or single definition. Therefore your strategy should again be to evaluate a range of meanings, and from this to pull out some core elements. Let us take the concept of management. We have now considered meanings for the term put forward from a variety of perspectives by various authors. It is by taking account of these different views that the definition given in our sample glossary in the introduction was developed. So, by putting together some of the major elements of different definitions we are able to develop a general understanding of management as: a process whereby a manager is involved in the coordination of resources and the actions of others, for the achievement of goals.

Understanding management in this way stresses the importance of strategy. In this definition the manager is working towards defined goals. Resources and actions will then need to be directed strategically. Decision making is also a central activity. The manager needs to make decisions about the goals to be set, the strategy to achieve them and the best use of resources, including people. Therefore the theme of strategic decision making runs through this guide, and will be explored explicitly in Chapter 4. Step 3 When using a concept yourself, it is important to be very clear about how you are defining it. Always make your own meaning clear. It can be helpful to discuss why you are using this definition, in comparison to the others available. Remember that recognising the complexity of a concept is key to developing a deeper understanding of it.

1.4 The evolution of business and management studies In the rest of this chapter we will consider how business and management studies have developed over time. Chapter 2 of Mullins is Essential reading for this chapter. The purpose of this section is to provide you with a basic summary of the main stages in the evolution of management studies. The stages outlined by Mullins are: • classical (including scientific) management and bureaucracy • human relations • systems • contingency. He also identifies other more recent approaches, as indicated below. 21


Why do you think it is important to study the evolution of management thinking? Jot down your thoughts and then look at Mullins, p.42 for feedback. Take a critical approach as you read Mullins. For each of the approaches summarised below, answer the following questions: • What are the key characteristics of each approach? • Does the approach work in practice – if not, why not? • How did the approach help develop management thinking? • Is the approach still relevant today? • Is the approach only workable in a particular social, cultural and economic context? You will find that Mullins answers most of these questions somewhere in Chapter 2! Finally ask yourself: Does this approach derive from a particular theoretical discipline – if so, which? However, you do not need to consider this at the moment. You will learn more about this in the next chapter of the subject guide.

Classical pioneers The early writers on management and organisations included both actual managers and social scientists. The classical school was predominantly concerned with the development of universal principles to achieve successful management, leading to a prosperous business. This was therefore a prescriptive approach, and is reflected today in the desire for managers to find the formula for success – think of today’s business gurus who claim to have discovered principles such as these. One of the most important classical theorists was Frederick Taylor (1868–1915). His ‘prescription’ was developed from extensive time-and-motion studies of particular jobs, and led to significant changes in the organisation of work to achieve efficiency and increased productivity. Some of the most significant principles he developed include the following: • The planning of a task should be separated from the doing of the task – this principle further justifies the need for managers and their planning role. • Selection of workers for particular tasks should be done through rational decision making – this principle stresses the importance of the manager’s decision making role. • Tasks should be simplified, standardised and require the minimum of movements – this principle can still be seen as important, but in some industries more than others. • There is ‘one best way’ of doing each task, and this should be ‘discovered’ by managers through rational analysis and measurements – this principle highlights the prescriptive approach and supports the rationality of management. The approach outlined here became known as ‘scientific management’ or ‘Taylorism’ after its most important exponent. Other significant contributions to this approach were made by Henry Gantt (1861–1919), who was the first to develop the method of the time-and-motion study, and also Frank Gilbreth (1868–1924) and his wife Lillian (1878–1972). The Gilbreths concentrated on the reduction of movements within tasks, with the aim of increasing production by overcoming fatigue. 22


Scientific management in action This process is suitable in situations where many people can be employed to do simple, standardised tasks, which would be repeated frequently. For example, if one worker was responsible for each of these tasks they would not need much training, and would be able to repeat the task many times. Managers, rather than workers, would plan each of these tasks to ensure minimal movement. The use of technology can also play an important part in minimising the level of skill and number of movements made, and also in standardising both the task and the product. Scientific management dominated the classical school, but this was by no means the only approach. Here are two more.

Bureaucracy At around the same time, Max Weber (1864–1920) was researching and developing a theory of bureaucracy. Weber was a German sociologist and important links can be made here if you study the course on sociology. His interest was in power and authority, and organisational structures. The major influence Weber’s writing has had on the study of business has mainly centred around understanding the need for stability and consistency in achieving efficiency. This approach required workers to be selected on merit for clearly defined roles, and to work within set rules.

Fayol’s principles of management Finally, Henri Fayol (1841–1925), whom we have already come across, made another significant contribution that has influenced the development of this subject. As we have already learnt, Fayol was interested in the concept of administration. Working as a manager, industrialist and theorist in France, he developed a set of General Principles for managing organisations. These were seen as a ‘prescription’ that could be passed on to other managers, being universally applicable, and so indicative of the classical school’s aims. Activity 1.4 Reading • Now read again Mullins (2010) pp.429–31, which contain the principles of management mentioned above. Think of an organisation you know. How many of these principles apply? We will return to this in the next chapter of this guide, where we consider the role of a manager.

Incorporating the human element The next significant stage in the evolution of the subject was the development of the human relations school. Nowadays we are used to hearing statements like ‘people are the life-blood of an organisation’, and with businesses describing their people as their most important asset. However, 50 years ago, concern for workers represented a major shift away from the classical approach of measuring and designing work in a logical way, aiming to increase the efficiency of their production as if employees were themselves machines. The few employers who tried to manage in a more people-friendly way were regarded as mavericks. The human element came to the fore when problems arose in the application of the scientific management technique. Criticisms came from management theorists, social scientists and managers, and from workers who were alienated and exhausted by doing mind-numbing, repetitive tasks. Pay was virtually the only motivator recognised and this sometimes led to angry confrontations between workers and managers. 23


The most famous studies conducted were the Hawthorne Experiments, associated with Elton Mayo (1880–1949) who studied workers under different conditions. As a result, the concept of the Hawthorne effect was developed. This was used to describe a rather surprising result of the research – that increases in productivity were actually found to be related to the fact that the employees were being studied rather than to the working conditions per se. In other words, productivity was improved when workers had something interesting to think about and react with. According to scientific management principles the researchers should have reduced productivity by getting in the way. Instead they galvanised the workers into greater efforts. This finding questioned the value of the scientific management, which did not consider the social and interaction needs of workers. A further influential contribution was that of Abraham Maslow (1908– 1970). Maslow cast doubt on the simplicity of scientific management. He argued that there was a hierarchy of employee needs. Although economic needs are a major motivating factor, other higher-order needs are important to people at work. Each category of need is seen as a different level and these have to be satisfied in order of importance. These include a range of needs: physiological, safety, love, esteem, and finally the need for self-actualisation. Activity 1.5 Reading • Look now at Mullins (2010) pp.260–64 to see a diagram, explanation and evaluation of Maslow’s theory.

Systems and contingency approaches The human relations approach remains popular but there have been other recent developments. The systems theory approach pulls together some of the core components of both the classical and human relations theory. Because organisations are open to the outside world, these ‘open systems’ have to be complex. They include the interactions of people, technology and tasks. Furthermore, as open systems, organisations are seen to interact with the external environment. There are major implications for the study of business and for the role of managers, as the decisions they make depend on a complex number of variables. This idea has links with another related approach, that of contingency theory. This theory goes against the classical school’s search for ‘one best way’ or for universal principles; contingency theorists stress that managers need to adapt their style to match the changing conditions. They claim that the specific variables of each situation need to be considered and decisions made in light of this analysis. This in turn is related to the decision making approach, a specialist area of contingency theory. Proponents of this theory focus on the need for good communication and information flows. The processing of this information, and how it is used by the managers as decision makers, is seen to be a key element of organisational effectiveness and the achievement of business objectives. Again, the business organisation is defined as a system and, as in all three approaches, it is seen as vital to recognise the complexity of the organisation. For decision making theorists this complexity results in uncertainty. However, unlike Weber’s bureaucratic approach for predictability and stability, decision making theory accepts that complexity means uncertainty and so is more focused on managing this uncertainty. 24


Activity 1.6 Imagine that you are a sales manager and you have to make a decision. You have to decide whether or not to recruit an additional member to your existing sales team. Do not spend more than 15 minutes on this. 1. What information would you need in order to make this decision? 2. What situational factors would you need to take into account? 3. Think of three possible decisions you could make, and write a few lines on the different circumstances under which you may have made each decision.

Continued evolution Many of the current developments in business and management are influenced by the evolutionary stages discussed above. The story certainly does not stop here! In fact the story continues at an ever-faster pace. Among the most significant contributors who have influenced contemporary business and management practice are Peters and Waterman in the 1980s, who studied the ‘excellent’ businesses to identify common characteristics of success. (For details, see Mullins, 2010, pp.777–78). Their results have been criticised – unfortunately, also, most of the ‘excellent companies’ they identified did not survive the 1980s, for one reason or another! Other influential contributors to management theory and science worth looking out for when you are browsing in the library, include Philip Kotler, Henry Mintzberg, Rosabeth Kanter and Michael Porter and Peter Drucker. We will consider some of these writings and further developments in the next section, particularly in Chapter 4. Have a quick look through the index to Mullins’ book and see how many you can find. The subject of business and management continues to evolve and react to wider changes and new needs. The final chapter in the guide looks at current trends and emerging issues. So we return to this review of ideas and theories about management and business later on. Developing an understanding of the subject’s origins, as discussed here and in Chapter 2 of Mullins, can really help you to investigate the new themes we discuss later in the subject guide. It is important when reading about any new management tool, organisational theory or business practice to consider how it developed and what influenced its development. Doing so will not only help your understanding of the new development, but will also assist you in your attempts to evaluate its worth. Activity 1.7 Reading Now read the following part of your main key text: • Mullins (2010) Chapter 2 ‘Approaches to organisation and management’. Boddy (2008) Chapter 2 also reviews the different approaches to management.

Chapter review Key points • Concepts are contested and usage can change over time, so no single or correct definition can exist. • Many concepts and ideas are relevant to the study of this course, but the central ones can be identified as management, business organisation and organisational behaviour. 25


• The origins of business and management have a long history, tied to the progress of human society. The creation of a body of theoretical and experimental knowledge has occurred since 1900. • The evolution of ideas about business and management has included a number of important stages, including classical approaches, perspectives that focus on the human element, and a range of theories, which stress the complexity of the subject.

A reminder of your learning outcomes Having completed this chapter, and the Essential readings and activities, you should be able to: • define and evaluate the concepts: management, business organisations and organisational behaviour, and appreciate the variety of possible meanings • develop an understanding of the subject’s origins, including the key stages of evolution and the work of the main contributors • identify and evaluate the influence of the subject’s historical context on contemporary developments.

Sample examination questions When considering these, remember the guidance given in the Introduction about examination preparation. Questions can be answered fully in approximately 45 minutes, under examination conditions. 1. Compare and contrast the approaches associated with the scientific management perspective and the human relations school. Which do you consider to be most relevant to business management today? 2. a. One of the approaches to management theory found under the classical heading is bureaucracy. Identify, describe and evaluate the main features of bureaucracy and the bureaucratic organisation. b. Discuss why public sector organisations might need to follow bureaucratic principles. 3. Discuss the view that the study of the evolution of management theories has no practical value to managers. Reinforce your arguments with reference to appropriate theory and practice. 4. Evaluate the contributions made by three key contributors to the development of business and management as a distinct area of study.

Advice on answering a question To help you further with your exam preparation, we offer below some suggestions for one of the answers. However, it is very important to remember that there is no model or correct answer to any of the questions. It is more important to demonstrate what you have learnt by developing your own response to the question, supported by evidence from the relevant parts of this chapter. 4. Evaluate the contributions made by three key contributors to the development of business and management as a distinct area of study. Examples of the contributors you could consider would include Fredrick Taylor, Henry Gantt, the Gilbreths, Max Weber, Henri Fayol, Elton Mayo, Abraham Maslow, Peters and Waterman, and others you have read about. 26


On introducing your choice of contributors you could explain why you decided on these rather than others. It would be relevant to show that you understand the main points of the work of each, including the way that each one of the three contributors has used concepts, but approaching this in a critical way, showing the merits and problems. It would be relevant to focus on understanding these contributions within their historical context, making comparisons of the schools and traditions from which they developed. It would also be useful to consider how their contribution influenced future developments in business and management, and the relevance of their work today. Therefore, by the end of your answer the reader would be clear why you have chosen these contributors; their significance; that you understand and can make comparative evaluation of their work; and that you can locate this in the wider historical context of the subject.

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Notes

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Chapter 2: Understanding the business organisation – a multidisciplinary approach

Chapter 2: Understanding the business organisation – a multidisciplinary approach Aims of the chapter The aims of this chapter are to: • explore the multidisciplinary nature of the study of business and management • identify the disciplines that have significantly influenced our understanding of business organisations and the behaviour of people • evaluate the contributions made by sociology, anthropology, psychology and economics • assess the stakeholder model of the organisation • appreciate the interconnections and conflicts between different disciplinary approaches.

Learning outcomes By the end of this chapter, and having completed the Essential readings and activities, you should be able to: • discuss the multidisciplinary nature of business and management studies • identify the range of disciplines that have contributed to the subject and which have influenced its development • explain the different ways in which sociology, anthropology, psychology and economics treat business, and then link this to the study of business organisations • consider examples of how to evaluate the usefulness of the contributions made by these disciplines • identify and assess the value of the stakeholder model of business.

Essential reading The Essential readings for this chapter are taken from the key text: Mullins, L.J. Management and Organisational Behaviour. (Essex: Pearson Education Limited, 2010). Chapter 1 ‘The nature of organisational behaviour’, pp.9–12, ‘A multidisciplinary approach’, and up to and including ‘Orientations to work and the work ethic’, and pp.14–18, ‘The psychological contract’ and ‘The changing nature of the psychological contract’. Chapter 4 ‘Individual differences’. Chapter 8 ‘The nature of work groups’. Chapter 9 ‘Working in groups and teams’.

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Further reading You are strongly advised that the Essential reading should be the focus of your study, and that these additional texts (apart from Boddy, which is a more general text) are suggested to deepen your knowledge only if you have the time after fully analysing the Essential reading. Boddy, D. Management: An Introduction. (Harlow: FT Prentice Hall, 2008) Chapter 15, ’Motivation’, pp.489–92, Chapter 17, ’Teams’. Douma, S. and H. Schreuder Economic Approaches to Organizations. (London: Prentice Hall, 2008). Grint, K. Management: A Sociological Introduction. (Cambridge: Blackwell, 1995). Grint, K. The Sociology of Work. (Cambridge: Polity, 2005) Chapters 3 and 4. Perman, R. and J. Scouller Business Economics. (Oxford: Oxford University Press, 1999) Chapter 4. Wright, S. The Anthropology of Organizations. (London: Routledge, 1994) Chapter 1.

Introduction In Chapter 1 we looked at the conceptual foundations for studying business organisation and management and the evolution of theory. We have established that it is not a subject with clear boundaries – it is a growing and developing area of study. In this chapter we try to understand why it is such a complex area of study with so many different, often competing, perspectives. First, we consider how organisations, particularly business organisations, pervade our lives and significantly affect the way we live. Given this scenario, it is not difficult to see that the subject is of interest to many academic disciplines, in particular the social sciences: sociology, psychology, economics and anthropology, all of which have, and are contributing to, the development of theory and practice. Also, we see that because our society is undergoing rapid change, so too does the theory and practice of management and business. Finally, taking this idea even further, we can see that as business and management is of fundamental importance to all members of society, we all – individually and in groups – have different views on how business organisations are structured and managed.

2.1 A multidisciplinary view of business and management Activity 2.1 Think for a moment about how organisations pervade your own life. Can you think of any significant events that have happened to you that did not involve an organisation of some kind? For example, when you were born, how your basic needs were provided for, how you were educated, who looks after your money, how you travel around, and so on. In particular, think about all the business organisations you have had dealings with or been a part of during, say, the last week. For example, who you have bought from or sold to? What services have you experienced? We are going to focus, in this chapter, on sociology, psychology, anthropology (the behavioural sciences) and economics, as they will provide the major theoretical foundations for other chapters in the guide. They are by no means the only relevant perspectives. Politics is an area that is particularly relevant to understanding power and control in 30


organisations – this will come up in later chapters of this subject guide. From the natural sciences, biology offers a view of the organisation as a functioning system and the idea of ‘survival of the fittest’ where only the healthiest businesses will survive in competitive environments. As you will see in Chapter 4, mathematics in particular has offered models and aids for decision making and for providing statistical information to managers. In the earlier days of the subject, engineering had a major role to play. A good example of this is the contribution that Frederick Taylor made through the idea of scientific management. The sciences in general have contributed also to the types of research and methodology used to study organisations. You will see in your next reading (Mullins, pp.2–10) just how varied understandings of organisations can be. For example, the use of different imaginative metaphors for organisations shows just how many ways writers have conceptualised organisations, for example a brain, a machine or a psychic prison. The reading also discusses how, as individuals, we differ in our view of the importance of organisational life at work versus our nonworking life. To some people commitment to the organisation they work for is central to their lives; to others it is being part of a group at work that is important, and for others work and the organisations are merely a means to an end. As students and potential managers, you need to be able to recognise your own current perspectives and to evaluate how the different perspectives can broaden and deepen your understanding of the business organisation. Activity 2.2 Reading What are your current perspectives on, and about, organisations? Begin by reading the following section of your main key text: • Mullins (2010) Chapter 1 ‘The nature of organisational behaviour’, pp.2–10. 1. How we view the world of work will influence what discipline we prefer to use to understand business. Use the classification in this reading to identify your own orientation to work. Also look at the orientations mentioned in Section 3.7 in the subject guide – these are discussed in the work by Goldthorpe et al. 2. Which of Morgan’s metaphors do you favour to describe an organisation? What disciplines do you think have influenced the different organisational metaphors mentioned in the reading?

2.2 Sociological perspectives Sociology is concerned with the study of human society, its origins, how it is organised and how people interact. The definition and boundaries of the discipline are contested, and this is such a wide-ranging subject that many sociologists specialise in the study of a particular area of social life. As part of your studies, you may complete course 21 Principles of sociology. The main ways in which sociology informs us about business and management are to help explain: • how people interact at work • the effects of different organisational structures on people; sociology can particularly contribute to our understanding of social relations within the organisation, such as the interaction of employees, power relations and social groupings • the ways in which business and management have impacts on wider society. 31


Sociologists view organisations as ‘social constructs’, i.e. they exist because of the efforts of people and because people decide to recognise that they exist. An organisation is seen as being made up of many different elements working together and interacting. It is not viewed as an object that has a solid outline. The sociological approach stresses the definition of an organisation as a social entity and one that does not exist in isolation, but is continually interacting with the environment. The classical theories of sociology are concerned with understanding the organisation of social life, change and significant institutions. Max Weber (1864–1920) was one of the founders of modern sociology; we have already read about him in Chapter 1. He studied government organisations in Europe and helped us to understand how administrative structures, hierarchies and authorities could improve the efficiency of organisations. Sociologists are also interested in the role that organisations play in society. Interaction between organisations and the life of individuals and groups in the wider society is a major concern. In particular, this means understanding how changes within the wider society affect organisations. This will be discussed further in Chapter 4 when we look at organisational change. Activity 2.3 Reading Read this short section of your main key text: • Mullins (2010) Chapter 4 ‘Individual differences’, pp.129–30 – from the beginning of the chapter up to but not including the section on personality. Remember this when you look at the issue of organisational change examined in Chapter 4. Can you see how the strategies developed by management need to take account of wider changes in society and also the diversity of the workforce? Industrial sociology is a specialised area concerned with: • how work is organised • workplace conflicts • management–employee relations and especially the role of trade unions • divisions between work and leisure time • links between work and the importance of social class • different labour markets. Studies in the 1950s and 1960s were mainly conducted within the factory setting; hence the name industrial sociology. An example is a study which will be mentioned in Chapter 3, ‘The Affluent Worker: Industrial attitudes and behaviours’, carried out by Goldthorpe et al. (1968). Goldthorpe investigated the ‘embourgeoisement’ thesis. This suggests that a rise in the income levels of working-class employees results in their adopting middleclass values. Therefore the class structure of society is seen to be affected by the behaviour and actions of business organisations. 1

More recently, Grint (1995) uses a sociological approach for management. In doing this he questions the accepted assumptions about what management is or what managers do. He treats concepts such as leadership, control and culture as social constructs. Thus, when society changes, so does the meaning of these words. 32

1

Recommended reading.


An application of sociology – gender relations at work A specific area to which this sociological approach has made a great contribution is our understanding of gender relations within the workplace. Activity 2.4 Reading • Mullins (2010) Chapter 4 ‘Individual differences’, pp.161–62. Read from ‘Diversity, gender and organisations’ to the end of the chapter. As you read this, think about the organisations that you know and remember this when you reach Chapter 3 where we introduce the issue of women and management. 1. Do you think that there are differences in the type of work that male and female employees do? 2. Thinking about an organisation you know, are there differences between the sexes with regard to the numbers working at each level of the business? 3. How can the approach of sociology help us to explain any differences? Think about the wider differences and changes in social relations.

2.3 The anthropology of organisations Anthropology is the study of cultures and societies throughout the world, and shares many of the features of sociology. The discipline emerged in Western countries and was originally focused on non-Western cultures, especially tribes and isolated societies. Anthropologists developed different methods of research from sociologists, because they faced different challenges by studying cultures that were significantly different from their own. More recently anthropologists have studied not only traditional but also industrial societies. 2

Wright (1994) in her book The Anthropology of Organizations draws together a number of anthropological studies that have been done in Western and non-Western organisations, in both the public and private sectors. These usually involve the anthropologist spending time within the organisation to develop an understanding of the behaviour patterns, social groupings, rituals, symbols and language within the organisation or within a particular group of employees. The detailed descriptive accounts made possible by this method, and the collection of data over a significant time length, can yield useful results for understanding problems with organisational efficiency and social relations within the organisation. Furthermore, the issue of national culture can influence aspects of management, and this has become increasingly important as more organisations operate globally. We explore the contribution of anthropology later in Chapters 6 and 7 of the subject guide.

2


Activity 2.5 It is important to note that anthropological research is not without issues that need to be taken into account when evaluating their contribution. For example, Mouly and Sankaran (1995) studied research and development departments in Indian organisations. They described their method as an ‘organisational ethnography’, which was also the title of their book. This is defined as a study of organisations that tries to understand the behaviour of people within it from ‘the member’s point of view’ (1995, p.9). 1. What types of problems do you think the researchers faced? 2. What benefits did the researchers have? 3. Can you think of any reasons why the data collected could be of limited use? 33


Feedback Studies of this kind assume that it is possible for a researcher to understand the world from the view of an employee – not easy even if the researcher comes from the same country. There are also practical limitations on the approach because employees may not welcome such in-depth observation. Also, the time the study takes and the problem of analysing the wealth of data that emerges (for instance, from hourly interviews) make it an expensive approach. Finally, the use of the conclusions may only extend to understanding internal or group culture, but may not offer any practical solutions for improvements.

2.4 The contributions of psychology Psychology is concerned with the study of the human mind. Psychologists engage in scientific research to understand the nature of the human mind and how it works. The processes that are studied include those seen to be determined by the inner mechanisms of the mind and include the processes of perception, memory and learning. Individual differences are a major focus of psychological studies, to try to identify what is normal and abnormal.

Individual differences Activity 2.6 Reading Read the following section of your main key text: • Mullins (2010) Chapter 4 ‘Individual differences’, pp.130–44, ‘Personality’ and up to and including the section on ‘Ability’. It is important to understand what personality is and what influences its development. Be aware of some of the dimensions of personality, especially those that are relevant to the management job. Do not spend too much time on the theories discussed in this reading. In this section about psychology, Mullins looks at theories of personality types in detail, and also points to the significance of key psychologists such as Sigmund Freud and Carl Jung. Remember this when you consider the roles of the manager in Chapter 3. Also, the functional area of human resource management that is examined in Chapter 5 is relevant, as it is this area that is mostly responsible for the selection and training of staff. How would you explain what psychology has to offer business and management? Jot down a few words and then read on. The approach of psychology is most useful for issues that are determined by the processes of the mind. These include how individuals make decisions internally, their performance capabilities, how they can learn, and how they respond to changing conditions. When exploring individual differences in relation to organisations, the personality is important. This refers to the characteristics or traits that together make a person unique and that are stable, so resulting in consistent patterns of behaviour. Theories of how we develop personalities cite a range of possible sources, some hereditary, and so biologically gained, and others social, such as from interactions with family, other groups to which we belong, and culture. Why might a manager want to assess the personality of an employee? Some examples of how an employee’s personality could be important are: • the likelihood that the employee will be suited to a particular type of job • how successful an employee would be in a management role 34


• the method of training that would be most effective • the way that they interact and work with other employees. The research methods employed by psychologists have helped business a great deal. They are used in several ways: First, psychological tests have been adopted to assess the personality and intelligence of potential employees or for decisions about promotions. Tests are also useful to assess the attitudes of employees, and so to try to identify conflicts with group or organisational goals. They are also used by the marketing departments of organisations to understand consumer attitudes for the purposes of promoting the products that will best satisfy the customer. Secondly, the experimental methods of psychology have been used to observe the effect of changes in the workplace, such as in working conditions, or changes to the benefits received by employees. A good example of this was introduced in Chapter 1, that of the Hawthorne experiments. Chapter 3 of this guide will introduce one of the most important contributions that psychological approaches have made to the understanding of organisational behaviour. This is the area of motivation. Psychologists have done many studies of what motivates employees to work or to work well. This is because motivation can be related to the internal decision making processes of an employee, and so the studies are interested in identifying the factors that influence whether an employee decides to work to the best of their ability or not. Examples of these theories that we will consider include those put forward by Hertzberg, Maslow and Vroom (see Chapter 3). Remember to check that you followed up the notes in the guide by reading about these psychologists in the Mullins readings, and also 3 check your glossary is up to date.

3

Refer to Chapter 3 and

your glossary.

Psychological contracts A more recent development is related to motivation, but more specifically to the expectations of both the organisation and the employee. The concept of the psychological contract is used to describe the unwritten agreement of what the organisation and the employee will both give and receive. This approach of psychology is able to add an appreciation of the need to consider commitment, goodwill, understanding, respect, trust and loyalty. Therefore the complexity of employee relations can be understood and this approach can also provide a means of trying to identify threats to the contract and understanding the consequences if the contract is broken. Activity 2.7 Reading Read the following section of your main key text: • Mullins (2010) Chapter 1, ‘The nature of organisational behaviour’, pp.14–18, the sections on the psychological contract and its changing nature. • See also Boddy (2008) Chapter 15, ’Motivation’, pp.489–92. As you read, think about the need for organisational change, which is discussed in Chapter 4. How could an understanding of the psychological contract help to implement a change programme? It may help to consider the elements of the psychological contract that could be affected and to think of the need to overcome resistance to change. 35


Work groups The final contribution of psychological approaches to be mentioned here is that made to our understanding of groups within organisations. Work groups are of interest to psychologists because they consist of a number of people who are psychologically aware of each other, who interact with each other and who perceive themselves to be a group for a particular purpose. This is true whether the groups are formally recognised by the management, such as a production work team or department, or whether they are an informal group, such as can develop within an official work group. Informal groups are just as important to identify and study, because members of these can also be working towards their own goals and can affect the behaviour of others. As teamworking has become an important tool of management, this contribution of psychology is particularly important. The need for teamworking skills is often stressed in recruitment drives and training often aims to develop and enhance these skills. Can you see the relationship between this and the need to understand personality types? Groups are made up of individuals and so the interaction of different personalities can have a significant impact on the success of group work. Therefore, psychological approaches are very interconnected, since they are all concerned with the workings of the employee’s, and also the customer’s, mind. This results in a view of the organisation that emphasises the interaction and interdependences of individual personalities. Activity 2.8 Reading Read these two chapters, which consider groups within the organisation: • Mullins (2010) Chapter 8 ‘The nature of work groups and teams’. • Mullins (2010) Chapter 9 ‘Working in groups and teams’. It is important that you spend some time reading Chapter 8. Do not spend so long on Chapter 9 – the synopsis at the end of the chapter summarises the content well, so make sure you read that carefully. • Another source is Boddy (2008) Chapter 17 ’Teams’. The disciplines of sociology, anthropology and psychology also contribute to our understanding of group processes, because each is concerned with the interactions of people, but on different levels. The aim of these readings is to show you, in a general way only, the importance of understanding human behaviour, both at a social and psychological level. It is not necessary for you to go through these chapters in great detail, but try to identify how the general approaches of sociology and psychology can be linked to, and are useful for, your understanding of business organisations. This task should not take longer than an hour of study time.

2.5 Economic approaches to organisations Economic theory is concerned with understanding the mechanism for the allocation of limited resources to achieve unlimited wants. In a free market, the price system is the mechanism for allocating resources between competing wants. Thus, markets allow the interaction of producers and consumers.

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One of the key elements in business economics is the focus on those activities of the business that are related to profit maximisation. This assumes that the overall mission of the organisation is ultimately to create as much profit as possible, for as long as possible. This would therefore be the guiding principle for all decisions made by managers, at all levels of the organisation. Within the traditional approach of economics, only a simple model of the business organisation is used to facilitate the theories employed by economists. However, there has been interest in how economic theory and organisation theory together can contribute to understanding business organisations, and to providing an economic analysis of organisational phenomena in more depth. Douma and Schreuder (2002) offer such a contribution, stating that: economic approaches to organisations are fruitful whenever the problem to be studied has an economic aspect, that is to say whenever part of the problem deals with the (optimal) allocation of scarce resources. 4 (2002, p.2)

4


Can you relate the relevance of the economic approach to our definition of management? Think for a few minutes, and then read on. The aim of management is to achieve goals through the coordination of available resources. Some of the resources we have already discussed in previous chapters include financial and human ones, and these can be scarce. For example, how likely do you think it would be that a manager would have an unlimited budget or an unlimited supply of employees? Therefore, economic approaches to organisations could help managers make decisions about the most efficient or optimal distribution of staff, or the most effective division of available funds. Douma and Schreuder (2002) offer five economic approaches to organisations, which they note are closely related.

Economic approaches to organisations 1. behavioural theory – this sees the organisation as made up of different participants who each have their own interests (this is a stakeholder approach and is expanded below) 2. agency theory – this approach centres on the idea of the decision making process being delegated to an agent, while the principal or manager is only able partially to observe the agent 3. transaction cost economics – this perspective sees transactional costs together with production costs as being the main factor that determines organisational forms 4. economic approaches to strategic management – an example of this is game theory, discussed in Chapter 3. Mention must also be made of evolutionary approaches to organisations. These overlap with economic approaches. 5. evolutionary approaches expand on the idea that business existence is an example of ‘survival of the fittest’ – as in biology. Thus, economic and evolutionary approaches can be seen as relevant, and attempts to coordinate these with organisational theory have made economics more useful. An example is stakeholder theory, considered in the next section. 37


2.6 The stakeholder model of the firm This final section does not relate to a specific discipline, but considers a particular way of viewing the business organisation. It is a model which represents the business organisation as consisting of a number of interconnected groups. All these groups have a ‘stake’ or a claim in the business, and are referred to as stakeholders: any individuals or groups that may affect or be affected by the organisation’s policies or actions.

Add this definition to your glossary, together with the definition given by Mullins.

Identifying stakeholders Activity 2.9 Before reading on, think about the concept of stakeholders, and who these stakeholders may be. Consider the example of an organisation you know or belong to. 1. Who holds a stake in this example organisation? 2. Who is affected by what the organisation does? 3. Who has an impact on what the organisation does? 4. Are you a stakeholder in that organisation, and if so, what stake do you hold? A useful approach for understanding the different types of stakeholder that make up the organisation is provided by Carroll (1993, 62), where a distinction is made between primary and secondary stakeholders. • Primary stakeholders include all those directly involved on a permanent basis with the organisation, for example employees, managers and shareholders. • Secondary stakeholders are more wide-ranging because they do not have a constant involvement, or this is not as strong; they often change as well, for example customers, the community, temporary employees, occasional suppliers, competitors and the government. With regard to the primary and secondary categories, both of these involve stakeholders who are internal and external to the organisation. One contribution to this view of the organisation was made by the economic approach of behaviour theory mentioned by Douma and Schreuder (2002). Within this view, each participant or stakeholder is seen to receive inducements from the organisation; for example, in the case of employees this would be their payment. In return for the inducement, the participant makes a contribution. However, this view has significant implications for decision making, as each participant or participant group is seen to have their own objectives, and so bargaining is needed to arrive at the decision or goal that satisfies the different objectives to the greatest extent. This is related to the idea of ‘satisficing’, introduced in Chapter 4. It also addresses one of the main problems of economic approaches, the focus on one goal (such as profit maximisation). Instead, stakeholder theory views the organisation as a coalition of participants. Thus it is easier to argue that the organisation has more than one objective. Different groups have their own, including those external to the organisation, that can put pressure on businesses to behave in a certain way.

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Shareholders

Distributors

Employees Competitors The business

Government

Suppliers

The community

The general public Consumers

Pressure groups

Figure 2.1 Stakeholder groups It should be noted that Figure 2.1 shows stakeholder groups that could be divided again, depending on the individual business. For example, employees could be divided into temporary and permanent. Each group will also have different amounts of power or involvement in the organisation. (This will be discussed in more detail in Chapter 10 of the subject guide in the context of social responsibility.) Furthermore, the term stakeholder can be used to represent the natural environment, which may also be affected by the operations of the business. This concludes our consideration of some of the disciplines that inform, and are informed by, business and management. Keep in mind the overlap between these contributions. Comparisons between different views of a firm are a useful tool for evaluation. As we are focusing on business and the business environment in this section of the course, the stakeholder approach in particular can help us to understand the complexity of the organisational context. The stakeholder model of the firm provides a framework for analysing the ways that different groups are affected by or contribute to the behaviour of a business. It has been developed further by attempts to understand the different groups to which the organisation has responsibilities, and this will be examined in Chapter 10. The stakeholder model can help us to assess both the internal and external factors that affect the management of business organisations, and so this model will be useful in the remaining chapters of this section of the course, as we investigate the business environment in more detail.

Chapter review Key points • The study of business and management is not a subject with clearly defined boundaries. • It is necessary and helpful to appreciate the contributions that different disciplines have made to our understanding of organisational behaviour and management, so as to avoid simplistic explanations and definitions. • Sociological approaches emphasise the importance of social relations within organisations.

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• Anthropological approaches focus on understanding the culture, language, symbols and rituals of organisations, by in-depth and lengthy studies. • Psychological approaches emphasise the importance of individual differences and personalities for understanding employee capability, motivation and group interaction. • Economic approaches focus on the activities of the organisation that result in profit maximisation and the optimal allocation of resources to achieve this. • Viewing the business organisation as a coalition of stakeholders can help us to understand the complexity of the organisational context.

A reminder of your learning outcomes Having completed this chapter, and the Essential readings and activities, you should be able to: • discuss the multidisciplinary nature of business and management studies • identify the range of disciplines that have contributed to the subject and which have influenced its development • explain the different ways in which sociology, anthropology, psychology and economics treat business, and then link this to the study of business organisations • consider examples of how to evaluate the usefulness of the contributions made by these disciplines • identify and assess the value of the stakeholder model of business.

Sample examination questions When considering these, please remember the guidance given in the Introduction about examination preparation. Each question is designed to be answered fully in approximately 45 minutes, under examination conditions. 1. Evaluate the contributions that two particular disciplines have made to your understanding of business organisations and their management. 2. a. Explain what you understand by the term ‘personality’. b. Discuss four factors that might affect the development of a person’s personality. c. Discuss four personality characteristics that you consider necessary in an entrepreneur. Justify your choice and use examples to reinforce your answer. 3. ‘The study of business and management can be described as multidisciplinary.’ Discuss. 4. a. Explain what is meant by the term ‘psychological contract’. b. Discuss the individual and organisational expectations in this context. Illustrate your answer with relevant examples.

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Advice on answering a question To help you further with your exam preparation we offer below some suggestions for one of the answers. However, it is very important to remember that there is no model or correct answer to any of the questions. It is more important to demonstrate what you have learnt by developing your own response to the question, supported by evidence from the relevant parts of the chapter. 3. ‘The study of business and management can be described as multidisciplinary.’ Discuss. This is a general question which offers the opportunity for many different kinds of response. However, all answers would need to state whether you think that it actually is multidisciplinary. The complexity of the issues covered in the subject could be reflected on, and how important these are – therefore being relevant concerns for a number of disciplines. The evolution of the subject could be considered and also those who contributed to its becoming an area of study; links could be made here to Chapter 3. The contributions that make the subject multidisciplinary will need to be identified, and these would need to include more than the four concentrated on in the chapter. Your answer could be expanded. For instance, look at the influence that one or two of the disciplines have had and illustrate your answer with example studies.

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Notes

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Section 2: Decision making

Section 2: Decision making This section of the guide contains three chapters. The focus of the section is decision making, a core theme throughout the course. Decision making is a key activity in the management of business organisations, ranging from the daily decisions related to operations in the workplace, to the long-term decisions which will affect the future direction of the business organisation. In Chapter 3, the role of the manager will be considered, asking what managers actually do. It will be helpful to think about the managers that you know and what you think they do. The first chapter in the section is organised so that you will explore the central activities of managers, such as planning, leading, motivating people and controlling. Decision making is seen as central to all of these roles. In Chapter 4, the focus is on strategic decision making, such as the longterm decisions mentioned above. We will also consider change in the organisation, which both results from decisions and demands further ones. The aids that managers can use in making decisions will also be examined, as well as different theoretical contributions as to how decisions are best made. Chapter 5 allows you to explore the different functions that a business can be made up of, such as marketing, human resource management, finances, communications and operations. Some of these are the subject of other courses; here you should aim to gain an overview of the role of managers in business organisations.

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Notes

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Chapter 3: The management role

Chapter 3: The management role Aims of the chapter As the first chapter in Section 2, this chapter focuses on the role of the manager. Specifically, it aims to examine: • the different types of managers • the various roles that managers play • what managers actually do at work • styles of management behaviour and managerial effectiveness • how managers make decisions.

Learning outcomes By the end of this chapter, and having completed the Essential readings and activities, you should be able to: • identify factors that contribute to differences between types of management, the attributes valued in managers and the expectations placed on the work of the manager • understand the limits of management behaviour theories, and appreciate the practical constraints that managers face in reality • discuss the idea of managerial effectiveness and evaluate approaches to measuring how successful a manager is • identify the types of decisions relevant to the different areas of the manager’s job.

Essential reading The reading for this chapter is taken from Mullins (2010) and, as in the last chapter, it is important for you to read these sections when instructed to do so by the guide. Mullins, L. J. Management and Organisational Behaviour. (Essex: Pearson Education Limited, 2010). Chapter 7 ‘Work motivation and job satisfaction’, pp.252–64, ‘The meaning of motivation’, up to and including ‘Maslow’s hierarchy of needs theory’, pp.265–67, ‘Herzberg’s two-factor theory, pp.268–71, ‘Vroom’s expectancy theory’. Chapter 10 ‘The nature of leadership’, pp.372–84, ‘The meaning of leadership’, up to and including ‘Contingency theories of leadership’, pp.386–87, ‘Vroom and Yetton contingency model’, pp.387–89, ‘Path-goal theory’, pp.391–95, ‘Transformational leadership’, and ‘Inspirational and transformational leadership’, pp.397–402, ‘The leadership relationship’, up to and including ‘Leadership effectiveness’. Chapter 11 ‘The role of the manager’, pp.442–48, ‘The attributes and qualities of a manager’ up to the end of Chapter 11. Chapter 12 ‘Managerial behaviour and effectiveness’, pp.457–64, ‘Managerial style’ up to and including ‘The managerial/leadership grid’, pp.467–77, ‘Management by objectives’ up to and including ‘Measures of effectiveness’, pp.480–90, ‘The management of time’ up to the end of Chapter 12. Chapter 14 ‘Organisational strategy, ethics and responsibilites’, pp.542–50, ‘The importance of strategy’, up to and including ‘Strategy, opportunities and risk’. 45

107 Introduction to business and management Chapter 17 ‘Organisational control and power’ pp.665–71, ‘The controversial nature of control’, up to and including ‘Forms of control’, pp.673–691, ‘Characteristics of an effective control system’, up to and including ‘The concept of empowerment’.

Further reading These readings will provide you with further detailed information if you are particularly interested in a subject, but again do remember that they are not an essential part of the course and so you should always do the Essential reading first! Boddy, D. Management: An Introduction. (Harlow: FT Prentice Hall, 2008) Chapters 1, 6, 14, 15 and 19. Daft, R.L. New Era of Management. (Mason, Ohio: South Western: Cengage, 2008) Chapters 7, 18 and 19. Mullins, L.J. Management and Organisational Behaviour. (Essex: Pearson Education Limited, 2010) Remaining sections of chapters mentioned in the Essential reading above. Huczynski, A. and D. Buchanan Organizational Behaviour: An Introductory Text. (London: Prentice Hall, 2006) Chapters 8 and 21. Mintzberg, H. The Nature of Managerial Work. (Upper Saddle River, NJ: Prentice Hall, 1990).

Introduction In this chapter of the guide we consider further the role of management in an organisation. In other words, what role or roles do managers play? Once more we focus on business management. The first section looks very briefly at organisational goals and objectives since, for the manager, these come first. We look at them in greater detail in Chapter 4 of this guide. The second section of the chapter looks at what managers do and what makes a good manager. The third section considers each of the main ‘roles’ played by managers – making decisions, planning, providing leadership, motivating and controlling.

3.1 Organisational goals and objectives This section is purposely kept short. It is put here to remind us that managers need goals to work towards. How they go about achieving those goals is the subject of the rest of this chapter. This short note is a reminder that clear and achievable goals must come first. If a manager does not have goals, how can he or she hope to be effective? Activity 3.1 Reading The Essential reading for this section is: • Mullins (2010) Chapter 14 ‘Organisational strategy, ethics and responsibilities’, pp.542–50. An alternative reading can be found in Boddy (2008) Chapter 6 ‘Planning’, pp.194–98. We look at goal setting in more detail in Chapter 4 of this guide, so for now read through these pages quickly – do not spend more than half an hour on this reading at the moment. You can look back at this reading when you move on to Chapter 4.

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3.2 What is a manager? Activity 3.2 Start by writing down a few sentences in answer to the question ‘What is a manager?’ We established one definition in Chapter 1, which defined a manager as: ‘a person who is responsible for co-ordinating resources and the actions of others, for the achievement of goals’. According to our definition, managers: • are involved with leading people to achieve goals • need to coordinate the actions of people, together with other resources, such as money, materials and technology. Therefore, managers are more than leaders. They are a group of people who have in common their responsibility of achieving goals through the coordination of all resources. Activity 3.3 Next, think what factors make for differences between managers. Some are suggested by the definition – spend a few minutes thinking about this. In general, differences that occur can be attributed to: • the type of organisation and its size and structure • the level (junior, middle, senior) of management • what it is that is being managed (products, services, finance, etc.) • the company and personal goals • the style of management • where the manager is working and where he or she comes from • who the manager is working with. We explore some of these differences below. If you look at these factors again you will see that they fall into two categories – those that relate to the business structure and its objectives, and those that relate to the individual manager and his/her objectives. Now, look at Mullins (2010) p.437, Figure 11.5. Notice that, as already noted above, there are several environmental factors that will have an effect on the nature of the manager’s job.

Differences between managers 1. Levels and functions of management In Chapter 6 of this guide we look at different organisational structures and you will see how these affect management structures. Figure 3.1 shows how management hierarchies are commonly described. Modern thinking has reduced the layers of management, especially ‘stripping out’ middle managers and ‘empowering’ junior managers. We will come back to this when we look at ‘business process re-engineering’ (BPR) later in the guide.

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Top, strategic or board -level managers

Senior-level management

Middle-level management

Junior-level managers

General and functional managers such as production, sales, distribution, purchasing, marketing, sales, finance administration, personnel and human resources, etc. (Some of these work at the strategic level alongside senior managers; most work in the middle, and some work below, at the operational level)

First-line or front-line managers, shop- floor managers, sometimes senior supervisors

Operational -level workers and staff

Figure 3.1 Common terms used to describe managers in an organisational hierarchy Note that in a hierarchy such as illustrated above, many managers are in the middle of chains of communication and command. Orders and messages go up and down the organisation (and from side to side). The first-line managers are those who are directly responsible for and oversee the production of goods and services. Above this level are the middle managers, who are not so directly involved in production but are more responsible for directing the front-line managers and communicating between them and senior managers. This last type of manager is responsible for the achievement of goals at a more strategic level, and would include the chief executive officer (CEO). Differences in the types of goals to be achieved are also determined by the scope of a manager’s responsibility. Functional managers are responsible for managing a particular section of operations, such as marketing, finance or communications. In contrast to this, general managers are responsible for the achievement of broader goals, or can be responsible across different functions. Activity 3.4 Reading We explore functional areas of a business in detail in Chapter 5. Look at Mullins (2010) p.500, Figure 13.1 to see how different types of managers share the responsibility for one functional area, that of HR, in an organisation. In this section we have examined how different goals that managers are trying to achieve are directly related to issues such as the type of organisation and the level at which they manage. However, there is another significant variable: a manager’s individual style and how factors such as attitude, culture and the individual qualities that make a good manager influence this style. 2. Qualities of the individual manager This issue has been the subject of a great deal of research, to discover what qualities are needed to be a successful manager. If it is possible to identify the necessary qualities that make a good manager, then managers can be trained to develop these qualities. Also, new recruits can be tested to see if they have potential. 48


Activity 3.5 Think about all the different types of managers that exist. For instance, are you managed by anyone? Do you in turn manage anyone else? Think of managers that you come across in your everyday life and what activities they are involved in. 1. Now write down three examples of a manager, specifying the scope and level of their job and the type of organisation. In your opinion, what attributes or qualities would each sort of manager need in order to be successful? Make a list of these next to each. Reading 2. Read the following section of your main key text: • Mullins (2010) Chapter 11 ‘The role of the manager’, pp.442–48; Chapter 17, ‘Delegation and empowerment’ up to and including ‘The concept of empowerment’, pp.683–693. A supplementary reading is Boddy (2008) Chapter 1 – this looks more generally at the management job. As you read these pages, compare the qualities mentioned in the text with the list of attributes that you developed for each of your three example managers above. • Are there any similarities? • Which of these qualities are managers born with and which can be learned? • What is your opinion of the different research findings presented here? In the examples below, two factors affecting the manager’s job and management style are considered. Example: gender differences Historically, business management has been predominately a male profession (not so household management!). The influence of wider societal attitudes cannot be ignored, such as women traditionally being seen as the homemakers. However, a particularly relevant issue with regard to management has been the different attributes and also values assigned to the sexes. If it is thought that successful managers need to have certain attributes, but these are only associated with males, then this can be used to justify male dominance in the field. Examples of these include rationality, competition, control and self-assertion being seen as male and positive for management potential. So-called ‘female values’ include intuition, caring, emotion, acceptance, and cooperation, which some would not consider suitable for the task of management. However, much has been done to counter this view and to prevent discrimination again women. The arguments put forward are that women can also have the same attributes as men. Furthermore, those traits believed to be common in women can be seen as an aid rather than a hindrance to successful management. An example of this would be cooperation for good teamworking. Despite changes in attitude and the law regarding women and work generally, when it comes to management the concept of a ‘glass ceiling’ is used. Have you heard this term before? Can you think what it could mean in the context of women and management? The idea here is that changes have resulted in women being able to enter organisations and climb the hierarchy to a certain level. However, at a certain point on the hierarchy, especially before the higher levels of management, they hit a ‘glass ceiling’: although they can see above them, they are not able to progress further. Although the progression for women to top management is easier in the twenty-first century, it seems that there is still some way to go, and the situation is similar for other groups that have been underrepresented in management, such as those from ethnic minorities. However, it is also important to recognise that issues of this kind also vary in different parts of the world. 49


Example: cultural influence Cultural influences are important for understanding types of management. We need to recognise that these exist so that we avoid making inappropriate generalisations and also avoid creating unhelpful stereotypes. Managers exist the world over, but in Chapter 1 of this guide we saw the importance of the historical context. It was mentioned that business and management as a field of study have developed at varying rates and under different influences, in different areas of the world. We have looked at cultural factors in Chapter 2, and in Chapters 7 and 8 we consider the international context of business. Here, it is appropriate to introduce the importance of culture, specifically in relation to management. Culture influences: • the types of people that are described as managers • the qualities valued in managers • the level and scope of managerial work • styles of management. For instance: • in Malaysia, all administrative and managerial personnel are described as managers • in France, executives and professional employees are not included as managers • in South Korea, graduates recruited to white-collar jobs would be defined as managers even though they would not be promoted to managerial work until later in their career. (Peterson, 1993) How about in your country? Activity 3.6 Think for a moment about management in your own country. Are there any cultural influences on how management is defined or the type of people who are managers? What about the historical context – how has this changed over time? Ask yourself whether the ideas you have read about are relevant to your own culture, or whether any of the theories would be inappropriate because they have been developed or based on research done elsewhere in the world. Having read this section, ask yourself if there is a simple answer to the questions: • What is a manager? • What makes a good manager? Feedback The answers seem to be complex and ambiguous. Even the definition of a manager is partly determined by wider issues such as the cultural context. Therefore it can be seen that the definition we began with is purposefully broad, so it can account for this variation. Appreciating this complexity is an important step in your understanding of business management.

3.3 What do managers do? The definition of management that we have adopted for this course (see above and your glossary) gives us a broad understanding of the job of a manager – to coordinate resources for the achievement of goals. But how do managers do this? What activities are involved?

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Looking back at the first reading in Activity 3.5 (Mullins, 2010, Chapter 11 ‘The role of the manager’, pp.442–48), see how Mullins defines ‘managerial roles’ and look also at the roles suggested by Mintzberg (1990) in Figure 11.6 on p.438. We will consider some of these roles next. Writers vary in the roles they identify as managerial. For instance, one approach to understanding the job of managers is to identify the major types of activities they engage in. An example of this is provided by Gulick and Urwick (1937) who, under the influence of the classical school, developed the ideas of Henri Fayol. The main activities of a manager are seen within this view to be: • planning • organising • staffing • directing • coordinating • reporting • budgeting. But how do these ideas translate into what a manager does from day to day? What is involved in each activity and how much priority is it given? Are these relevant to all types of managers?

Mintzberg’s ‘folklore and facts’ of management Henry Mintzberg (1989) studied real managers at work and from his findings he distinguishes the ‘folklore and facts’ of the manager’s job (‘folklore’ means traditional beliefs). Folklore

Fact

1

The manager is a reflective, systematic planner.

Study after study has shown that managers work at an unrelenting pace, that their activities are characterised by brevity, variety, and discontinuity, and that they are strongly oriented to action and dislike reflective activities.

2

The effective manager has no regular duties to perform

In addition to handling exceptions, managerial work involves performing a number of regular duties, including ritual and ceremony, negotiations and processing of soft information that links the organisation with its environment.

3

The senior manager needs aggregated information, which a formal management information system best provides.

Managers strongly favour the oral media – namely, telephone calls and meetings.

4

Management is, or at least is quickly becoming, a science and a profession.

The managers’ programmes – to schedule time, process information, make decisions, and so on – remain locked deep inside their brains.

Table 3.1 Mintzberg’s ‘folklore and facts’ of management Source: Mintzberg, 1989, pp.10–14 51


Lawrence’s results Another piece of research done on this issue was a comparative study between the work of managers in Germany and Britain. Lawrence (1984) studied the daily activities of 16 German and 25 British general and production managers in detail. He calculated the time given to different activities to discover what managers really do. Activity

Percentage of manager’s time

German

British

Attending regularly scheduled meetings

9.78

15.5

Attending irregular meetings

12.62

14.46

Ad hoc discussion

20.07

17.93

Being on the shop floor

16.87

17.35

On the telephone

10.56

7.23

Working in the office

11.56

11.16

Talking to researchers

10.45

13.08

Various other activities

8.02

4.08

Table 3.2 Lawrence’s results from his German-British comparison of managers’ use of time Activity 3.7 Spend a few minutes looking at these results and think back to the subsection ‘Cultural influences’ in Section 3.2 of this chapter of the guide. 1. Are the results shown here consistent with cultural differences between Germany and Britain? 2. How about in your country? Think of another country and imagine making a comparison, as Lawrence did between Germany and Britain. Suppose you compared China and Russia, or Japan and Korea. Would you find differences in how managers spend their time? Feedback The results do seem to support the idea that scheduling of formal meetings is more common in Britain. However, it is also important to recognise that similarities do exist as well, such as the time managers spend in their offices.

Comparing Lawrence and Mintzberg Another point to be made is that research findings support the facts put forward by Mintzberg to counter the ‘folklore’ of what managers do. Look again at the four folklores of management in Table 3.1 and the facts that Mintzberg offers to discredit these myths. Can you see how the evidence presented by Lawrence can be used to support Mintzberg’s claims? Think about this before reading on. Remember, the skill of comparison is an important academic tool for evaluation. Consider for a few minutes the folklore that managers need information via a formal management information system. See what Mintzberg says, and then see if Lawrence’s results support Mintzberg. Once you have tried this, read on. Mintzberg suggests that the folklore is rejected in practice because managers said they preferred oral methods of communication. This is also 52


supported by Lawrence’s results. Look at the high percentage of time that managers spent on the phone. Also, look at the time they spent in ad hoc (informal) talks. See if you can continue this comparison yourself. Which other points made by Mintzberg are supported by Lawrence’s research results? The result of this discussion is that managers may in practice do different things to what the theory states: the ‘roles’ of a manager may not be what actually happens in practice. So how can we move forward in the light of these results? One approach to come out of the research discussed is to understand the work of managers by examining different managerial roles. This is how Mintzberg deals with the problem, as Mullins (2010) explains on pp.439–40, ‘Behaviour pattern of general managers’. One role that the management literature has tended to emphasise is the manager as someone who delegates to others. This is consistent with research that has found managers overworked and with too many responsibilities. Delegating refers to a manager passing on a task to a subordinate, but with the manager retaining responsibility for the task being done. Mullins deals with this at length in the text you read for Activity 3.4. Summing up this section, when asking what managers do we have to be clear about what type of manager we are discussing and we also need to understand what they do not do – in other words, what they delegate. Activity 3.8 Test the ideas of Fayol, Mintzberg and Lawrence. Study what a manager you know actually does over a period of time, then complete Assignment 1 on p.450 of Mullins (2010). Next we consider some specific roles of a manager. However, as you read on, it is important to remember that these roles are not set, are not universal, and will need to be adapted for each particular type of manager as well as situational differences.

3.4 Decision making and effectiveness In Chapter 1 of this guide, decision making was introduced as a key activity of managers and this is a theme that runs throughout the course. Decision making is very important, because it is not a separate role that managers take on: it can actually be seen as integrated and essential to all their roles and the activities involved with them. Activity 3.9 Think, for a moment, about how many decisions you make in a day to ‘get things done’. Jot them down. Then think of the decisions you have already made about the next year, what you want to achieve, decisions about your studies and career. Just an ordinary day may involve decisions about what time to get up, what to wear, what to eat, when to leave home, what to take with you, how to travel, who to speak to, etc. Most things we do involve making decisions and, as we have established, the main job of a manager is to get things done – not only by his or her own actions, but also by the coordination of the actions of others and of all available resources. 53


Strategic decision making will be discussed in the next chapter of the guide, and decisions are actually an integral part of the business organisation, not only for managers. However, here we are focusing on the role of the manager, and analysing the specific managerial roles of planning, leading, motivating and controlling; it is important to focus on the decision making involved in each of these.

Effective managers To be effective means to be good at achieving your goals. It is important to note that is not necessarily the same as being efficient. That means achieving a high output per unit input. It is much easier to assess how effective a manager is than to try to find out how efficient he or she is! Making effective decisions is essential for effective management. This is the topic of the next reading, which considers differences in managerial behaviour and also how successful management can be measured. As we have been establishing the complexity of management, involving many different definitions, types and goals, then it is not surprising that what constitutes effective management is also contested. However, for the purpose of our understanding of the manager’s role, it is necessary to understand what is expected of managers and also how their effectiveness can be assessed. Activity 3.10 Reading Read the following chapter from your main key text: • Mullins (2010) Chapter 12 ‘Managerial behaviour and effectiveness’, pp.457–64; ‘Managerial style’ up to and including ‘The managerial/leadership grid’, pp.467–77; ‘Management by objectives’ up to and including ‘Measures of effectiveness’, pp.480–90; ‘The management of time’ up to the end of Chapter 12. This chapter has a lot of material and covers many theories with several diagrams. You should spend no more than three hours studying it. Concentrate on the passages that are listed in the Essential reading. Use the synopsis and review questions at the end of the chapter in the book as a checklist. Also look at the learning outcomes at the beginning. The case studies presented give you a good idea of how to use the ideas in the chapter. As you read, think about managers you have encountered – those you personally have been managed by, others you have observed, and managers you have read or heard about. Relate the style of these managers to what you read. Using what you read about measuring effectiveness, write down which of the managers you know about, or have experience of, was the best and which was the worst. Explain why. Feedback By the end of this activity you should be able to make a good argument about the ways in which the behaviour of a manager determines how effective that manager is. It is important, because ineffective managers can be trained to change their behaviour and thus become more effective. It is also important to note that managers are also judged by the results achieved by others; see the section on ‘Measures of effectiveness’ on pp.476–77. In the rest of this chapter we consider four managerial roles that are often identified: planning, leading, motivating and controlling.

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3.5 Planning role Activity 3.11 Begin by reflecting on these questions for five minutes. 1. How do managers plan? 2. What decisions does this involve? 3. What needs to be planned? Remember that management involves coordinating for the achievement of goals. First, there is planning in the setting of goals. Managers at all levels need to make decisions about the goals they need to achieve, or about setting the goals that their subordinates should achieve. At the top and higher levels of management these will involve decisions about the strategic goals and direction of the business, but other levels of management will also make longterm and short-term decisions about goals in their own area of responsibility. The topic of goal setting will be revisited in Chapter 4 when we discuss strategic decision making. Once goals have been set, it is necessary to decide on a plan of action for their successful achievement. This is where the coordination of resources comes in – not only including the actions of others, but also the actions of the manager as well. A plan can be understood to be a formulated scheme of action designed to get something done, and so planning is the process of developing this. Approaches to planning vary immensely, but different models often have some key elements in common. Here are some possible stages involved in planning. 1. Setting the goal 2. Gathering information 3. Developing the actions necessary to achieve the goal 4. Setting targets to be reached on the way to achieving the goal 5. Measuring the achievement of the goal 6. Evaluation and reviewing the goal and the plan. There are a number of important constraints to planning which managers need to consider when developing a plan. Think for a few minutes about what these constraints might be. As stated in Stage 2 of the planning process, managers need information. Think back to the developments in the history of the subject that came to view the organisation as a complex open system; see ‘Incorporating the human element’ in Chapter 1 of this guide where the need for information flows is stressed. Also, in relation to planning, managers need to consider the resources available to contribute towards the achievement of the goal. In particular, the cost of implementing a plan and the time involved are often the most crucial constraints for developing the best scheme of action.

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Therefore the planning role can be seen as central to the work of managers. Managers plan at all levels, but it is often emphasised more at the strategic level because it is at this level that management is concerned with looking forward rather than concentrating on today’s problems (and worrying about yesterday’s mistakes!). On the other hand, remember what we found out earlier about managers and their use of time. Maybe planning is important in theory but not in practice. Maybe managers typically never have time to plan? What do you think? Boddy (2008) Chapter 6 ‘Planning’, listed under the Further reading section at the beginning of the chapter, provides a review of the planning process. Activity 3.12 It would be useful for you to talk to a manager. You may already know one, but if you do not, there are several options available to you. Perhaps someone you know, a friend or family member, could put you in touch with one. Think about the places that you have worked or the places you have studied at. Otherwise it may be appropriate for you to approach the manager of a shop or restaurant that you know well. Talking to a manager now can provide another valuable perspective on what a manager is and what managers actually do, and this will also give you an example of a manager in your own country. 1. Ask the manager to describe a typical day at work. 2. How does this description compare to the research done on how managers spend their time? 3. Ask the manager what planning is involved in their job, what type of goals they strive to achieve, and how they develop their plans to achieve them. 4. From the description of the manager’s day, can you see when they spend time planning? If you cannot, ask them when they do their planning and how much time they spend doing it. Note that if you are unable to talk to a manager then it can be useful to consult the biography of a manager from your country. Finally, remember to add ‘planning’ to your glossary.

3.6 Leadership role Activity 3.13 We began this chapter by making a distinction between a leader and a manager. See if you can express this now – take a couple of minutes before reading on. Feedback A manager is involved in more than leading people because managers work to achieve goals by the coordination of all resources, the actions of people being only one type of resource. Leadership can be understood as the influence needed to direct the actions of subordinates in a common undertaking. Decisions within this role are mainly concerned with choosing the most effective and appropriate type or style of leadership. Add this definition to your glossary (and see also Mullins’ definition of leadership; you may want to add this too).

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Leaders come in all shapes and sizes. Some styles of leadership are listed below. As you read on, consider what sort of leadership styles you have in: • your country’s government • your present or past school, college or university • your family.

Approaches to leadership Some theorists argue that leadership is an aspect of personality and cannot be learned. Others argue that leadership can be learned. This leads to the study of the relationships between leader and the led, and how leadership styles can be adapted to different situations. Mullins (2010), Chapter 10 p.376 provides a helpful framework for the study of leadership. We will look briefly at these approaches in the following pages. Leadership style is often discussed and different models highlight different styles. The broad classification of autocratic, democratic and laissez-faire is useful to remember (see Mullins, 2010, Chapter 10, p.381). The differences in style are often analysed within a continuum that places autocratic management at one end and democratic management at the other. Note again that decision making can be seen as the central issue, and the issue of decision making can be used to explore styles of leadership on this continuum.

Autocratic leadership At this end of the spectrum the manager makes all decisions The manager suggests decisions and invites comments, and then the manager decides The manager asks for suggestions and then makes a decision Toward this end of the spectrum the manager permits subordinates to make decisions within set limits

Democratic leadership Figure 3.2 The spectrum of leadership styles You can see a similar representation on pp.381–83 of Mullins (2010), although he emphasises power rather than decision making as the central issue. Clearly the two are closely related. Look at Figure 10.4 on p.382. Theories of leadership have strong links to the different stages of development of management, which we discussed in Chapter 1.

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Activity 3.14 Reading Now read the following sections of your main key text: • Mullins (2010) Chapter 10 ‘The nature of leadership’, pp.372–83, 386–87, 387–89, 391–95, 397–402. See the Essential readings at beginning of this chapter for the appropriate sections. • Read also Mullins (2010) Chapter12, pp.461–64, ‘The managerial leadership grid’. An alternative reading is Boddy (2008) Chapter 14 ‘Influence and power’, pp.454–69. From your reading you will have a better understanding of the differences in approaches to the study of leadership. Leadership is a process which involves the leader, the led and the situation. The different approaches to leadership theory look at different elements. Having read the above readings, and before reading further, write a quick summary of the following approaches and in each case identify whether the leader, the led or the situation is the focus of attention: • traits approach • behavioural approach • contingency approach. Now read on.

Traits approach Some of the early studies of leadership attempted to produce a profile of personality characteristics of people who have leadership qualities. Early researchers listed those characteristics to be found in recognised ‘good’ leaders. However, this approach proved to be not very reliable since there were too many exceptions to the rule. It was felt that although certain traits may be necessary in a leader, they were not sufficient for good leadership. However, many organisations believe that certain types of people tend to make better leaders/managers and attempt to isolate these people at the recruitment stage with the aid of personality or psychometric tests.

Behavioural approach In this approach it is the behaviour, not the personality, that is important. This approach describes how the leader behaves in response to the situation. For instance, should a manager act in a task-centred or employeecentred manner to get the best out of subordinates? There is some evidence that employee-centred (supportive) leadership style is related to: subordinate satisfaction, lower turnover, absenteeism and grievance rates (other things being equal) and less intergroup conflict. But note that some people prefer to be managed in a directed and structured way. There are various theories, some of which consider the two extremes: authoritarian versus democratic styles. See Mullins (2010) Figure 10.3 on p.380 for examples. (See also Boddy, 2008, pp.462–66, ‘Behavioural models’). You have already read about the managerial/leadership grid in Mullins (2010) Chapter 12, pp.461–64. (See also Boddy, 2008, pp.463–65.) This was developed by Blake and Mouton (1985). The model identifies the combinations of the measures of concern for production (initiating structures) and concern for people (consideration). The various combinations of styles are plotted on a two dimensional grid. Each style

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is measured on a scale of one to nine. There are five basic models for leadership. For instance, the combination (1,1), which indicates low concern for production and low concern for people, demonstrates a style of management which is minimal, provides little direction, with just enough effort exerted to stay out of trouble (called impoverished style). The team style (9,9), which is high on both scales, is deemed to be preferable. Like the trait approach, the behavioural approach does not come up with consistent findings. It proved to be more complex than just isolating a set of desirable traits or behaviours for leaders. This led to a focusing on situational influences.

Contingency approach Different types of personality and behaviour are effective in different situations. For example, if time pressure is tight, then task-centred leadership is more effective. If jobs are intrinsically satisfying, the considerate style will not make much difference. However, if the jobs are not intrinsically satisfying, then the considerate style is likely to lead to more satisfaction. There are several different models that demonstrate this approach. The Essential reading suggests you look at the Vroom and Yetton model and the Path-Goal model. (See Mullins, 2010, pp.386–89; Boddy, 2008, pp.466–68.) Quickly look at the other models mentioned to get a general view of the different ideas. Vroom – Yetton model This is sometimes known as the leader-participation model. There are five leadership styles appropriate to different degrees of subordinate involvement in decision making. This model argues against inflexibility of leadership behaviour – the leader should adjust his/her behaviour to the situation or task. The model is represented by a decision tree incorporating seven contingencies and resulting in the appropriate style of leadership at the end of each ‘branch’. This model has been tested by researchers with encouraging results as to its validity. The model has been extended to include twelve contingency variables and, although not having been tested as extensively as the original, the revised version appears to provide a useful set of guidelines to help managers choose the appropriate leadership style. (If you are interested, see Mullins, 2010, p.387 for the revised version.) Path – Goal model The leaders’ style should be appropriate to needs of subordinates and situation task characteristics. This theory suggests that the performance of the subordinates is related to the extent to which their manager satisfies their expectations. It describes four styles of management: achievement oriented, directive, participative and supportive. The two contingency variables are employee characteristics and task characteristics. The leader/ manager should clarify the path or means by which subordinates can attain both high job satisfaction and high performance.

Other approaches to leadership Action-centred leadership This comes under the heading of the functional (or group approach). See Mullins (2010), pp.377–78. The leader is concerned with three areas of need within the work group: the need to achieve a common task, the need for team maintenance, and the individual needs of the members of the

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group. In order to be an effective leader, and to ensure that these needs are met, Adair (1997) suggests that the manager needs to be aware of what is going on the group, i.e. the group process, underlying behaviour and content of discussion. Also the leader needs the understanding and skill to determine when a particular action is required. This approach to leadership has been used extensively in leadership training. Transactional versus transformational leadership There has been interest in differentiating transformational leaders from transactional leaders. Very briefly, transactional leaders are those who guide or motivate their followers in the direction of established goals by clarifying role and task requirements, whereas transformational leaders provide individualised consideration, intellectual stimulation and possess charisma. (Since transformational leaders are considered to be charismatic or inspirational, there is a certain overlap between this approach and the next one.) Transactional and transformational leadership should not be viewed as in opposition, rather that transformational qualities can be built on to transactional qualities. Evidence suggests that transformational leadership can be superior to transactional leadership. Inspirational leadership Studies of inspirational/charismatic leadership have often been concerned with identifying characteristics of charismatic leaders. Characteristics such as unconventional behaviour, having strong convictions about their idealised goal or vision, environment sensitivity, etc. have been highlighted.

Leadership and gender There is no evidence to suppose that one sex is better at leadership than another, but it has been noted that women tend to exhibit a different style of leadership, very often more interactive in nature. As more women reach top management positions, more evidence can be gathered on their leadership style and effectiveness.

Leadership power Power is central to the leadership process. The leader will have different power bases, some which are given, e.g. legitimate; some which are as a result of the leader’s personal characteristics, e.g. referent. The leader may have one or more of the following power bases: legitimate, reward, expert, coercive, referent, etc. The subordinates’ reaction to that power can range from total commitment to active resistance. Activity 3.15 Reading The different forms of leadership power are considered in this reading: • Mullins (2010) Chapter 10, pp.397–99. (Or alternatively, Boddy (2008) pp.469–78, ‘Sources of power to influence others’, ‘Using positional power to influence others’ and ‘Influencing through networks’.) As you read this, think of an organisation you are familiar with. Who holds the power? What sort of power is it? What are your power bases? You will meet the subject of power again when the controlling role is considered.

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3.7 Motivating role Activity 3.16 First add into your glossary a definition of ‘motivation’. The role of a manager as a leader is closely related to their role as a motivator. Can you think why? Once more, stop and consider for a few minutes before reading further. Again, in this role the manager is concerned with the human aspect of the resources available for achieving goals. Motivating people is about generating enthusiasm and persistence in their actions. Leadership can be done without this, but it can be argued that more effective leadership, and so management, will involve taking the role of motivator, so goals will be achieved more effectively. Theories of motivation again can be seen to have roots in the various developments in business management literature. Three of these are offered here as examples. Activity 3.17 Reading This reading will look at the concept of motivation, get an overview of the main theories, and look at three specific theories: • Mullins (2010) Chapter 7 ‘Work motivation and job satisfaction’, pp.252–64, ‘The meaning of motivation’, up to and including ‘Maslow’s hierarchy of needs theory’; pp.265–67, Herzberg’s two-factor theory; pp.268–71, Vroom’s expectancy theory. The rest of Chapter 7 explains a number of other motivation theories and looks at job satisfaction. Skim this if you have time. (An alternative reading is Boddy, 2008, Chapter 15 ‘Motivation’, pp.494–97, 500–02, 505–08 for discussion of the three models.) The inherent differences between individuals means that what motivates one person may not motivate another. Nowadays people are generally better educated than they were 50 years ago and therefore have greater expectations. They require more interesting and challenging work, and managers who will make them feel valued, give them regular feedback and rewards for increased performance. Managers who do not fulfil these expectations will not get the best out of their staff. The terms ‘motives’ and ‘motivation’ can be used in several contexts: the goals that people have, e.g. status, power, friends etc.; the mental processes that lead people to pursue those goals; the social processes through which some individuals try to change the behaviour of others. Motivation is important because: • individual performance is a function of ability, motivation and situational factors • the less the workforce is motivated, the more controls management has to exercise – and these can be self-defeating. • the concept of motivation enables an individual to make causal attributions and explain others’ behaviour to him/herself. There have been attempts to explain how people are motivated, what motivates them and their different attitudes to work. Motivation in the workplace will be affected by many factors – the characteristics of the

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organisation, the characteristics of the job and the characteristics of the individual – all these factors interact with each other. There are several different approaches to understanding motivation: • Content approaches emphasise needs that motivate people. • Process approaches emphasise workers making decisions based on needs. • Reinforcement approaches focus on how employees learn to behave. You will have met the three models below as part of the Essential reading of this topic.

Maslow’s hierarchy of needs (1943) This model has already been discussed in Chapter 1 – you should have read about this in Activity 1.7. Go back and look at it again.

Herzberg’s two-factor model (1968) Herzberg et al. (1959) offered a two-factor theory of motivation, where research was done on what factors can affect job satisfaction levels. Two categories were developed. The first set is called hygiene factors, which are the elements needed to prevent dissatisfaction. They include salary, security and supervision. The second set is called motivation factors, which are the elements that affect satisfaction levels but that cannot lead to dissatisfaction. These include recognition, responsibility and advancement. Hygiene factors are seen to be the most crucial, but both types have to be present together to motivate workers fully. Activity 3.18 What stage of development, in the study of management, do you think influenced Herzberg’s theory? Think about this for a moment. Can you see similarities with the hierarchy of needs idea offered by Maslow? What were the historical roots of that? You can trace this in Chapter 1 if necessary, because recognising the links between these issues is very useful.

Expectancy theory A different type of theory is offered by Vroom (1982): the expectancy theory. This theory stresses that understanding how employees perceive possible outcomes is vital for knowing how to motivate them. Vroom uses the term ‘valence’ to describe what the employee anticipates will be the satisfaction gained from the outcome of a particular action. Two categories of outcomes are possible, either performance-related or need-related. The theory suggests that motivational force results from the combination of anticipated outcomes (performance and need-related) and the expectancy the subordinate has that the predicted outcome will actually be realised.

Goldthorpe’s research Another example is a theory developed from research on a particular group of workers: manual employees in a car factory (Goldthorpe et al., 1968). This was a classic sociological study of the workplace. The main findings were that motivation could be influenced by factors outside of work, so different workers will be motivated in different ways. This makes the role of the manager as a motivator particularly difficult. However, three main types of workers were described and could be identified as: 1. affluent workers – instrumental in approach to work and so motivated by money 62


2. professional workers – bureaucratic in approach and so motivated by position 3. traditional workers – feeling solidarity with each other; as a result they are motivated by a sense of belonging. It seems, then, that managers have again to make important decisions in their role as motivators. They need to decide what type of workers they are trying to motivate, what behaviour they are trying to motivate in these workers, the most appropriate method of motivation and possibly the outcomes that can be used to provide the motivation. How would you motivate the telephonists in the next example? Activity 3.19 Consider the following example and think how you would motivate staff in these circumstances. Try to use one of the theories you have just read about. Your company is a telephone answering service (a ‘call centre’) and operates from the Indian city of Mumbai. Staff must answer problems about household equipment (vacuum cleaners, gas boilers, kitchen appliances) from consumers in Texas. Staff members are taught how to speak to and understand Texans. They know the sports results and weather in Texas so they can chat in a friendly way. However, staff find the work too abstract and unreal. Many move on to other jobs once their language skills are improved. The manager needs to motivate staff to stay and work hard. Feedback To help you get started, you may find the following answer outline useful. First, decide which theoretical model you want to use. Expectancy theory or Herzberg are quite appealing for this problem. Your analysis of why staff become fed up will lead to your recommendations. These may include a mixture of measures such as promotions and bonuses for long-serving staff. Also, it might be worth developing social contacts that help bring Texas ‘alive’ for the Mumbai staff (visits, special uniforms, TV and video links). There might even be a scheme to lend long-serving staff money to buy an apartment; this would certainly tie staff to the company. However, the opposite could be the case and they might come to feel very secure and become lazy. Look at the theories and see how they suggest one can motivate young, educated employees that want independence, flexible working conditions and an interesting work life. Maybe the company can decentralise management and have teams working on specific products or in competition with each other. The important thing is to decide on a theoretical framework and use that to analyse the problem.

3.8 Controlling role The final role to be considered is that of the manager as controller. What do managers control? How do you think this relates to the other roles we have discussed? Once more, take a few minutes to think about these questions and then read on. Managers are required to control the actions of individuals, but management is also more than this. Our understanding of management involves the coordination of all resources, and so the controlling role involves how these resources, including but not only people, are used and interact. Other areas of control include the plans developed to achieve

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the goals and all delegated activities, for example budgetary control. The stages involved in the controlling process can be perceived as follows: 1. Define the necessary standards or goal to be achieved. 2. Decide upon and implement a measure of outcomes. 3. Make an ongoing comparison of current activities with the standards set. 4. Make changes to current behaviour if needed to ensure standard or goal attained. See Mullins (2010) p.668, for a more detailed discussion. Activity 3.20 Reading This final reading gives an overview of why it is important to have control in organisations. We also look at the components of an effective control system. The issue of power is considered again and there is an extensive discussion of delegation and why it is so important for a manager to delegate effectively. • Mullins (2010) Chapter 17 ‘Organisational control and power’, pp.665–71, ‘The controversial nature of control’, up to and including ‘Forms of control’; pp.673–691, ‘Characteristics of an effective control system’, up to and including ‘The concept of empowerment’. An alternative reading for this topic can be found in Boddy (2008) Chapter 18 ‘Performance measurement and control’, pp.598–616. You can read the remainder of the chapter but do not spend much time on it. As you read, think about the other roles of the manager that we have discussed and try to draw connections between them. Keep in mind the manager that you met and what he or she told you about their job. Could you identify the controlling activities in their work? It can be seen that the controlling role of managers is interrelated with others, such as planning and leading. Again, decision making is crucial to this role, and is an integral part of each stage of the controlling process. Therefore it is important to remember that the roles a manager takes on cannot be seen in isolation, but are interconnected and overlap. We also established that many different types of management exist, and so it is necessary to recognise that the roles a manager has will depend on what type of manager they are. The roles that have been discussed here are only some possible ones, and offer one way of understanding what managers do. In reality we have learnt that the job of a manager can be very complex and demanding, and can depend on external constraints.

Chapter review Key points • Research studies of actual managers suggest that what they spend time doing in practice is different from what we expect a manager’s job to be in theory. • Many different types of manager exist and no one set of attributes can be agreed on. • No one set of attributes for a good manager has been agreed upon. What is seen to make a good manager is dependent on the context, and this can change over time. 64


• The work of a manager can be understood by investigating the various overlapping and changing roles that a manager takes on. • Theories of what managers should do often conflict with research into what managers actually do. • There are a number of theoretical approaches that contribute to our understanding of how managers perform in all the roles they play, such as planning, leading, motivating and controlling. • Goal setting and decision making are central to the effective performance of the manager.

A reminder of your learning outcomes Having completed this chapter, and the Essential readings and activities, you should be able to: • identify factors that contribute to differences between types of management, the attributes valued in managers and the expectations placed on the work of the manager • understand the limits of management behaviour theories, and appreciate the practical constraints that managers face in reality • discuss the idea of managerial effectiveness and evaluate approaches to measuring how successful a manager is • identify the types of decisions relevant to the different areas of the manager’s job.

Sample examination questions When considering these, remember the guidance given in the Introduction about examination preparation. Each question can be answered fully in approximately 45 minutes, under examination conditions. 1. a. The jobs of individual managers will differ widely, even though they all have to perform similar general activities. Discuss three factors that will influence the nature of a manager’s job. Use examples to illustrate your answer. b. One of the functions of management is that of planning. Describe the stages a manager will go through when performing this function. Illustrate with reference to a specific situation in the business context. 2. Discuss why decision making is central to the role of the manager. Illustrate your answer by referring to at least two different types of managers. 3. a. Briefly discuss the purposes of management control in a work organisation. b. Describe the essential elements in a management control system. Illustrate your answer with practical examples. 4. a. Discuss what measures you would use – both qualitative and quantitative – to assess the effectiveness of a manager. Give reasons for your choice of measures and illustrate with examples. b. Discuss how a manager’s job might change as s/he moves up the career ladder. How might the changing demands present problems for the manager?

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Advice on answering a question To help you further with your exam preparation we offer below some suggestions for one of the answers. However, it is very important to remember that there is no model or correct answer to any of the questions. It is more important to demonstrate what you have learnt by developing your own response to the question, supported by evidence from the relevant parts of the chapter. 2. Discuss why decision making is central to the role of the manager. Illustrate your answer by referring to at least two different types of managers. A brief introduction to the role of the manager and how this depends on the type of manager would be a useful starting point. Setting out the major roles a manager can play could be useful, although it would be important to recognise that these roles cannot be strictly separated, but can change from one manager to another and also relate to what a manager is trying to achieve. The managerial roles, and their dependence on the type of manager we are discussing, could be demonstrated by introducing your example managers at an early point. It would be helpful to use examples of very different types of manager for this illustration. The sorts of examples that would be relevant would be a front-line manager in a fast-food outlet; the CEO of an airline company; or a branch manager for a chain of tailors. For each of your examples you could suggest the roles that would be important, and the types of decisions that the manager would have to make in these roles. It could also be useful to consider how the constraints and the reality of the manager’s job could affect their decision making, therefore recognising the complexity involved in understanding the role of a manager.

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Chapter 4: Theoretical approaches to strategic decision making and organisational change

Chapter 4: Theoretical approaches to strategic decision making and organisational change Aims of the chapter In particular this chapter aims to: • consider decision making within a business • look at business strategy • see how decisions are made • identify factors which contribute to the need for change • explain ways of managing organisational change and the decisions involved.

Learning outcomes By the end of this chapter, and having completed the Essential readings and activities, you should be able to: • identify and evaluate different approaches to the process of making decisions, particularly at the strategic level • assess the importance of strategy and evaluate the decisions involved in formulating a business strategy • identify the constraints placed on the manager during the decision making process • identify the different techniques used to support managers when making decisions and developing strategy, and evaluate the usefulness of these techniques • assess the importance of the business environment • distinguish different types of organisational change, and identify the triggers which can generate the need for these • evaluate different approaches to managing organisational change and identify and explain techniques for overcoming resistance to change.

Essential reading Two of the readings for this chapter are from the main key text, and two readings from the secondary text are used for the subjects of decision making and strategy. Mullins, L.J. Management and Organisational Behaviour. (Essex: Pearson Education Limited, 2010). Chapter 19 ‘Organisation culture and change’, pp.751–64, ‘The nature of organisational change’, up to and including ‘Overcoming resistance to change’. Chapter 20 ‘Organisational performance and effectiveness’, pp.782–86, ‘Total quality management’, and ‘Business process re-engineering’. Daft, R.L. New Era of Management. (Mason, Ohio: South Western: Cengage, 2008). Chapter 8 ‘Strategy formulation and implementation’. Chapter 9 ‘Managerial decision making’ 67


Further reading The Further reading for this chapter includes suggested book chapters and some journal articles. Do remember that, as stated in the Introduction, you are advised to refer to journals whenever possible. This is where up-todate research is reported, and they can also be a source of interesting case studies. Four recommended journals were mentioned in the Introduction. This is a good time to have a look at these if you have not already done so. Boddy, D. Management: An Introduction. (Harlow: FT Prentice Hall, 2008) Chapters 7, 8 and 13. Johnson, G., K. Scholes and R. Whittington Exploring Corporate Strategy. (London: Prentice Hall, 2008) Chapters 1 and 14. Miller, G. Managerial Dilemmas: The Political Economy of Hierarchy. (Cambridge: Cambridge University Press, 1997) Introduction to Part Three (pp.179–81) and Chapter 9 ‘The possibilities of co-operation’. Needle, D. Business in Context: An Introduction to Business and its Environment. (London: Business Press, 2004) Chapter 7 ‘Management Strategy’. Nutt, P. ‘Decision-making success in public, private and third sector organisations: Finding sector dependent best practice’, Journal of Management Studies 37(1) 2000, pp.77–108. Porter, M. ‘What is strategy?’, Harvard Business Review 74(3) 1996, pp.61–78.

Introduction In Chapter 3 we looked at the role of the manager in business, including analysis of the decisions that managers have to make in their various roles. In this chapter we consider how management is shaped by a business’s strategy and how the activities of managers shape strategy. This will include exploring theoretical contributions to making strategic decisions and understanding organisational change. This chapter will cover: • decision making • strategy • decision models and theories • decision making tools and techniques • organisational change and development • the change process and managing resistance to change. Do not rush this chapter. You should not be surprised if it takes you three weeks of part-time study. If you hurry you may confuse the ideas presented here. You will find, if you take them slowly, however, that they are logical and can be understood and remembered satisfactorily.

4.1 Decision making in business This section of the syllabus focuses on decision making, and this is a key theme running throughout the course. In the last chapter we considered the different roles that managers play and decision making was found not only to be a central role, but one that is part of every role the manager plays. Chapter 5 will consider the different functional areas of the business and the types of decisions involved in managing each of them. Therefore, decision making is at the core of managing and central to the operations of the business. Here we will consider decision making in more detail, and this will then be related to the concept of strategy. 68


We start by returning to basics and the need to be clear about the terms we are using. How would you define a decision? A decision is the product of the decision making process, but what is decision making? For our purpose it is most helpful to define decision making thus: as the process whereby a course of action is chosen from a range of possibilities, to achieve a specific purpose.

The decision, then, is the product of this process, the chosen outcome or course of action. Earlier we looked at individual managers, and identified two major factors that affect their decision making: the roles they have and the organisational environment. This latter point is very important to the decision making process, and the third section of the course looks at environmental factors in greater detail. In this chapter we are specifically interested in strategic decision making. However, it is helpful to understand how this type of decision contributes to the range of decisions needed within the organisation. Daft offers a distinction between two main types of decisions:

Types of decisions • Programmed decisions – these are made in response to a situation that has occurred enough times to enable decision rules to be developed. These decisions are frequently made by lower-level managers. The problems to be solved are usually well-defined. Formal rules and regulations would be consulted to enable managers to choose the most appropriate course of action. • Non-programmed decisions – these are made in response to situations that can be unique, or poorly defined, and largely unstructured. These decisions usually have important consequences for the organisation. Creativity is needed to find the best solution to this type of decision. From the above it can be seen that different kinds of decisions can be associated with different levels in the business organisation. For example, programmed decisions are more likely to be made by lower-level managers or line-managers, including non-managerial staff such as supervisors or team leaders. In contrast, non-programmed decisions are more likely to be made by higher levels or top management. Again, however, in some organisations lower-level managers or other employees can sometimes be invited to develop creative solutions to problems. Activity 4.1 Try this exercise, but do not spend more than 15 minutes on it. The following individuals all work at the same organisation, but at different levels. The organisation is Lo Cost Ltd., a chain of supermarkets. Think about the job that each employee does. What types of decisions would be involved in these jobs? Write down two decisions that each of these employees might have to make. To get you started, you have been provided with one example for each employee. 1. A supervisor for the checkouts in one branch of the supermarket (example: how many tills should be open at once?) 2. The CEO of the company (example: should a new store be opened?) 3. A store manager who has responsibility for one particular branch (example: what can my store do to improve sales?)

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Feedback All these various decisions will require different approaches. However, several major stages in the decision making process can be identified as relevant to most; they are set out in the text below. As you evaluate each stage think about your example decisions and how each would fit into this process. Activity 4.2 Reading • Now read Daft (2008) Chapter 9, pp.272–75, ‘Types of decisions and problems’. Make sure you understand what is meant by certainty, risk, uncertainty and ambiguity in the context of decision making. (An alternative source is Boddy, 2008, Chapter 7 ‘Decision making’, pp.215–21, ‘Types of decisions’ and ‘Decision making conditions’.)

Stages in the decision making process 1. The decision maker needs to be consciously aware of the situation. This involves understanding the factors that affect the decision to be made, and recognising those elements which are out of the control of the decision maker, such as the constraints placed on the decision. 2. The decision maker needs to recognise the real problem. Before being able to develop a solution it is important to study and understand the problem fully, especially when multiple or complex problems exist. The decision maker has to be sure to get to the central issue and so make a decision that matches the real problem. 3. Information needs to be gathered and alternative solutions developed. This is a key stage and is vital if the best decision is to be made. Good communications are required to gather all the relevant information. The search for alternatives involves generating as many solutions as possible. This was the subject of research by Nutt (2000), who studied how a range of organisations developed alternative options as responses to problems they faced. Different methods of generating alternatives included benchmarking (exporting the practices of other individuals and organisations), innovation (custom-made solutions), and existing decisions. This investigation into the decision making process found that private sector organisations make better decisions when innovative alternatives are sought, but it was found that they are actually more likely to use an existing solution. Why do you think this might be? What could attract a manager to use an existing solution that has been used before, rather than spend time generating an innovative alternative? Could it be the pressure of work and shortage of time? 4. The best solution is decided on. This decision comes out of careful analysis of the alternatives that were generated and evaluation of the relevant costs and benefits of each. 5. The decision is implemented. For successful implementation it is necessary for the decision to be accepted by the organisation, because decisions relate to a chosen course of action that often requires the cooperation of others. Therefore communication may be important again, for explaining the decision and the reason for it. 70


6. The implemented decision needs to be monitored and evaluated. This is particularly important for major decisions, where the outcome has great significance for the organisation. It is also especially important when situational factors are likely to change, and so the most appropriate solution may change. 7. Any necessary changes or modifications need to be made. Related to the above point, if the situation does change or it is found that the best solution was not chosen, then the course of action resulting from the original decision needs to be adapted, and this is needed on an ongoing basis. If you think back to the example decisions you wrote down earlier for different levels of management, you should now see that big decisions would go through these stages more systematically than other simpler ones. For example, think about the difference between a supervisor deciding how many tills to open, and the CEO deciding whether to open a new branch. Spend a few minutes on this before reading further. For the CEO, each stage would involve a great deal more work and the implications of the decision are much greater. It is the decisions at the top level of the organisation that we are most interested in for this chapter. However, this general discussion of decision making should make it possible for you to make comparisons with the other levels and types of decisions necessary for the operation of a business. Activity 4.3 Reading See Daft (2008) Chapter 9, pp.281–86, for further discussion of this process. (Boddy, 2008, Chapter 7, pp.208–15, ‘Tasks in making decisions’ also covers the topic.)

4.2 Theories and models for making decisions We go on now to look at the theories and models that have been developed to assist managers in making decisions at all levels. Many different approaches have been developed and as technology also advances, so do the aids available to support managers in their decision making. Here we are able to introduce a selection of these, some of which are developed in the Essential reading. It is also possible that you will investigate some of them in more detail in the other courses that you study. We will first look at some models of decision making, before moving on to decision theory and game theory.

Rational model The classical model of decision making is known as the rational model. Within this, decision making is seen to be a rational and objective process to achieve predictable results. The decision maker would be seen to go through similar processes to those we have outlined in the last sections. The rational decision maker would identify the problem, generate possible solutions and then make the best decision according to the information he or she has.

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Activity 4.4 1. What possible problems can you identify with the rational model of decision making? Think about the assumptions that it makes about the situation, and make a list of these. 2. What difficulties could there be in applying this model to the type of decisions managers make in their daily work? Look back at Chapter 3 and the difference between what managers should do in theory and what they do in practice. Perhaps this applies here as well? Think about it for a minute before reading the feedback to this activity. Feedback The rational model assumes that: • decision makers have the necessary information to generate possible alternative options and to evaluate them • managers have time to gather this information and do this evaluation • managers are therefore trying for a condition of certainty • managers operate in a stable situation where the variables are not changing • goals of managers and the strategy they are working to are defined and agreed • decision makers make rational choices by selecting the option that will bring most benefit. Since it is difficult to use a rational model, the next question is - can you think of a situation where a manager may not make a rational decision? What sort of factors could influence a manager to make an irrational choice? Think about this. For instance, say a manager has interviewed five candidates for a job. Now she has to make a decision. Think about how she might make it, given that she cannot use the rational model. Reflect on this for a few minutes before reading on.

Model of bounded rationality The assumptions made by the rational model mean that in practice it might only offer an ideal type, one to be striven for but usually unobtainable because of the complexity. Herbert Simon (1992) was one of the first to identify the problems with this model, and from these criticisms developed the model of bounded rationality. This approach recognises that in reality decisions are often made under stressful and unstable conditions. Therefore, the potential for rationality is ‘bounded’ and constrained. It is suggested that managers make decisions as best they can under the conditions they find. This may involve operating with imperfect information. For example the idea of ‘hidden information’ (Arrow, 1985) is used to describe the situation when one party in a potential transaction has more information, is thus better informed than the other parties, and so is better able to make a decision. The bounded rationality model states that decisions need to be made within the constraints and pressures of organisational life, and so managers have to make the decision ‘that will do’. The term used to describe this is ‘satisficing’, the practice of choosing an option that may not be the optimal solution, but one that does satisfy the minimum requirements to achieve a goal or solve a problem.

Bounded rationality in practice Can you think of a situation where a manager may make a decision under less than perfect conditions and base his decision on satisficing? 72


One example could be when a manager has to decide whether to buy a piece of new production machinery. If the item was at a significantly reduced price for a limited amount of time, the manager would be under pressure to decide this before it was possible to make full calculations as to the return this could bring and the training needed. It is also impossible for the manager to know whether more advanced machinery will be available soon. Therefore the manager may gather information on the price of similar machinery available now, contact the production and finance departments for initial estimates of the possible return, and then base a decision on this. Think of your own example and identify the factors that would prevent an optimal or fully ‘rational’ decision from being made. What problems can you see with using the bounded rationality model in practice? Think for a few minutes. One of the major problems with the bounded rationality model is that it can lead managers to make the easiest or first decision possible. It may also result in managers continually using old decisions and applying them to new situations if they know that the old decision would at least meet the minimum requirements. A study of management decision making by Nutt (2000) supports this view. One of the major reasons for this is the desire to avoid risk, thereby limiting opportunities for creativity and innovation.

Garbage can model Another approach that recognises complexity and uncertainty is the garbage can model (Cohen, March and Olsen, 1972). This is particularly relevant to turbulent situations, and introduces the element of chance or randomness. The organisation is seen to contain individuals, problems and possible solutions, and opportunities to bring these together. To put this more formally, there are four independent streams of activity, and it is argued that decisions occur when these four streams meet. The four streams are: • choice opportunities – these are scheduled or unscheduled meetings where it is expected that decisions will be made • participants – people who have the opportunity to influence decisions – they have different knowledge and experiences which may contribute to solutions of problems • problems – possibly a result of a performance gap – these require attention • solutions – these are separate from the problems that they may eventually solve – answers looking for questions. The choice opportunities act as a ‘garbage can’ for the other three constituents: participants, problems and solutions. A particular combination of these three constituents might produce a decision that will deal with the problem. The results may involve radical and creative decisions. In Figure 4.1 it can be seen that individuals, problems and solutions are present and exist independently. The managers’ role is to link them together to create solutions. This action is represented by the arrows. In the example shown, a manager has found a solution to Problem 3 by linking the problem with Individual 1. 73


Individual 1

Problem 1 Problem 2 Solution 1

Problem 3

Individuals 2,3,4 Individual 5

Problem 4

Solution 2 MANAGER

Figure 4.1 How a manager finds a solution within an organisation

Political model This model describes the decision making process in terms of particular interests and objectives of powerful stakeholders. Internal and external stakeholders use their power to influence the different stages in the process (e.g. define problems for their own advantage and set their own objectives). Stakeholders often distort and selectively withhold information to further their own interests. Within the organisation different departments will have different goals which will affect their decisions. Similarly, external stakeholders will have their own agendas. Managers often have to form alliances, or coalitions, in order to gain support for a particular decision. Activity 4.5 Reading See Daft (2008) Chapter 9, pp.275–81, the section ‘Decision making models’. You will find more discussion of the rational, bounded rationality and political models. (Boddy, 2008, Chapter 7, pp.221–27, the section ‘Decision making models’, also discusses these models and includes the garbage can model.) Understand and evaluate these models. To what extent can they help the manager to make decisions in practice?

Decision theory As we have already noted, managers are often charged with the responsibility of making complex decisions. Decision theory, which we introduce here, is one way of analysing decision situations and is mainly used for situations in which there is one decision maker. Game theory, which we look at next, extends the idea of decision theory to situations where two or more decision makers interact. The decision maker faces a series of options, each of which leads to payoffs with certain (subjective) probabilities. Decision theory can sometimes help managers to clarify the situation and decide upon an optimal course of action. We start by analysing a simple decision.

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The issues involved are best understood in terms of what is called a decision tree which contains the main constituents of the problem. These are: • the decisions • the sources of uncertainty • the pay offs; namely, the results of each possible combination of probabilistic outcomes and decisions. The basic idea is to: • construct a decision tree • attach some value (payoff) to the ‘outcomes’ indicated by the decision tree • estimate the best (expected) outcome. A decision tree is best introduced by an elementary example, as shown in Figure 4.2. Payoffs of actions

Action 1

7.0

0.25

10

0.50

5

0.25

8

0.25

10

0.25

4

0.25

–2

0.25

–4

7.0

Action 2

2.0

Figure 4.2 Decision tree The decision maker must choose between Action 1 and Action 2.

Some conventions This shape is called a decision (or action) node: This shape is called a probability node: Lines (arcs) from action nodes are actions available at that node. Lines (arcs) from probability nodes are beliefs by the decision makers about the probability of outcomes. They sum to unity at each node. Outcomes are exclusive. Payoffs are the monetary values of the actions to the decision maker. The probability nodes are labelled with the respective expected payoffs (see below). Note – the payoffs are those which the decision maker attaches. Another decision maker may have different payoffs. In more advanced theory, payoffs are often measured in terms of utility. The probabilities may be objective or the subjective estimates of the particular decision maker. The question that now arises is this: a. Which should the decision maker choose (normative theory)? b. Which will the decision maker choose (positive theory)? 75


If the decision maker is rational, a) and b) should be the same. Use the expected value theory as follows: Expected value of Action 1 = (0.25)(10) + (0.50)(5) + (0.25)(8) = 7.0 Expected value of Action 2 = (0.25)(10) + (0.25)(4) – (0.25)(2) – (0.25)(4) = 2.0 The decision maker will/should choose Action 1: that is, maximise expected payoff. Note: • Could have many actions at the decision node • Two or more actions may have equal expected value (then indifferent between them) • The probabilities might be subjective, estimates then maximise subjective payoff (sometimes called decision making under uncertainty).

Some assumptions • The decision maker ‘knows’ the tree (even if only subjectively). • The decision maker ‘knows’ the payoffs.

Some points to note These are large assumptions, but trying to analyse a decision by trying to construct the tree is often useful. This might show value where there is complete uncertainty (i.e. can’t decide upon probability numbers). Decision making under certainty is a special case where the probability number from the node is unity on a single arc. You should get into the habit of trying to construct decision trees. They are a useful way of presenting possibilities when analysing problems. Decision trees may have a number of decision nodes. Finding the optimal solution is slightly more complicated but not too difficult. Starting at the end of the tree, work backwards. Label the nodes in the following way: at the probability node, calculate the expected payoff using the probabilities given on the arcs leading from that node. This expected value becomes the label for the probability node. At a decision node to the left of the probability nodes under consideration, select the maximum value of the labels of the probability nodes. The maximum becomes the label for that decision node. The decision which generates this maximum is the optimal decision at that node. Repeat that procedure until you reach the starting node (moving to the left across the page). The label at the starting node is the expected payoff obtained when the optimal decisions are taken. Consider the example below and try to construct the tree without looking at Figure 4.3. Example Suppose the Chief Executive of an oil company must decide two things: • first, whether or not to drill a site for oil • secondly, if the company does go ahead, how deep it should drill. It costs £160,000 to drill the first 3000 feet and there is a 0.4 chance of striking oil. If oil is struck, the profit (net of drilling expenses) is £600,000. If she does not strike oil, the executive can drill 2000 feet deeper at an additional cost of £90,000. Her chance 76


of finding oil between 3000 and 5000 feet is 0.2 and her net profit (after all drilling costs) from a strike at this depth is £400,000. What action should the executive take to maximise her expected profit?

0.4 oil

0.2 oil

600

400

-120

168 Drill

0.6 no oil

0.8 no oil

Drill 3000 ft -120

168

5000 ft

- 250

Don’t drill Don’t drill

-160

0

Figure 4.3 Oil exploration Looking at the decision tree, and working from left to right, you can see that the optimal solution is to drill to 5000ft (if oil not found at 3000ft).

Game theory model Other theoretical approaches relate to more specific situations and decisions, rather than applying generally to the process of decision making. One of these is game theory. This is useful for approaching decisions in management that involve two or more parties. It can be particularly relevant to decisions involving competitors – other companies who wish to trade in similar goods and services to similar customers. To place this theory in its historical context, Neumann and Morgenstern (1947) put forward a theory of zero-sum games and non-zero-sum games. In a zero-sum game, a gain by one party will result in a loss being incurred by another party. In a non-zero-sum game, it may be possible for the parties to cooperate to increase the benefits to all. However, within this type of game, making decisions about cooperation is difficult because it is unclear whether competitors will actually cooperate and to what extent. Therefore trying to predict the decisions of competitors becomes important. Study and repetitive research into such games has produced ideas about how participants may behave. One of the best known examples is the prisoner’s dilemma which we will look at later. But first we must look at some of the definitions and assumptions in game theory. Game theory is the study of how decisions interact and is a means of analysing human (and animal) behaviour in the social sciences, politics, biology and, most importantly, economics. Those of you who go on to study 28 Managerial economics will realise how game theory is one of the main tools used by economists today. Game theory is useful for dealing with situations where outcomes depend on the interaction of individuals, rather than decisions taken independently. The decision making can be said to be strategically interdependent. 77


By strategically interdependent we mean: • the outcomes of one player’s decisions are dependent upon the decisions of other players and vice versa • therefore, players need to take account of others’ decisions in making their own decisions if they have an interest in the outcomes and are to influence them accordingly.

Definition of a game In defining the game, we must identify: • players (individual/collective), at least two, who are characterised by a particular objective function such as, for example, profit maximisation • actions available to each player under all circumstances – if you do not know what all the possible actions are then you cannot specify what can happen in the game • strategies of the players, which are action profiles for each player conditional on the actions chosen by the other players • outcomes which are the end results of all possible combinations of actions • payoffs to each player, given the set of actions chosen by all players in the game – payoffs are the rewards that the players derive from their participation in the game – in business this is usually monetary profit – but it need not be so. These will become clear as we proceed.

Some basic distinctions in game theory There are two branches of game theory, cooperative and non-cooperative: • cooperative theory assumes that communication and binding (enforceable) agreements can be secured between players, everyone shares the same objectives and is interested in the collective good – coalitions or groups of players are analysed • non-cooperative theory makes no such assumptions – it is concerned with situations where individuals are assumed to have selfinterested motives. Those of you who have chosen to study 28 Managerial economics will be mainly concerned with the application of non-cooperative games. One-shot and repeated games: • in the one-shot situation a game is played once. • in repeated games they are played more than once – perhaps an indefinite number of times. We shall, in this introduction, only consider one-shot situations, though repeated games are very central to management theory. You might refer to any introduction to game theory if you want to take things further.

Assumptions of rationality Game theory usually starts by assuming rationality. By this is meant: • players maximise expected return (utility) • players assume others playing are also rational • players assume that others assume they are rational, and so on.

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Equilibrium The object in game theory is usually to identify equilibrium outcomes to particular games. An equilibrium is a proposed solution of a game – it is a combination of strategies that are believed most likely – so, in fact, they are predictions. It is useful if we can identify a small number of equilibria for all the possible outcomes – ideally we would like to find a unique equilibrium. We could then use it as a prediction of what would happen if the game was in fact played. There are several different types of equilibria in game theory. We will be looking at three, namely the Dominant Strategy Equilibrium, the Nash Equilibrium and the Pareto Equilibrium. These equilibria will be explained as we meet them in the examples.

Structure of the game There are two alternative ways of depicting the structure of a game: • games in extensive form • games in normal (or strategic) form. Extensive-form games We start by introducing the basic ideas of games in extensive form. They are best introduced by elementary examples. Consider first a situation where two players, P and A, decide upon a joint venture. Each has two possible actions (moves): 1. to cooperate (involving costs) 2. to slack (reducing costs). We can model an interdependent decision tree as shown in Figure 4.4: Outcome c

c

Both cooperate

A P cooperates A slacks

s P

s

c

A cooperates P slacks

s

Both slack

A

Figure 4.4 Interdependent decision tree As the model stands, however, we can make no predictions without some idea of the preferences of P and A over outcomes. The tree is almost self-explanatory. P is described as the first mover and A as the second mover. Games could be much more complicated with repeated moves and, indeed, more than two players. In this simple model both P and A have two possible actions (s and c each). It should be clear to you that players could have any number of actions and, indeed, different sorts of actions.

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The tree gives, as it were, the logically possible combinations of actions and the outcomes are described here in an obvious manner; they derive from tracing the ‘path’ through the tree. So we now assume, not unreasonably, that the outcomes are valued as follows (payoffs).

c c

P

A

3

3

1

4

4

1

2

2

A s

P c s

4>3>2>1

A s

Figure 4.5 Game 1 This is the same game as in Figure 4.4 except that the ranking of the outcomes for both P and A are now included. So, for instance, P’s best outcome (scored 4) is for her to slack and for A to cooperate. This is known as a non-zero sum (or variable sum) game because the payoffs for any outcome are not such that the gain of one player is the loss of the other (we assume for this idea that the numbers not only rank the outcomes but can be added and subtracted). The question now is, what will happen in this simple situation? The basic idea is to think forwards, reason backwards, although this does not always work. Now A will choose s whichever node he is at. This is because s is known as a dominant strategy for A, being the choice at both nodes. (When all players have a dominant strategy, this is said to be a Dominant Strategy Equilibrium.) P will then choose s because 2 > 1. ss is what is termed the Nash Equilibrium. It is the prediction of what rational decision makers will choose. P can think ahead and note that A will choose s, and she will thus also choose s. A Nash Equilibrium is a combination of strategies (one for each player) which has the property that no player has an incentive to choose another strategy if the other players also choose their Nash strategies. This game has one unique Nash Equilibrium (both slack). Note that the cc combination could make both players ‘better off’. Both would acquire 3 rather that 2 units of value. cc is the Pareto Equilibrium, though ss is the Nash Equilibrium. Much of management theory is concerned with how to move interactions from the Nash to the Pareto Equilibrium. A Pareto Improvement is a change that makes at least one individual better off without making the other individual worse off. We reach Pareto efficiency when no further Pareto improvements can be made. 80


This game has a number of noteworthy characteristics. 1. It is a game of complete information. Roughly speaking, this means that both players know the structure of the game (the tree) and each other’s payoffs. Imagine what might happen if the players did not know each other’s payoffs! 2. It is a game of perfect information. This means that the players know what choices have been taken in the past (the history of the game). So A knows whether P has chosen c or s. Note that if P (by mistake, shall we say) chose c, then A would still choose s (and receive 4 units of value). 3. You should satisfy yourself that the same outcome (Nash Equilibrium) will result if A is the first mover rather than P. There is no first mover advantage. Now consider what might happen if the ranking (value) of the outcomes changed as shown in Figure 4.6.

c

P

A

c

3

3

s

2

4

c

4

2

1

1

A

P s

A

4>3>2>1

s

Figure 4.6 Game 2 What will happen now? You should think forwards, reason backwards. A will choose s at upper node and c at lower node. P will anticipate this and choose s. (s,c) is the Nash Equilibrium. If A moved first, he would get the 2,4 result. There is first mover advantage. Again, this is a game of: • complete information • perfect information. We will now consider games with imperfect information.

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P

A

3

3

1

4

4

1

2

2

c A c

s

P c

s A

s

Figure 4.7 Revert to Game 1 (Game 1a) You should now note the dashed line (called information set). This is a convention which indicates that A does not know the history of the game (whether P has chosen c or s). Alternatively, A and P may decide at the same time. What will happen now? • A will still choose s. • P will still choose s. We obtain the same result as before (the ss Nash Equilibrium). This, however, is not always true. You might consider Game 2 with imperfect information.

Games in strategic form We now turn to the definition of games in normal or strategic form. Consider Game 1a. Both P and A have two strategies, c and s. The normal form is a matrix as follows:

A

P

c

s

c

3,3

1,4

s

4,1

2,2

Here the rows represent the strategies of P and the columns those of A. In each cell of the matrix the first number (by convention) is the payoff of the row player and the second that of the column player. You should be able to see how to move from the extensive form of Game 1a to the normal form. We know, of course, that the Nash Equilibrium is at ss (the bottom right hand corner of the matrix). You can find the Nash Equilibrium in the normal form as follows: • if A chooses c, then P will choose s (4 > 3) • if A chooses s, then P will choose s (2 > 1). Now: • if P chooses c, then A will choose s (4 > 3) • if P chooses s, then A will choose s (2 > 1). Then ss is the Nash Equilibrium. 82


Now consider Game 1 again (perfect information). A strategy in a game for a given player is a complete specification of what he or she may do under all possible circumstances. In Game 1, P has two strategies, c and s respectively. A, however, has four strategies: • c if P does c and c if P does s, cc • s if P does c and c if P does s, sc • c if P does c and s if P does s, cs • s if P does c and s if P does s, ss. The game in normal form is given by:

A

P

cc

sc

cs

ss

c

3,3

1,4

3,3

1,4

s

4,1

4,1

2,2

2,2

The prisoner’s dilemma This is a common example of game theory and describes a game or situation in which to act in self-interest will have negative results for both parties, whereas to cooperate can have positive results for both. This dilemma arises from two criminals being arrested. They are held separately and have no way of communicating with each other. When questioned they have several options which all have differing consequences. If one of them were to confess then the other would receive severe punishment. If neither confessed they could both be set free. The dilemma, therefore, is based on whether to hope that you will both say nothing or whether it would be best to confess before the other does and so receive less punishment. Can you see how this could relate to decision making within a business context? You might need a paper and pencil to think up a scenario – although you should not spend too long on this. One possible situation could be if a company (Business A) was deciding whether to update an existing product with the latest technological innovation – say a new car engine that uses a new type of fuel instead of petrol. This could be costly. Let us say that Business A has one major competitor, Business B. The options available are as follows: 1. Business A updates to new type of fuel and Business B does not 2. Business A does not update but Business B does 3. Both Business A and B update to new type of fuel 4. Neither Business A nor Business B updates. The first three options would involve one or both businesses incurring the cost of updating. The first two options have the risk for each business of losing customers by becoming uncompetitive in comparison to the rival who updates when they do not. However, the final option could be beneficial to both Business A and Business B, since no costs would be incurred and their competitive status would remain the same. 83


The next question is: would either business be prepared to trust the other and cooperate to achieve this benefit? If this did happen, how long would the cooperation last for? Clearly, risk and trust are important factors when analysing business decisions using game theory. We will return to game theory after looking at the topic of strategy.

4.3 Strategy Activity 4.6 In Chapter 3 Activity 3.1 we looked briefly at goal setting and noted that we would return to the subject more fully later in the course. Reading Now look more closely at: • Mullins (2010) Chapter 14 ‘Organisation strategy and structure’, pp.543–50. This covers the topic of setting goals. Read these pages more slowly now, because goal setting is a crucial step in designing a strategy. (An alternative reading is Boddy, 2008, Chapter 6 ‘Planning’, pp.194–98, ‘Developing a mission and goals’.) Defining the term ‘strategy’ is difficult – it is another one used differently by different people. We are specifically interested in business strategy, and some common characteristics can be drawn out from most definitions. These would include that a strategy is concerned with the long-term operations of the business and that it is significant for the whole organisation. One definition put forward is that a business strategy is: the pattern or plan that integrates an organisation’s major goals, policies, and action sequences into a cohesive whole. (Mintzberg et al., 1996, p.3)

If you are not quite clear on strategy yet, test yourself with the following short activity. Activity 4.7 Look at these four statements and in each case say whether they are true or false. 1. An objective is a way of achieving a strategy. 2. Planning comes first, then you decide on your strategy. 3. You can have a strategy without having any goals. 4. A good strategy is an end in itself. Give yourself a few minutes to answer these before looking at the feedback! Feedback All the statements are false. Come back to this question at the end of this chapter and make sure you can see why. What does our definition of strategy have in common with our understanding of management? Well, both involve goals although, at the strategic level, goals are set for the whole of the organisation rather than for one section or for one particular project. Strategic goals are those that are used to direct the organisation.

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Mission statement One way of explaining and communicating these strategic goals is within a corporate mission statement. An organisation’s mission statement is a general declaration of the overarching purpose of the business, and is closely related to the culture of the organisation, which we will discuss in Chapter 6. Activity 4.8 Think of the different organisations that you have belonged to, perhaps places where you have worked or studied or places where you are a member, such as a bank or library. 1. Are you aware whether any of these organisations have mission statements? If so, where did you see the statements displayed? 2. For those organisations that did not have statements, what do you think these might have been? Write a short mission statement for one of those organisations. The mission statement should offer managers and all employees a guide to the organisation’s values and aims, to help the decision making process. Strategic decisions, then, are those that contribute to achieving the organisation’s mission. Porter (1996), however, points to a change in approaches to strategy as managers have come to recognise that no single ‘best’ strategy necessarily exists. An alternative view is that an optimal strategy can be different for all organisations, and depends on certain contingencies. Can you recognise links here to broader trends in management theory?

Formulating strategy To recap, we know that strategy is related to achieving the organisation’s mission. We also know that the strategy should have significant impact on the organisation and that it should be concerned with the long term. But how is the strategy formulated? What process does this involve? Think for a few minutes, then read on. The formulation of a business strategy is similar to that of the general decision making process. Several stages are usually involved, although – again – this will be adapted to each organisation’s needs. These stages can be explained as follows. 1. Strategy makers first need to be aware of the current situation of the organisation as well as the external environment. They will evaluate the organisation’s current position with respect to mission, goals and strategies. These may have to be redefined. Several tools are available to help managers carry out this sort of situational analysis and these will be detailed later in this chapter. 2. All possible strategies need to be identified and then evaluated. This will involve considering the likely results of each strategy and linking them with the mission of the organisation. Again, models exist for aiding evaluation of these and will be looked at later. 3. The best strategy then has to be chosen. In making this decision the strategy makers will again need to refer to the organisation’s mission and will need to be confident that this strategy will satisfy the main goals of the business.

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4. A plan of action needs to be devised to implement the strategy. This will involve setting targets or objectives to indicate measurable results achievable along the way. This stage could also involve the creation of specific organisational policies in keeping with the strategy, to integrate the mission with the operational activities of the organisation. An important part of the implementation also involves communicating the strategy to all parts of the organisation, to ensure that goal setting and decision making at all levels can be done in line with the corporate strategy. 5. The final stage is continual, involving the monitoring and adapting of the strategy. Once the strategy is designed and implemented, it has to be adapted and amended in accordance with changing organisational variables. Porter (1996, p.78) defined this as ‘strategic continuity’ and stressed that continual improvement in efficiency is not an alternative to strategic continuity, but strategic continuity will actually ‘make an organisation’s continual improvement more effective’.

Strategic decision making – an ongoing process Once a business strategy has been defined, its continual application involves decisions being made on an ongoing basis at the strategic level. These decisions, like the overall strategy, involve the long-term operations of the business and are significant for the whole organisation. Johnson et al. (2008) describe the characteristics that are often associated with strategic decisions: • Strategic decisions are likely to be concerned with or affect the longterm direction of an organisation. • Strategic decisions are normally about trying to achieve some advantage for the organisation, e.g. over competition. • Strategic decisions are likely to be concerned with the scope of an organisation’s activities: does (and should) the organisation concentrate on one area of activity or should it have many? • Strategy can be seen as the matching of the activities of an organisation to the environment in which it operates. • However, strategy can also be seen as building on or ‘stretching’ an organisation’s resources and competences to create opportunities or to capitalise on them. • Strategies may require major resource changes for an organisation. • Strategic decisions are therefore likely to affect operational decisions. • An organisation’s strategy is affected not only by environmental forces and resource availability, but also by the values and expectations of those that have power in and around the organisation. Activity 4.9 You do not need to complete this activity all at once: you may find it more useful to spread it over a week or so. Gather together at least three examples of a corporate mission statement. These can be found in corporate literature, such as annual reports, or they may be displayed in the premises of organisations or on their websites (a listing and links to many large corporations can be found at www.fortune.com). 1. What similarities can you identify between these statements and what differences? 2. Choose one of the mission statements. Look back to the stages in formulating a strategy, and write down the types of options that may be suitable for achieving the 86


mission of that organisation. Evaluate the alternative strategies you have developed. Which option do you think you would choose and why? 3. If your chosen strategy was implemented, what impact could this have on the future strategic decisions that top management could have to make? For example, if the opportunity arose to buy a smaller company working in a similar area, would your strategy help to guide the decision makers or indicate the main factors to be considered? We have now considered decision making and particularly how this relates to the overall mission of the organisation. This mission is a strong determining factor for the formulation of the business strategy, which further determines and guides the strategic decisions that need to be made by top management on a continual basis.

Using game theory in strategic decision making Activity 4.10 Can you identify any problems with the application of game theory to strategic decision making? Think back to your evaluation of the classical and bounded rationality models: are any of the problems with those approaches relevant here? How helpful do you think game theory could be to a manager facing a dilemma, and in what sort of situation do you think it could be most useful? Feedback Game theory is applicable to certain situations, but only where two or more parties will be in conflict of some sort, and as we discussed earlier, rational behaviour is assumed. Decisions are based on predictions of how the opponent or competitor will behave, and these predictions will be dependent on the evaluation of possible options and outcomes for each party – assuming that each will choose the rational choice to bring optimal benefit. Therefore, some of the limitations of the rational model of decision making are relevant. For example, managers will not always have the time or information to develop predictions of competitor behaviour. Despite this, game theory does offer a useful approach to understanding organisational decisions within a competitive environment. This is not only relevant externally with other businesses, but can also be applicable within an organisation. For example, Miller (1997) demonstrates how the study of game theory can also be useful for making decisions about incentive schemes for employees. If a work group is offered a reward for increased team effort, then each worker has to consider the likelihood of the other team members working harder to earn the reward. If an individual is the only one in the group to work harder, so that the group as a whole does not improve much and they fail to gain the reward, the individual’s extra effort was wasted. On the other hand, if the team cooperates and all members work harder and are rewarded, then they all benefit. It follows that the greater the expectancy of group members that everyone will work harder – and therefore the greater the probability of winning the reward – the more likely it is that each individual will work harder. This is an example of expectancy theory (Vroom’s expectancy theory) and an important approach to motivating staff. For more on this, see Mullins (2010) pp.269–71.(See also Boddy (2008) pp.505–08). For a further description of game theory in relation to business decisions, see Miller (1997).

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4.4 Analysing the environment An important part of the process of formulating a strategy is to assess the internal and external factors that will affect the organisation’s situation. There are aids (also called tools or techniques) to help managers to do this. As technology has evolved, more statistical decision making models have become available as risk analysis can be done via increasingly sophisticated programming. Some of these contributions assist with the gathering of information, some with analysis of information to generate possible decisions, and some with the prediction of outcomes to help select the most appropriate decision.

SWOT SWOT analysis is a simple tool, much used to gather information on the current situation of an organisation. You can read more about SWOT on p.545–46 in Mullins (2010), which was part of your reading for Chapter 3. Different elements of the situation are evaluated within the categories of strengths, weaknesses, opportunities and threats. It is important to consider only the major elements within each category, otherwise the tool is less useful for deciding what strategy can be matched to the needs of the situation. These elements are represented on a chart such as Figure 4.5.

Strengths

Opportunities

Weaknesses

Threats

Figure 4.8 SWOT analysis Have a look at the example in Mullins for a completed SWOT. You can set out the four components how you wish. Here the positive factors (S, O) are across the top and the negative factors (W, T) are across the bottom. Note also that here the factors internal to the organisation (and therefore under its control) are on the left-hand side (S, W) whilst the external factors (outside the organisation’s control) are on the right-hand side (O, T). Can you see how this grouping of the four headings helps frame a discussion about strategic direction? Think for a few minutes before reading on. It helps two approaches to formulating strategy. The first approach is to consider the business and what it can offer (S, W) and then look at the external environment (Chapter 7 of this guide) to see what a strategy can target (O, T). This is sometimes called an ‘inside–outside’ approach to strategic thinking. You can see what an ‘outside–inside’ approach would be, though it is less common.

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Are the factors static or changeable? Think how you can use SWOT as a dynamic tool to help strategic thinking. They are changeable. First the factors are all changeable. Secondly, once factors have been identified, good management will take steps to strengthen weaknesses, capitalise on strengths, target opportunities and either turn threats into opportunities or avoid them. This will also be relevant to the next section of the course, concerned with the business environment, because the SWOT analysis offers an evaluation of the opportunities and threats presented by environmental factors. Once the analysis has been done, the main problem can be identified and understood within the context of the overall position of the business. Activity 4.11 Try your own SWOT analysis. Think of a business that you are familiar with. Draw up a SWOT analysis for them, or use the example of your college or workplace. Make a list of the decisions relating to the proposed change that could be helped by the information provided by this tool.

Other aids Another tool of this type is specifically aimed at assessing the current situation of the overall business when it involves different areas or products. This is the Boston Consulting Group matrix, and offers a view of the different parts of a business in relation to one another, the business portfolio. Each part is seen to require an appropriate strategy and so these are referred to as strategic business units. Each course is seen as independent in that it needs its own strategy to include appropriate mission, goals, customer type and product. This approach can provide management with an overview of how these different units fit together to make up the overall portfolio, and so can be helpful in making strategic decisions. Each business unit is analysed in relation to market growth and market share, and so allows them to be displayed visually within a matrix and different labels are given to units or products with different characteristics. You will also read about Porter’s Five Forces and PEST analysis in Chapter 7 of the guide – these can be used to analyse industry and the external environment respectively. The stakeholder model can also be used. Other qualitative techniques that can be used for gathering information are focus groups and brainstorming sessions. These involve managers getting groups of people together to gain information on a current situation, opinions on a certain topic – perhaps a possible course of action or the performance of a product – or they can also be used to generate possible solutions to a problem. Once the situation has been evaluated, all possible information gathered, and alternative solutions generated, aids are available to help the manager decide which will be the best option. One of these is simulation. This usually involves computerised programmes to run a series of simulation trials to predict the likely outcomes of different decision possibilities.

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An example is queuing theory, where the need for equipment or staff may vary and is partly due to chance. Simulation in this case would allow a manager to test out possible strategies – say for the scheduling of machine use, via the use of past experience of when demand is greatest – and in addition would use subjective probability for times when experience cannot be drawn on. Therefore, although the information gained is not perfect, it can contribute to the other factors that will help the manager make the most appropriate decision. Another aid of this kind is the decision tree which you have already come across earlier in the chapter. This can be used to trace the possible consequences of making different decisions. Activity 4.12 Draw your own decision tree. Can you think of decisions where the possible outcomes and their consequences can be represented on a decision tree? Think about decisions you make yourself – for instance, how you will celebrate your birthday or choose a holiday destination for yourself – and also ones that managers are faced with – how a manager, for example, decides between hiring transport for his goods and buying his own trucks. Draw out your own tree for one of these. How can this help you to make your decision? It can be seen, then, that many different theories, models and tools have been developed to help managers make decisions. Why is this so important? Research by Nutt (2000) suggests that, in reality, the decisions made by managers are often of poor quality. The main reasons given for this are: • a focus on the short term • a tendency to implement solutions that have the least risk and have perhaps been used before. These reasons can be related to the development of strategy. In Chapter 3 of this guide, research was presented that suggested managers do not have time for many planning activities and often spend time dealing with small problems that arise on a daily basis and need immediate solutions. When evaluating these approaches to strategic decision making, then, it is important to relate them to the workplace and the constraints managers face. Activity 4.13 Reading Read the following chapter from the secondary key text: • Daft (2008) Chapter 8 ‘Strategy formulation and implementation’. As you read this chapter, think about the realities of the manager’s job. Evaluate the value of the theories and their relevance to strategic decision making within the constraints of workplace pressures. (An alternative reading is Boddy, 2008, Chapter 8 ‘Strategic management’.) The remainder of this chapter will focus on a particular area of decision making, that relating to organisational change.

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4.5 Organisational change and development Change is one of the only constant factors regarding the behaviour of organisations. Why do you think organisations change? It is useful to distinguish between two different types: change that is planned and change that is unplanned or forced. • Planned change is related to the discussion in the first part of this chapter, because making strategic decisions about the direction of the company can often involve initiating change. • Unplanned change may also involve making strategic decisions, but these are decisions forced by particular circumstances rather than being the initiative of the top managers. The need for either type of change is strongly related to the business environment, since organisations operate within changing and sometimes turbulent conditions. Planned change can be used to attempt to overcome potential problems and to create the best fit between the organisation and the environment, whereas unplanned change can be necessary to react to and cope with external changes that are beyond the control of the management. In Chapter 6 we will be examining the internal environment of the firm, and in Chapter 7 we will focus on the external environment. However, here it is useful to consider the factors that can contribute to the need for organisational change. Activity 4.14 Think about the organisations that you know or have been part of. How have they changed during the time you have known or belonged to them? Was this planned or unplanned change? Think of an example of when strategic change may be forced and an example of when this could be planned. Make a list of the factors that could initiate the need for an organisation to change. Cole (2000) categorises the possible triggers for change as either internally or externally located. However, it is important to recognise that some of the triggers will have greater impact than others, and also there are differences in the level of predictability which affects whether management can plan for them or not. External triggers may include: • changing demand for goods and services • threats from the competition, such as the updating of a product • the entry of a new competitor • the threat of takeover by a larger company or a merger with a competitor • problems in the supply of materials needed for production • financial changes such as interest and currency exchange rates • lack of skilled labour • changes in the technology available • political and legal changes which affect the regulation of behaviour.

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In addition to these, triggers of change that may be internal, initiated within the business organisation, could include: • planned strategic change • introduction of changes to organisational culture • need to improve production efficiency, quality, supplier relations, use of personnel • the development of a new or improved product. How similar are these triggers to the list you made during the last exercise? It seems, then, that organisational change can be planned or forced (unplanned), and that it can be triggered by a wide variety of both internal and external factors. These elements of the business environment will be the focus of the next section of the course, which will also include an examination of organisational culture. Once you have studied this you should be able to link it back to the importance of organisational change. However, we also need to consider the nature of change itself, as the changes we are discussing can involve varying levels of significance for the operations of the organisation. Change that has the most impact is that which will transform the organisation, because in its current form the business would not be able to cope with the change. Less dramatic change can be described as incremental, involving the organisation continually adapting its strategy to cope with the changes and pressures faced. Therefore the different types of change that can be experienced by an organisation can be represented as in Figure 4.9. Type of strategic change

Management role

incremental

transformational

proactive

tuning

planned transformation

reactive

adaptation

forced transformation

Figure 4.9 Types of strategic change Source: adapted from Johnson et al. (2008)

Organisational development One particular way of understanding the proactive incremental type of strategic change is provided by the concept of organisational development (OD). You can read about OD in Mullins (2010) at the beginning of Chapter 19, pp.737–39. Once you know what it means, read on here. OD can be viewed as a specific sort of strategy, and although it can be defined in many ways, again several common elements can be found in most definitions. OD is seen to be important because it is a process that involves the whole organisation. The development of the organisation involves planning and the conscious implementation of incremental changes; the approach of the behavioural sciences is therefore important for understanding the human element of developments. 92


OD also usually involves a third party to act as the change agent. This is the person or group of people responsible for initiating the change, and usually for implementing the changes decided on. For the specific approach of OD this agent may be a special consultant or corporate team; however, for the initiation of organisational change more generally it is likely that managers will act as change agents. The manager’s role in organisational change is a very important one. Even if an OD expert carries out some stages, management would still have initiated this process and they would be involved throughout. Activity 4.15 What does organisational change mean for a manager? 1. What different types of roles do you think a manager would need to play? It will be useful to think back to Chapter 3. 2. Thinking back to the triggers discussed earlier, can you identify any that a manager would be the first to become aware of and so initiate change? One example would be a production manager recognising the need to change the relationship with a major supplier if it was not running smoothly. Can you think of another? Feedback Depending on the type and level of the manager, it is possible that he or she may be involved in many different roles. These could involve leading change, motivating employees during times of change – with communication being particularly important – and also controlling change as much as is possible.

4.6 Managing the change process Because change is such a pervasive element of organisational life, attempts have been made to develop models and theories to assist in managing the change process. This is by no means a new phenomenon, although it can be said that the environment of the organisation is becoming ever more turbulent and increasingly unstable. In Chapter 8, for example, we will be considering the impact of globalisation. From the perspective of social psychology, Lewin (1951) offered a view of change that involved three major steps. 1. The first is unfreezing, and refers to the process by which the forces which support existing behaviour in the organisation are reduced. 2. The second stage involves moving, where new responses are developed based on new information. This can include new behaviours, approaches, values etc. 3. The final stage is then refreezing, to establish the new behaviours as accepted and established practice, processes or values within the organisation. What is your evaluation of this? Can you see any problems with each of the stages? The final part of this chapter will consider these in more detail.

Different ways of managing change Another approach put forward stresses the importance of management style. This suggests that different managerial styles each have advantages and problems, but the most important factor is to adopt a style that best suits the organisation, the manager and the change being implemented. 93


Johnson et al. (2008) have developed the following typology of ways of managing change (called by them ‘styles’). • Education and communication – where management spend time explaining the problems being faced and the strategy for overcoming, but this can be time consuming. • Collaboration/participation – where employees or special groups of them are involved in setting the strategy, but again this can be time consuming. • Intervention – parts of the change are delegated and different agents coordinate the process, so it is controlled but still participative. • Direction – change is conducted through the use of authority, but employees are less likely to accept this. • Coercion/edict – change is forced through the overt use of power, but again employees are less likely to accept this unless in a crisis situation. Clearly it might be sensible to combine some of these styles in a change situation.

Organisational Development (OD) model The OD model of managing change has six key stages, which are set out by Cole (2000). 1. Preliminary stage – this will involve top management in discussions with the change agent to decide that change is needed (the OD approach usually uses an external change agent). 2. Analysis and diagnosis – during this stage the change agent will evaluate the current situation and gather necessary information, possibly through research such as interviews with employees and managers. The managers and change agent will then determine the diagnosis from the information gathered. 3. Agreement about aims of the programme – the aims and objectives of the change programme will be deliberated and decided upon. 4. Action planning – this stage involves planning the actions needed to implement the change and the plan of their timing and order. 5. Evaluation and review – following initial implementation, it is necessary to monitor and frequently review the strategy for change. In the longer term, monitoring is necessary. Also it is advisable to carry out major reviews to measure the achievement of the goals. 6. Revised aims and plans – the degree of revision needed will be dependent on the findings of the reviews, and if any aims of the programme are altered then it will also be necessary to adapt the plans. Once the programme is stable and major revisions undertaken, the change agent (third party) will no longer be involved. This approach to managing organisational change can also be relevant when a third party is not involved, but where the organisation’s managers are the strategic decision makers. The view that organisations continually need to change and adapt to different environmental factors is also taken up by the concept of the learning organisation, which will be explored in Chapter 9 of this guide.

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Total quality management (TQM) and business process re-engineering (BPR) Have you heard of either of these systems before? What do you think they mean in relation to organisational change? Think for a few minutes before reading on. Well, both involve a radical redesign of organisational operations, when change will impact every area of the organisation. Activity 4.16 Reading Turn to the following section of your main key text: • Mullins (2010) Chapter 20 ‘Organisational performance and effectiveness’, pp.782– 86. You can read about TQM on pp.782–85 and about BPR on pp.785–86. 1. Once you have read these sections, study Figure 20.4 on p.783. What roles can you identify for the managers within the organisation during the implementation of TQM? 2. From your evaluation of the models of change management you have studied in this section, what problems do you think could be experienced when trying to use them within a business?

4.7 Managing resistance to change One of the greatest challenges for managing change is the resistance it encounters. This resistance mainly comes from the employees of the organisation, but can also come from customers, suppliers etc. The extent of this problem will be determined by each individual situation and by the type of change being implemented. However, a range of approaches and techniques is offered to help managers and change agents overcome this resistance.

Making change acceptable Activity 4.17 If an organisation that you belonged to announced that it was going to implement radical change, what do you think your initial reaction would be? What would make you more accepting of this? Do not read on until you have thought about these questions for a few minutes, and have made a note of your main thoughts. The questions you have been considering are ones asked by researchers who try to develop ways of implementing change that will create the least or no resistance. Most resistance is experienced when employees feel that their goals are in conflict with those of the management. Therefore, change can be seen by employees as a threat to their job security, status or established patterns of behaviour. If a feeling of distrust and suspicion develops, then even if the goals of each party do not conflict, the employees may still feel threatened. The problem of uncertainty also contributes to this, as the need for change is often triggered by a turbulent and unstable business environment, and so disruption to work patterns can compound the feeling of uncertainty.

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However, Woodward (1968) stresses that this resistance is actually a ‘natural’ process that needs to be understood. If a threat is perceived from the change, then the natural reaction is to resist the change. Understanding this can assist in the planned implementation of a change programme, because resistance can to some extent be expected and so a strategy can be put in place to ‘manage’ the resistance. Lewin (1951) again contributes to this debate, by offering the technique of forcefield analysis. The aim of this is to provide a framework for analysing the major forces of resistance that are likely to emerge from a programme of organisational change. The stages involved are as follows: 1. Analysis of the forces that will affect the change to the new organisational state or condition. There are seen to be two types of forces: restraining ones, such as the response of the people who disagree with the need for change, and the driving forces of the change. 2. Assessment of which of these forces is most important. 3. Action needs to be taken to reduce the most important restraining forces and to increase the most important driving forces. A number of possible methods and considerations can then be put forward, as to how managers can reduce the negative effects of change. See if you can think of some of the possibilities for a few minutes before reading on. The definition of objectives is important, and clear communication of these is vital. If employees understand the need for change, how it will be implemented and the effects it is expected to have, then the fear and threat of the unknown will be reduced. Employee involvement wherever possible can also be seen to contribute to the employees’ ‘ownership’ of the change, such as asking for comments on the current situation or suggestions for possible solutions. The aim of this will be to gain greater employee commitment to the changes. The timing of the programme will also be important, again with the employees being made aware of what this is and why. Finally, it may be helpful to build in a number of shortterm goals, where improvements will be visible. The aim of this is to demonstrate to employees that the change programme will have positive and measurable benefits. The overall mission for managers of strategic change, then, is to decide what the most successful changes will be and how to implement them, whether transformational or continual. However, these managers also have the responsibility of delivering strategic change in a way that creates not resistance, but commitment. Although not listed as Essential reading you might find it useful to read Daft (2008) Chapter 11 ‘Managing change and innovation’, pp.367–70. This gives a practical example of force-field analysis and discusses tactics for overcoming resistance to change. See also Boddy (2008) Chapter 13 ‘Managing change and innovation’, pp.429–33. Activity 4.18 Reading Read the following section of your main key text: • Mullins (2010) Chapter 19 ‘Organisation culture and change’, pp.751–64.

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As you go through this reading, think about the different decisions that will have to be made during each stage of organisational change. Note why resistance to change occurs at both the individual and organisational level. It may be useful to have a particular organisation in mind to help you evaluate the contributions you read about. We will be dealing with organisational culture later on in this course.

Chapter review Key points • Decisions can be categorised into different types, which are associated with management at different levels in the organisation. • Models for decision making can assist the manager; however, each model has limitations and makes assumptions that may not be applicable. • A business strategy gives direction to an organisation and also provides a guide for subsequent decision making. • Environmental factors and conditions have a direct influence on the decision making process, and these can also trigger the need for organisational change. • Organisational change can take many forms and, as this is faced by all organisations, models for implementing change programmes are important despite their limitations. • The main challenge of change management is to overcome resistance to strategic change, and so management of resistance has to be an integral part of the programme.

A reminder of your learning outcomes Having completed this chapter, and the Essential readings and activities, you should be able to: • identify and evaluate different approaches to the process of making decisions, particularly at the strategic level • assess the importance of strategy and evaluate the decisions involved in formulating a business strategy • identify the constraints placed on the manager during the decision making process • identify the different techniques used to support managers when making decisions and developing strategy, and evaluate the usefulness of these techniques • assess the importance of the business environment • distinguish different types of organisational change, and identify the triggers which can generate the need for these • evaluate different approaches to managing organisational change and identify and explain techniques for overcoming resistance to change.

Sample examination questions When considering these, please remember the guidance given in the Introduction about examination preparation. Each question can be answered fully in approximately 45 minutes, under examination conditions. 97


1. Discuss why strategy is important to the business organisation. In your answer consider the decisions needed for the formulation and implementation of a business strategy. 2. a. Discuss the possible reasons for resistance to change in respect of: i) the individual, and ii) the organisation. b. Consider the different approaches senior management might use to overcome these various sources of resistance. Discuss how effective the approaches might be. Support your answer with reference to theory and practice. 3. a. Discuss why an internal and external environmental audit is a vital part of the strategy formulation process. b. Describe two techniques that will aid managers in this part of the process. Demonstrate the techniques with appropriate examples. 4. Discuss the usefulness of decision theory and decision making models to the manager in making effective decisions. Support your answer with reference to theory and practice.

Advice on answering a question To help you further with your exam preparation we offer below some suggestions for one of the answers. However, it is very important to remember that there is no model or correct answer to any of the questions. It is more important to demonstrate what you have learnt by developing your own response to the question, supported by evidence from the relevant parts of the chapter. 1. Discuss why strategy is important to the business organisation. In your answer consider the decisions needed for the formulation and implementation of a business strategy. The concept of strategy is central to this question, so the essay would begin by exploring this and offering a definition. The concept could then be linked to the business organisation and with ideas of organisational mission and goals. Different stages in the formulation of a strategy could be considered in turn, and at each stage the type of decisions needed could be discussed. For example, it might be useful to evaluate the organisation’s current situation. This would include looking at the aids that could be used to understand this. If a SWOT analysis were done, then decisions would need to be made as to what the organisation’s strengths, weaknesses, opportunities and threats are. A brief evaluation of the use of these models can add a critical dimension to your essay. When considering implementation, it would be helpful to identify the problems that could be faced by management and what the limitations of strategic decision making models may be, such as the assumptions they make. The decisions to be made here could concern how to overcome the problems faced – possibly linking this to management of organisational change. Any answer should include references to the main types of models and some of the main authors you have read about. As the main question is concerned with the importance of strategy, it would also be helpful to consider the consequences of not having a strategy and of avoiding strategic decisions. 98

Chapter 5: Managing the main functional areas

Chapter 5: Managing the main functional areas Aims of the chapter The aims of this chapter are to: • approach the business organisation as comprising different functional areas • introduce the major business areas, providing a preview to the subjects you may study later or in parallel as specialist courses • examine the role of the manager within the functional areas of finance, human resource management, production, marketing and communications • reflect on the types of decisions that managers in each of the different functional areas may have to make • evaluate the interconnections and relationships between these functions.

Learning outcomes By the end of this chapter, and having completed the Essential readings and activities, you should be able to: • provide examples of the various types of decisions that different functional managers will be involved in, and identify the types of information that would be needed • evaluate the human resource approach to managing, appreciating the impact this has on all areas of the business and on the responsibilities of all managers • recognise and evaluate market orientation, the aims of market researchers, advertisers and product branding • identify the activities and functions which represent the behaviour of the business organisation, and the roles and responsibilities involved in managing these.

Essential reading For this chapter there are several extracts from Mullins (2010). As before, use the learning outcomes at the start of each chapter and the end-ofchapter synopsis and review questions to navigate through the large number of diagrams and theories presented. Mullins, L.J. Management and Organisational Behaviour. (Essex: Pearson Education Limited, 2010). Chapter 9 ‘Working in groups and teams’, pp.344–47, ‘Patterns of communication’. Chapter 13 ‘Human resource management’. Chapter 14 ‘Organisation strategy and structure’, pp.555–60, ‘Clarification of objectives’, ‘Task and element functions’, ‘The division of work’. Chapter 15 ‘Patterns of structure and work organisation’, pp.589–92, ‘Technology and the Woodward study’.

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107 Introduction to business and management Chapter 20 ‘Organisational performance and effectiveness’, pp.766–71, from ‘The importance of effective management’, up to and including ‘Management development process’.

Further reading The Further reading suggested for this chapter is taken from the second key text, and from one other source. However, these contain much more detailed information than is necessary for this course. It is the Essential reading that you must complete first. You should also remember that you may follow up your studies of particular functional areas in more detail during your study for the other courses in this degree. Boddy, D. Management: An Introduction. (Harlow: FT Prentice Hall, 2008) Chapters 9, 11, 16, 19 and 20. Daft, R.L. New Era of Management. (Mason, Ohio: South Western: Cengage, 2008) Chapters 12, 16 and 20. Needle, D. Business in Context: An introduction to business and its environment. (London: Business Press, 2004) Chapters 10, 11, 12 and 13.

Introduction In this final chapter on decision making, we focus on the major functional areas of management. Business organisations can be defined and understood in many ways, as we discussed in Chapter 1. We now need to approach the business organisation in a way that will help us to understand decision making, different types of decisions and how they interlink. In Chapter 3 we considered the different roles that one manager can play and the decisions involved in these roles, but now we turn our attention to different functional managers within the same organisation. The definition we developed in Chapter 1 of a business organisation was an entity that is both commercial and social, which provides the necessary structures to achieve the central objective of trade in goods or services.

5.1 Functional areas of business organisations How would you divide up a business in order to analyse what it does? Look back at Chapter 1 of this guide for ideas. Spend a few minutes thinking about this and then read on. To analyse the business organisation in more detail, we can focus on the functional areas that the business is made up of. A functional area is a specialised department. It is a section that is concerned with one element of a business’s operations, although in smaller organisations the responsibility for a function may be organised differently. Examples of specialised departments include the finance and production functions. Can you think of others? For this chapter, five main areas have been selected for discussion. These are: • finance • production and operations • human resource management • marketing 100


• communication – though not usually considered a function, it is central to the organisation’s operation. However, it is important to recognise that other areas do exist and their importance is related to the type of business organisation. Any function could be defined – and other examples could include transport, public relations, quality control and exporting. One of the determining factors with regard to the importance of different functions and how the organisation is structured is the strategy of the organisation, and in considering some of the different functions we will be particularly relating them to managerial decision making. The division of work into functions contributes to the ‘necessary structures’ that are needed for the business organisation to achieve its objectives. Many organisations are formally structured in relation to the different functional areas; that is, they are made up of different functional departments. Each is usually headed by a manager or a management team, depending on the size of the organisation. In Chapter 6 we will examine in more detail the ways in which organisations can be structured. At this point, though, viewing the organisation as comprising different functional areas can offer us a way of analysing the decision making relevant to managers who are responsible for different parts of the organisation. Activity 5.1 Reading The first reading is from a chapter in your main key text: • Mullins (2010) Chapter 14 ‘Organisational strategy and structure’, pp.555–60, ‘Clarification of objectives’, ‘Task and element functions’, ‘The division of work’. We will return to this reading when considering organisational structure in Chapter 6 of this guide. Bear in mind that, for now, we are particularly focusing on organisations that divide the work on the basis of major functions and purpose, as mentioned on p.558 of the reading. As you read these pages, think of an organisation that you are familiar with, or think of a fictitious example – say a soft drinks manufacturer who makes five different products for a big market such as Thailand. 1. Looking at the example charts on pp.558–59 of Mullins (2010) draw your own chart to represent the organisation you have been thinking about. 2. How many different functional areas make up this organisation? 3. Would each different area be headed by a manager or a team of managers? Make a list of all the different managers that would then exist in this organisation. In this way, the business organisation can be represented visually as a number of functional areas which together make up the business and provide the structures for the achievement of organisational objectives. In turn, each functional area is a separate responsibility and each area has its own goals in helping to achieve the overall business objectives. Once we have identified the functional areas, we can investigate the roles of the functional managers and how they contribute to decision making within that area of the business. However, we need to approach this critically and apply what we have already discussed in relation to the role of the manager in organisations.

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Is a business just a set of functions? Activity 5.2 Look at the chart that you created for Activity 5.1 (or use the example in Mullins). As you look at it, think about the complexity we have already discussed in this course, for example with regard to the different types of managers that exist and the diverse roles they can play. 1. What are the problems in viewing the organisation as a composition of functional areas? 2. In your opinion, will each of the managers or management teams you have assigned to the functions be able to work independently? 3. In what ways might these functions overlap or be connected? 4. Consider the process of decision making. How might the decisions of one functional manager either affect or be affected by the decisions made by a manager in a different area? Write down an example from the organisation your chart is based on. Reading Now read: • Mullins (2010) Chapter 9 ‘Working in groups and teams’, pp.344–47, ‘Patterns of communication’. (Another source for this topic of communication networks can be found in Boddy, 2008, Chapter 16, pp.536–44.) Feedback This reading illustrates well the difficulties faced by functional managers who must: • coordinate colleagues within their functional area • coordinate also with other functional managers, general managers, top management and operation-level staff. In some cases the communications network extends beyond the company, as when a manufacturing company collaborates with a shop or chain of shops. In other words, a web of communications can make a simple functional division misleading. In one company there may be more marketing done by production managers than by the marketing department, for instance. In another company the source of most new product ideas and innovations might not come from the Research and Development Department. As we go on to look at some of the major functional areas, keep in mind the need for a critical approach. Drawing lines and divisions between the different functions of the organisation provides a framework for analysis, but organisations in the real world are more complex. The work done within organisations and the responsibility for it cannot always be clearly assigned to a particular function. Overlaps exist and need to be taken into account. Also, connections between the functions are a necessity, as the organisation is divided like this for one purpose which unites it, and that is to trade successfully in goods and/or services. The overall organisational goal is only possible through the coordination of these functions. This is the responsibility of the top managers or CEO. They work outside of the functional divides, overseeing the areas and the flow of work between them. Now see if you can solve the problem of finding a place for an ‘awkward’ function in an organisation.

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Activity 5.3 A department store has a structure that divides the business according to different parts of the store: fashion, shoes, furniture, crockery, etc. It also has a ‘wedding gifts’ desk where people can buy presents chosen from lists given to the store by the couple getting married. Where would you fit this into the organisational structure? Think about the problem before reading on to see the suggested solution. Feedback The weddings desk cuts across other departments. One solution is to make it a department on its own. A second possibility is to make it a separate business unit from the store. The manager can then purchase goods that customers want from other departments as part of an internal market. A third possibility is to include wedding gifts in whichever department most people buy from for weddings. Note that as customers change the types of gifts they buy, so the structuring of the wedding desk in the organisation should change. As you consider each different function of the business organisation, ask yourself these questions: • How does this function contribute to the overall aim of the organisation? • With which other functions would it interact most? For the remainder of the chapter, the five major functional areas have been selected for discussion although, as stressed above, other areas do exist. The aim here is to give just an introduction to, or overview of, the issues in each area, because you will have the opportunity to study several of these in more depth by taking specialist courses in them. However, you should spend more time studying human resource management and marketing as these two functions link into much of the material of this course. Here, we focus on the management of these functional areas and decision making within them.

5.2 Finance The area of finance is one that we can all relate to, as most of the activities involved are similar to many that we do ourselves on a much smaller scale. The main issues to be considered are: • management accounting • budgeting and financial control • financial reporting. As you read on, consider your own financial position and how these methods of managing finance apply to your circumstances. Also, do not forget to keep looking up new terms in your dictionaries and entering them in your glossary.

Management accounting Why is finance and accounting an important topic for the management of organisations? Take a few minutes to think about this, and then read on. First, remember that management coordinates resources for the achievement of goals. One of the major resources in an organisation is money. Furthermore, accumulating more money than it pays out is often the major goal of business organisations. 103


Therefore, the issue of finances is important to all managers. Financial accounting means using accounts techniques to prepare sets of accounts to satisfy legal requirements. Management accounting is what we focus on here: it is the use of accounting techniques for management purposes. In general, management accounting takes current and past data and looks to the future. Note how management accounts differ from financial accounts. Financial accounts take past data and create a picture of the business at one point in time, whereas the output of management accounting takes the form of costing and investment appraisals. The output of financial accounting takes the form of balance sheets, profit and loss accounts and other accounts (this form of accounting is dealt with below under the heading ‘Financial reporting’). Any middle or top manager carries out management accounting. Financial accounting is left to professionally trained and qualified accountants. There are links – here are two examples. • First, estimates of costs are sometimes based upon past financial accounts. However, this can lead to wrong decisions. • Secondly, in many companies the finance department is both responsible for producing financial accounts and also for taking a lead in creating management accounts. Estimating the costs per unit of a product or service requires an understanding of the nature of costs. • Direct costs are those costs specifically related to the production process; examples include raw materials and electricity. • Indirect costs are those costs incurred from the overheads or general running of the business; examples are the costs of machinery and buildings. Economists prefer to divide costs according to whether they are incurred or not when the company ceases production. • Variable costs are those costs which change according to the number of units produced and it is usual that the more of a product made, the lower the variable costs will be; examples include materials and any overtime wages. • Fixed costs are those costs which do not change according to the number of units produced and so the same cost will be incurred irrespective of production levels; examples include wages of permanent workers, the factory or other premises, and the machinery. You can see that indirect and variable costs are very similar, as are indirect and fixed. However, the distinction is worth making. Economists use the variable/fixed split in their theories while most managers use direct/ indirect. For both economists and managers the main problems are: 1. to include all the costs, not forgetting ‘hidden’ costs 2. to draw the line between what costs are direct or variable and what costs are indirect or fixed. This depends a lot upon the period under review. A costing that looks over a period of six months will have a different split between the two kinds of costs to a costing that takes a period of five years. Once the process of costing is complete, the manager will have the information needed to make decisions and recommendations, such as

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whether to make a product, what target production levels should be, or what price a product should be set at in order to cover costs appropriately. The process of analysing costs involved in any investment, such as the purchase of new machinery to produce a particular product, can be understood as an investment appraisal. This is an appraisal of the return that can be gained from a particular investment. The next activity is an example of using costs in decision making. Activity 5.4 Suppose you are a production manager of an office furniture manufacturing company. You have to decide whether or not to invest in a new piece of equipment for the production of office chairs. What information do you need to make this decision? Jot down what you think the answer is before reading on. Feedback A framework for your answer might include some or all of the following: • How many chairs do you think you can sell and how much for (revenue)? • What level of direct costs will be expected and therefore what margin per chair? • How many years will the equipment last? • What possible effects will competition have during the life of the investment? The concept of depreciation is important in costing capital equipment. The word refers to the fact that assets – the valuables owned by a company or individual, actually become less valuable or ‘depreciate’ over time. This may not be true for all assets, for example the actual premises of a company may become more valuable, but machinery may be worth less the more it is used and as new technology is invented. Therefore managerial accounting is concerned with providing the most comprehensive information available to make the best-informed decisions. All managers can be involved in this process to some extent and some companies encourage all their managers to back up their case for new equipment, improved processes and new products and services with wellprepared management accounts. This is therefore a good example of how, although expertise is often concentrated in one area of the organisation, such as the accounts department, financial decisions pervade the whole business and can involve all types of managers.

Budgeting and financial control How do you decide what to spend your money on? Do you just spend your money until you have none left, or do you control your spending in any way? Think about this concept of a budget for a few minutes. Since we established at the beginning of this section how important money is for any business organisation, budgeting to ensure the most efficient use of the resource is a major responsibility. A budget is a planning tool, based on the finances coming in and the amounts expected to be paid out. Each item of cost is ‘budgeted for’ within the overall plan by allocating it a part of the available funds. The aim is to prevent overall losses by sticking to the budget. A budget is therefore also a controlling tool. 105


Preparing a budget Activity 5.5 Have you ever prepared a budget? What money do you have coming in this month? Do you know what expenses you are going to incur? Think of this now as if you were a departmental manager, trying to budget for the year ahead. 1. What information would you need to make decisions about how to allocate your money? 2. What problems might you face in trying to make these decisions? 3. What would be likely reasons for your budget not being adhered to? This issue of financial control is very important because it can have significant impact on the overall success and actual survival of the business. If you did not control your own finances, could you predict the results? It is for this reason that great emphasis is placed on financial control within most organisations, with targets set and achievements measured. The budget is often one of the major responsibilities of individual managers, and monitoring of their financial activities is often the responsibility of a specialised finance department. This department would also usually be involved in the overall budgeting for the whole organisation, together with the top management. Many decisions will be involved in this planning and so a wide range of techniques and programmes have been developed to aid this process. The decisions will, however, mainly be related to the priorities and goals set out by senior management.

Financial reporting This final element of the management of finances relates to the presentation and reporting of financial information. The financial statements that a business will produce are partly determined by the law of that country. Depending on this law and the type of organisation, some of these reports may need to be made available to the public. Do you know what companies are legally required to report in your country? Have you ever seen examples of company reports? There are two main forms of financial reports, which we shall briefly explain here. The first is the balance sheet. This is used to report financial information relating to assets and liabilities of the business on the last day of the accounting year. Again, the concepts of fixed and variable costs are used in the preparation of this statement, and the aim is to give a snapshot of the company’s financial standing.

The balance sheet Examples of balance sheets can be found in companies’ annual reports and often on their websites. The Further reading suggested for this chapter also includes an example (Needle, 2004, p.472).1 Activity 5.6 Have a look at the type of information offered by the balance sheet, preferably by comparing a few examples. 1. What does a balance sheet show? 2. What does it tell us about the financial position of an organisation?

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3. What problems might there be in evaluating a firm’s financial standing based on information that relates to one particular day? The balance sheet is usually viewed together with the second major type of financial report, the profit and loss account. This differs from the balance sheet in that it relates to an accounting period, rather than the situation on a particular day. This report provides information on the organisation’s income and expenditure during the defined period. The report therefore shows whether a profit or loss has been made, by demonstrating the difference between the money received e.g. from sales, and the money spent e.g. in production, marketing, etc.

The profit and loss account Examples of profit and loss accounts can be found in the same places as the balance sheets, including in the Further reading (Needle, 2004, p.587).2 See also the discussion in Boddy (2008), Chapter 19, pp.631–37 – this reading looks at cash flow, profit and loss, and the balance sheet.

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Activity 5.7 Look up a few examples of a profit and loss account, for comparison. 1. What use does this type of statement have? 2. How can it help you to understand the financial position of the business? 3. What are the main differences between this and the balance sheet? Often, several reports are analysed to gain a fuller picture of the company’s standing. These types of reports though, may be of limited value. Can you think why? Spend a few minutes on this before reading on. 1. Financial reports are used for specific purposes and are tailored for specific audiences, especially reports required by law (for example, by the tax authorities). 2. The information shown is an amalgamation from many sources within the company. Reports are therefore as accurate as the information collected. 3. Some items may not be reported; such as the value of a company’s reputation or the environmental and social costs of a company’s activities. If the reporting authorities do not want this information, it will not be collected for financial reporting. Can you think of other examples that do not lend themselves to precise calculation? To sum up, finance is dominated by planning and control. Also, elements of financial activity are embedded in all sections of the organisation. Note how this confirms a theme of the course – that ‘who is responsible for what’ in management is often different from what appears on the surface. Other forms of organisational finance exist, such as cash flow statements, and you will deal with those issues in more detail in specialised courses. The aim here is to develop an appreciation of the link between finances, the role of the manager and decision making. Some of you will be studying finance and accounting in more depth as part of your degree. 107


5.3 Human resource management The second functional area to be discussed is that of human resource management (HRM). Start by considering these questions for a few minutes. What do you think this term means? Think about each of the three words. Many organisations today have specific human resources departments to fulfil this function. Have you ever come across one of these departments? If you have ever been employed by an organisation, or trained or appraised by them, then it is likely that you have come across one. HRM is literally about managing the people in an organisation as a resource. This includes planning and forecasting organisational requirements in the future, the staffing levels, types of staff and types of contracts, staff training and development, appraisal and promotion, working conditions, incentive schemes, pensions and benefits. Previously, and in some cases still now, some of these responsibilities would be defined as personnel issues. Personnel management is a term related to HRM. In some organisations it means more or less the same thing, but in others the term ‘personnel’ reflects a more limited and day-to-day area of activity. Some organisations do use the terms interchangeably; however, seeing HRM as a distinct approach can help us to understand its contribution to the organisation and also how it might be relevant to the other functional areas. Our definition of HRM is the treatment of employees as a specific resource and the practices used to utilise this asset. Add this definition to your glossary and also add the definition given by Mullins. If you can find a definition for ‘personnel’ put that in as well. Remember to reference all your glossary entries. Activity 5.8 Reading Now read: • Mullins (2010) Chapter 13 ‘Human resource management’. This reading provides a comprehensive discussion of the HRM functional area. When you read this, pay particular attention to the sections on training and development, performance appraisal, and the international dimension. We return to international aspects in Chapter 8 of this guide. (An alternative source is Boddy, 2008, Chapter 11.) As you read, do not forget to keep up your glossary entries. This, together with the notes you are taking from the readings and the guide, are your main ‘learning resources’ for this course. On completing the reading, it is recommended that you attempt the review questions on p.528, particularly numbers 1, 2 and 5. As usual, you will find the synopsis and review questions at the end of the chapter in the book useful. Two distinct emphases can be identified within the HRM literature, although these should be seen as the extremes on a continuum, with most styles actually being somewhere in-between. 108


• ‘Hard’ HRM places emphasis on the resource part of the term and aims to increase efficiency by control. It has its roots in the scientific management school. • ‘Soft’ HRM places emphasis on the human element of the term and aims to increase efficiency through employee commitment. It has its roots in the human relations school. Spend a few minutes thinking about this distinction. Recall Chapter 1 and the Hawthorne experiments. Then read on. When approaching workers as a resource to be controlled, production is thought to increase by gaining compliance. This can be linked to ideas about strict rules for individual tasks and control over how these should be done and the time they should take. In contrast to this, approaching workers as a different kind of resource is more in line with the softer HRM approach. The need for motivation is recognised, as people are not seen to respond to stimuli in the same way that other resources would do. Gaining commitment is seen as the most beneficial approach and so this can be related to the human relations school. Can you see these influences? For example, think how the results of the Hawthorne experiments could support the softer HRM approach.

HRM and decision making What types of decisions do you think an HR manager will have to make? Can you make a distinction between the short-term and longterm decisions that would be the responsibility of this functional area? The types of decisions are discussed in the chapter from Mullins that you read for Activity 5.8 (Chapter 13). With regard to the long term, it is important for the decisions of the HR manager to be fully coordinated with the overall strategy of the organisation. People are involved in all aspects of the business and in all stages of plans to achieve the business goals. Therefore the decisions of the HR manager can have a significant impact on the organisation’s ability to achieve those goals. Let us take two examples. • First, if a business intends to specialise in providing a high-quality service to customers, then the recruitment of the right personnel to deal with customers and their customer service training will be essential to this goal. • A second example would be a business that intends to increase production by 50 per cent. For this the HR department will be the key, as the HR department will be responsible for making the necessary changes to the workforce size and composition. Likewise, if a company is in difficulties and needs to cut costs, achieving this goal may involve HR strategies of downsizing or reducing the expenditure on staffing. It is also important to recognise how HRM can be integrated into the whole of the organisation, as well as being the primary responsibility of the HR department. Because people are such an important resource, all managers who have subordinates are to some extent responsible for HRM. An example of this would be managers involved in the training of their subordinates, or at least the identification of training needs. Also, managers are often involved in the appraisal of their subordinates and the continual 109


evaluation of their work. Therefore, again, the boundaries between the functional areas can be blurred. This is also true when we view the managers themselves as a resource to be managed. The responsibility lies partly with senior managers and partly with HR managers. Part of ‘managing the managers’ as organisation resources involves the HR activity of management development. This relates to more than training programmes for managers, since it is recognised that the roles they have are complex. Managers need to develop skills rather than learn tasks.

How can we ‘develop’ a manager? Activity 5.9 Think back to what you have read about the job of the manager (such as in Chapter 3), the attributes of a good manager, and the characteristics of effective management. Look back at the notes you have made to remind yourself. (Remember, it is helpful to review and re-read your notes regularly, so that you can make connections between different issues and also to help your exam preparation.) 1. What are the main skills that the HR department should be trying to develop in managers? 2. What differences might there be in the training techniques used for managers, compared with those used for other employees? Think about the aims of the training. 3. Can you think of any problems that may be faced when trying to ‘develop’ managers? Think about the relationship between the trainer and the manager, and also about how relevant to practice some of the techniques may be if they are learned within a training room. Reading Turn now to your main key text and read: • Mullins (2010) Chapter 20 ‘Organisational performance and effectiveness’, pp.786– 91. This reading is about how to develop managers. In doing so, the organisation becomes more effective. You may find it helpful to re-read the section ‘Effective managers’ in Chapter 3 of this guide and the related reading for Activity 3.9 from Mullins (2010) Chapter 12. Feedback Managers can be seen to be different from other employees because they are often more likely to take responsibility for their own development. This could mean, for example, requesting training, or self-development through taking external courses – think of the popularity of the MBA. Part of the reason for this is in the nature of the managerial career. This is culturally influenced, but a common pattern can involve a career with many different organisations and at different levels. This, therefore, does not provide the opportunity for a continued or consistent development programme to be provided by one HR department. So, in considering the functional area of HRM, it can be said that the decisions relating to this area are central to the survival and success of the organisation (unlike finance?). As well as being an important specialisation, the responsibility for HR activities is actually shared by the whole organisation. Any manager who is responsible for subordinates, and any manager who is engaged in the coordination of other people’s actions, is also involved in HR.

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Furthermore it is important to recognise that managers themselves are a resource of the organisation, and therefore need to be managed and their actions coordinated for the achievement of organisational goals.

5.4 Production and operations The next function to be examined is concerned with the actual output of the organisation rather than the running of it. This is the production and operations function. It refers to the production of any goods or service (‘the product’) and the operations or tasks involved in the production process. This function obviously varies immensely depending on the type of business, and in Chapter 6 we will consider variations in business type. However, here we are interested in the management of this function and the types of decisions involved. The production and operations function is an important one because it is through this that the output is provided for the customer, from which the business makes revenues for continued survival. Although our understanding of this function was historically associated with manufacturing goods, it is equally applicable to the production of services. Examples of this would include a suit alteration by a tailor, the services of a financial advisor or the buying of a haircut. The management of this function is heavily dependent on the type of product because very different production methods exist and different products also require different emphases in the organisation of operations. For example, if the product is an expensive sports car, then attention to quality and safety will be very important. If the product is crude oil, rate of flow from the oil wells is important. Think of a few goods and services yourself and how the relative importance of aspects such as quality, volume of production and diversity of products differs. One of the key activities of the production and operations function is the design of the production system. This will need to take into account elements such as the type of product, the numbers to be produced, the technology available, and other resources available – including money and labour, quality needs and the time scale. Once the different stages in the process have been designed, it is necessary to decide how all the elements in the process will be combined. In this way, decision making plays an important role. Activity 5.10 Reading In this reading Mullins discusses the Woodward Study and looks at different methods of organising production: • Mullins (2010) Chapter 15 ‘Patterns of structure and work organisation’, pp.589–92. Now answer the following questions. 1. What types of products do you think will be best suited to the three types of production systems described in this reading? • unit and small batch production • large batch and mass production • process production.

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2. How do you think the production and operations function relates to the other functional areas? Which do you think it is most strongly linked with? (See p.608, Table 16.1, for inspiration.) Decisions about the management of resources are particularly important for the production function. In relation to the technology used, decisions relate to investments in the latest machinery and equipment. Note this connection with the finance function. In relation to the labour to be used throughout the operations, decisions relate to staffing levels, types of skills required and patterns of work, determined in part by the HRM policies adopted – illustrating a major link between different functional areas. Which other functional area do you think this connects to? Finally, in relation to the management of the materials to be used, decisions relate to the quality, cost and quantity. This last point about quantity is important.

Making decisions about production Activity 5.11 Imagine you are the production manager in a shoe factory, particularly responsible for one style of men’s shoe. You need to decide the quantities of raw materials you are going to order. What information do you need to make this decision? It might help to think about the productivity levels you are aiming to meet, the scheduling of the production stages and the costs of the materials. 1. What problems may occur if you do not order enough materials? 2. What problems may occur if you order too many materials? 3. What might the implication be if you need to store excess materials – for example in terms of space and budget? 4. Why might the type of product affect your decision? Think about the type of raw materials needed and the length of time they can be stored without being ruined or damaged. Inventory management refers to the process of planning and controlling the levels of materials stored in relation to the demands of the production process. One approach to this is the just-in-time (JIT) system, which aims to provide the exact quantities to each stage of the production process at the exact time that they are needed. The benefit of this system is that less storage space is required and also less of the business’s money is tied up in materials. Another approach is that of material resource planning (MRP), which uses a computerised system to plan and manage inventories as well as to order new materials when needed. Getting this supply of materials correct is vital, since delays in production caused by a problem with supply can be costly in lost revenue and can also potentially jeopardise the likelihood of a customer returning if a delivery date had been agreed and then missed. Related to this is the issue of quality management: controlling the quality of production for goods or services can be vital to retain competitive advantage and the loyalty of the customer. To ensure this the practice of benchmarking is used to apply best practice to the production process as comparisons are made with other production systems within and outside the organisation, to maintain the highest standard possible. 112


Another example is total quality management (TQM). You have already come across this in the previous chapter of the subject guide. Refresh your memory by looking in Mullins (2010) pp.782–85. Note the TQM diagram on p.783, Figure 20.4. TQM relates to the idea that a focus on quality should pervade the whole organisation. It is not just about checks made on random products as they leave the production process; instead, the drive for quality is concerned with all processes, materials and work practices, and enters into every level of the organisation. This is another good example to demonstrate that the functional areas cannot be studied in isolation. Through approaches to production such as TQM, the quality of the product is not only the responsibility of the production department, but also a responsibility for the whole organisation. An example is the link to HRM. This could possibly involve the training of workers in benchmark standards being of great priority for the HR department, as well as a scheme to motivate and reward staff for highquality work. Therefore the adoption of a particular production strategy can affect the decisions made throughout the organisation. (A useful source for a discussion about managing operations and quality is Boddy, 2008, Chapter 20.)

5.5 Marketing Marketing has developed as a specialist subject, with its own theories, gurus and terminology. Our aim here is to gain an understanding of the concept and to identify its contribution to decision making in the organisation. The growth of marketing has been closely related to the growth of the media and so the reach of marketing messages and images. Activity 5.12 Nearly everyone has some idea about marketing. For this activity, think about how it affects you personally. Do not spend more than 15 minutes on this. Think about a product, either a physical item or a service which you have purchased recently. 1. Did you know this product existed before you bought it? If so, how? 2. What made you think that it would fulfil your requirements? 3. If you chose this product from a range of alternatives, what stood out about this one? 4. What would make you buy this product again? Answers to such questions are interesting to marketing managers. Marketing involves identifying or creating a ‘need’ or desire, and then fulfilling it to the satisfaction of the customer, if possible on an ongoing basis. In this context a need can be understood as something which has to be fulfilled to avoid deprivation, such as shelter, food, clothing; a desire or want is something social, which can be created and is seen to offer a deeper satisfaction.

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This is a general definition of marketing, and the aims of a particular marketing department will be dependent on the type of organisation and the product. For large organisations which market a range of products, it is likely that the overall strategy will be set at the top level of the department, but then each product would have its own marketing team. The reason for this is that it is necessary to market the qualities of each product to meet specifically the requirements of each target audience – the group of people who it is hoped will buy the product.

Identifying a target audience Even for one type of product, the potential market can be differentiated to target even more specific audiences. Take the example of a product like noodles: • The economy range of dried noodles may be targeted at low-income families and students. • Noodles brightly labelled with the name of a famous cartoon character may be aimed at children. • Organic noodles could be aimed at mothers concerned about their children, or other health-conscious groups. • The ready-to-stir-fry noodles could be targeted at young professionals with little time for dinner preparation. Think of making and marketing a brand of toothpaste. Which target audiences could these products be aimed at? • a minty cool toothpaste to freshen breath • a toothpaste that stresses the protection given to gums • a toothpaste in a tube the shape of an animal • a toothpaste that aims to whiten teeth. So, marketing involves decisions about product design and linking this with the desires of a target audience. We can fill in the details of what happens between the initial conception of the product and it reaching the customer by listing some of the responsibilities of the marketing manager. They are: • to identify the needs of the customer, and to segment the potential customers according to their needs • to input into the design of the products and services that will meet those needs • to price the products and services, taking into account the costs involved, the competitors’ pricing and the customers’ ability to pay • to communicate to the prospective customer, giving information about the products and services • to be involved in marketing the products and services, ensuring that they are available at the place and time to suit the customer • to provide the after sales service, etc. to ensure the satisfaction and loyalty of the customer. There are different philosophies/orientations to marketing that businesses will adopt: • A production orientation to this would aim to satisfy consumer desires that are already established and so would not concentrate effort 114


on promoting the desirability of the product. In short, the organisation will concentrate on production efficiency and high volumes. • A product orientation relies on the product ‘selling itself’. The customer will favour those products that offer high quality and performance features. • A selling orientation assumes that, once the product is created, the consumer just has to be convinced that they need it. There will have to be a substantial selling and promotion effort. • A marketing orientation, though, tries to establish the desires of customers and then satisfy them. The organisation will try to deliver more effectively than its competitors. • This last approach, in particular, will require market research to discover what customers think they want, or what they like or dislike about existing products. Have you ever taken part in market research? Think about what the marketing function of that organisation wanted to know from you. How might that information have helped them?

Marketing strategy Market research is not only directed at your thoughts about the product, but also tries to find out the customer’s idea of a fair price. The setting of this price is not only a marketing function – can you think which other departments may contribute? For example, the production function would need to estimate production cost and a budget may need to be agreed with the finance department. However, this is not a simple decision, and is dependent on the marketing strategy for each particular product. The marketing strategy involves defining what the aim is for each product. Certain elements have to be considered which all contribute to the strategy. The first of these, as we have discussed, is the type of product. Others include the price, the way the product will be promoted and place where the product will be made available to the customer. People can also be included here, for we have already established that the target market is important. Together, decisions on this marketing mix formulate the marketing strategy for each product. Notice the four highlighted words beginning with P. The 4Ps is a simple framework for the marketing strategy – this will be sufficient for our needs in this course. Those of you who go on to study the course 141 Principles of marketing will be investigating the marketing strategy in much more detail.

The marketing planning process Let us briefly look at some of the stages in the marketing planning process. No new product is introduced, or a new market entered, without considerable planning and research. The first stage is to set in motion the strategy process – what is the organisation setting out to do and how is it going to achieve this? Much is invested in market research and setting up information systems. The next stage is to analyse the market for opportunities – what is happening in the market environment, in the consumer and industry markets? Having observed the potential customers and segmented them into homogeneous groups, the company targets those segments it means to approach and decides where to position its product or service in relation to its competitors. The marketing mix (or strategy) is developed and implemented. 115


The marketing mix We will look at the 4Ps in more detail: • Product: the product is the core of the company’s marketing effort. A great deal of time and money is spent in developing the product. Many prototype products never reach the market or, having reached it, fail. The success rate is small. Products also have a limited life-cycle before they are rendered obsolete by new products or technologies. So it is important to get it right. • Price: this is related to costs of production, the price the customer will bear and the competitors’ prices. There are various pricing strategies such as skimming (setting a high price to attract a high profit/unit from less price sensitive customers) or penetration (setting a low price to build a mass market). • Promotion: one of the most visible aspects of the marketing mix - the promotional mix will differ according to the product and the customer target market. • Place: distribution involves wholesalers, retailers, shippers, agents and manufacturers; these comprise the marketing channel. Think about this marketing mix as it relates to the following example and then design your own marketing strategy. Activity 5.13 Take the example of a briefcase. It has been decided that this briefcase will be promoted as very high quality, of the latest design, and quite exclusive – only being available in a select few specialist shops, with the target audience of senior-level business people. 1. How would these decisions about the marketing mix affect the decision of price? 2. What could be the result if the price was set just by calculating production costs plus a standard percentage of profit? Could this have implications on the marketing message being developed? Now make up your own example and design a strategy for marketing it that includes creating a suitable marketing mix. How interdependent are each of the decisions to be made? Remember that the marketing function is more than advertising, which is what some people still think. One of the aims of marketing is to have a ‘unique selling proposition’, something that leads consumers to become loyal customers of the product. Linked to this is the search for a niche or a gap in the market, which the business can supply at high prices until competitors enter the same niche. Brands are a relatively recent way of finding and retaining niche markets. The idea of a brand can be seen as more related to fulfilling a lifestylewant rather than a particular product-want. Images and messages are used to convey to consumers a certain style or lifestyle or life-view which their brand rather than the product can represent. Can you think of any examples? One could be Nike, where the Nike image, message and symbol are more the focus of their marketing campaigns than any particular running shoe or product. (When you come to the last chapter of this subject guide, which is concerned with ethics and social responsibility, you will read about Nike and their aim to be a good corporate citizen. How valuable is this to the Nike image?)The benefit of a brand image is that there is no need to sell each product, because effort concentrated into selling the brand name can be used to sell a whole range of products. Do you have another example? 116


The marketing function therefore has an important and evolving job to do, which requires adaptability as markets, wants, competitors and technology develop. Marketing management needs a constant flow of ideas, research and knowledge of these developments. The advances in information technology and the internet have had a great effect on the marketing function. Can you think how? Decision making within marketing is important, frequent and requires up-to-date information which needs to be shared with the other functions. This leads us to the last topic we will consider in this chapter: communications. (See section 5.6.) Activity 5.14 Reading If you are interested in learning more about marketing, you could consult a marketing text, for example, Kotler, P. and G. Armstrong Principles of Marketing (Prentice Hall, 2009) [ISBN 9780136079415] or refer to Chapter 11 in Needle (2004) or Chapter 9 in Boddy (2008). Alternatively, look at the subject guide for course 141 Principles of marketing.

Game theory and marketing Game theory can be used by marketers to understand certain aspects of the marketing environment. For instance, it could be used to model behaviour of competitors. In zero-sum games, a player’s gain will lead to a loss by the other player(s). The competition for market share can be seen as a zero-sum game. If one organisation increases its market share, then its competitors will have less. This is an example of a non-cooperative game. The lessons learnt from the prisoner’s dilemma can be demonstrated in the context of marketing. For example, if all organisations competing in a particular product market cooperate to keep the prices at a high level, then they will increase their profitability. However, if one organisation decides that it will lower its prices, then it will increase its market share. The other organisations may follow suit to maintain their market share. The result will be that profitability will be decreased. Other examples of the use of game theory in marketing can be found in the subject guide for course 141 Principles of marketing.

5.6 Communications Why do you think that communication within an organisation is an important topic for the study of business management? After all, not all organisations have a communications department or even a specialised unit for this function. However, communication is a major activity within organisations and plays a significant role in determining the success of a business. Think for a few minutes before moving on. Think back to your understanding of management, the coordination of the actions of people and other resources to achieve goals. We have looked at the importance of planning, leading, motivating and controlling. We have also considered the functions of finance, HRM, production and marketing. In looking at these, the links between the different functions have been considered and we have established the need for information to make informed decisions. What do all these elements have in common? 117


The need to communicate Communication refers to the act of imparting ideas, opinions, knowledge or information. People communicate with each other and between groups, in many ways and at many levels in organisations. Communication may be informal, such as through ad hoc discussion, or it may be formal, for example an official memo. Communications can flow up the organisation towards the top managers, or can flow down from them to all levels of employee. A communications system involves a formalised structure to facilitate this activity. This can include anything from a regularly updated notice board, to a complex intranet and electronic mail system, to a system of reporting from various committees to other committees. It can therefore be seen that technology can play a major role in communications, although it is acknowledged that communications can take many different forms and do not need to be sophisticated. When focusing on the issue of decision making, it becomes clear how important the area of communications is to a business organisation. In Chapter 4, we discussed the need to have as much information as possible before being able to make the best choice of options. When making strategic decisions this information is provided via communications. This involves all the various different functional areas as well as specialist knowledge. When functional managers make decisions, good information flows within their own area or department will be important, as well as communication lines between the different functions, as has been stressed throughout. Also, communications with higher managers will be important for functional managers. These are just some examples of how people and groups communicate within an organisation. Activity 5.15 How do you prefer to communicate? Think about an organisation you have belonged to, either as an employee or a student. Make notes in answer to the following questions. 1. What was the main type of formal and informal communications that were used during your time there? 2. Who were these communications from, and at what level of the organisation? 3. How did you communicate with different parts of the organisation? 4. How important was it to communicate? Think about what your aims were and the tasks you had to do: could you have achieved these without sharing ideas or receiving information? Reading We looked at the complexity of communication channels earlier in this chapter. Re-read the following section of your main set text, which you studied in Activity 5.2: • Mullins (2010) Chapter 9 ‘Working in groups and teams’, pp.344–47. (Alternatively Boddy, 2008, Chapter 16, pp.536–43.) In this short reading we are offered a number of patterns that communication flows can follow. Referring back to the question ‘How do you communicate?’, think again about your experience in a particular organisation and the type of communications you were involved in. Which pattern or patterns of communications best suited your experience? Draw a diagram to represent your ideal system.

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The network diagrams in the reading look neat and orderly. Do you think this is the case in most organisations? The distinction between formal and informal communications needs to be remembered here. Some businesses favour informal communications (advertising agencies, computer games companies) while others prefer a formal style (steelworks, manufacturing). Management of informal communications may be limited to a controlling role. In other words, a manager can have control over informal links to some extent, but the manager cannot make them happen by him or herself. However, management of formal communications should ideally involve, first, a planning role for the manager, in actually designing the communications system rather than letting it evolve. This is important for ensuring that the communication system facilitates decision making processes well. If a specialised division does not exist, then this could be the domain of top management, or if the organisation is very technically oriented it could be the responsibility of an information technology group. Maintaining a communications system and ensuring the most effective use of it would usually be the responsibility of all managers, as would the design of their own departmental communications system. The managerial role of motivating would also be required to encourage the sharing of ideas and information, all of which can help the decisions which managers make to be more effective, since they will be better informed and can also disseminate and explain the decisions they make. This will be discussed in more detail when we examine the area of knowledge management in Chapter 9. Then finally the controlling role would be needed to ensure proper use, and decisions would be needed regarding changes and improvements to the system. This final example of a functional area, then, offers an insight into how the different roles of the manager and the different functional areas of the business are interconnected, and all involve decision making.

Chapter review Key points • Approaching the organisation as composed of major functional areas provides a framework for analysing management and decision making. • The management of budgets, financial control, and the need for sound financial information are important for the whole business organisation. • The management of HR is vital for the success of the organisation and, although having a specialised responsibility, this is also an integral part of every manager’s role. • Managing the production process includes decisions about design, scheduling and approaches to inventory, and all of these are directly dependent on the product type. • Marketing management requires a dynamic and flexible approach, responsive decisions and an integrated strategy, matched to each target audience. • The need for good communications pervades and links all functions and managerial roles and is therefore central to the provision of information for good decision making. 119


A reminder of your learning outcomes Having completed this chapter, and the Essential readings and activities, you should be able to: • provide examples of the various types of decisions that different functional managers will be involved in, and identify the types of information that would be needed • evaluate the human resource approach to managing, appreciating the impact this has on all areas of the business and on the responsibilities of all managers • recognise and evaluate market orientation, the aims of market researchers, advertisers and product branding • identify the activities and functions which represent the behaviour of the business organisation, and the roles and responsibilities involved in managing these.

Sample examination questions When considering these, please remember the guidance given in the Introduction about exam preparation. Each question is designed to be answered fully in approximately 45 minutes, under examination conditions. 1. a. Briefly describe the main responsibilities of (i) the HRM function, and (ii) the marketing function in the organisation. b. Discuss how both these functions are likely to have a significant input into achieving the overall strategy of the organisation. 2. Managers, in collaboration with the HRM function, have a responsibility to develop their staff. Discuss formal and informal methods managers might employ in performing this task. (Note: You might like to return to this question when you have completed the readings in Chapter 9.) 3. A company is considering expanding the market for its product to another country. a. Discuss and assess possible methods it might use to access this market. (Note: you might like to return to this part of the question when you have studied Chapter 8.) b. Discuss what the company needs to consider when developing the ‘marketing mix’ for the new market. Illustrate your answer with practical examples. 4. ‘People are a company’s main asset.’ Evaluate this statement with reference to the relationship between the HR and other functional areas.

Advice on answering a question To help you further with your exam preparation we offer below some suggestions for one of the answers. However, it is very important to remember that there is no model or correct answer to any of the questions. It is more important to demonstrate what you have learnt by developing your own response to the question, supported by evidence from the relevant parts of the chapter.

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4. ‘People are a company’s main asset’. Evaluate this statement with reference to the relationship between the HR and other functional areas. It would be helpful to begin this answer by considering the terms in the question, such as HR, asset, and what the other functions might be. What implications does the statement have? This could be linked to the approach of HR management and, to go further into this, the distinction between hard and soft HRM could be evaluated and this statement linked to the soft. This would also offer the opportunity for a brief connection to be made with the human relations school. Expanding on the approach of HR, the responsibilities of the specialised department could be discussed in relation to treating people as the main asset. Links can be made to the other functions to demonstrate how HR pervades the whole organisation; for example, all managers need to manage their subordinates as resources and also many of the decisions made by the other functions would require information (such as staffing or training costs) from the HR department. These comparisons are specifically asked for in the question, and so should be a focus of the answer. In dealing with these points, the evidence for and against the statement should be developed, but it will be important to be clear what your response to the statement is, based on your evaluation of the evidence.

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Section 3: Business and the environment

Section 3: Business and the environment You have now reached the third section of the course and here our attention turns to the business environment. We will consider both the internal environment of the firm and the external elements of the environment. For the purposes of in-depth study it is necessary for us to deconstruct the different elements of the business and of the manager’s role, as in the previous section. This allows for detailed analysis. However, it is important to remember that the different elements of the business are interconnected and also interact continually with the external environment. Chapter 6 and Chapter 7 consider the internal and external environments respectively. The interaction between the issues in these chapters must be recognised, and it is in this interaction that the business organisation can be seen as dynamic. The final chapter in the section, Chapter 8, illustrates this dynamism by looking at issues such as multinational companies and the international business environment.

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Chapter 6: Key internal elements of the firm

Chapter 6: Key internal elements of the firm Aims of the chapter Chapter 6 specifically aims to: • identify the elements that make up the internal environment of the business • assess alternative forms of organisational structure and the implications structure has for behaviour • examine the relationship between business and technology • identify the factors that contribute to the culture of an organisation • evaluate the significance of culture and how this relates to organisational success and change • explore how the internal dynamics of the firm interact and are particular to each business organisation.

Learning outcomes By the end of this chapter, and having completed the Essential readings and activities, you should be able to: • evaluate the importance and significance of different elements of the internal business environment • identify different ways of structuring organisations, and evaluate when these are most useful • construct an organisation chart for a variety of different business structures, but also assess its limitations • discuss the relationship between business and technology • explain the concept of organisational culture and identify the ways in which this can be communicated by management • evaluate the effectiveness of attempts to manage corporate culture • examine the links between elements in the internal environment and also links to the external environment.

Essential reading The majority of your Essential reading for this chapter is taken from your main key text for this course. The selection is made up of sections of five chapters, all from: Mullins, L.J. Management and Organisational Behaviour. (Essex: Pearson Education Limited, 2010). Chapter 3 ‘The nature and context of organisations’, pp.82–87, ‘Private and public organisations, production and service organisations, types of authority and organisations, and the classification of organisations’. Chapter 14 ‘Organisation strategy and structure’. Chapter 15 ‘Patterns of structure and work organisation’, pp.588–89, ‘Size of organisation’, and pp.605–11, ‘The demand for flexibility’ and ‘The Shamrock organisation’. 125

107 Introduction to business and management Chapter 17 ‘Technology and organisations’, pp.642–49, ‘Types and characteristics of technology’ up to and including ‘ICTs, networks, organisations and society’, and pp.657–61, ‘Technology and the experience of work’ to the end of the chapter. Chapter 19 ‘Organisation development, culture and change’, pp.721–30, ‘Organisational culture’ up to and including the section on ‘The importance of culture’.

This list looks a bit daunting at first, but remember most of the items are referring to a part of a chapter, not the whole chapter (with the exception of Chapter 15).

Further reading Listed below are a number of readings taken from business journals and other textbooks relevant to this chapter. The journal articles offer a flavour of the types of research being done on specific issues, whereas the textbook readings offer a more general overview of the area. Again you are reminded that these readings are not an essential part of the course, and are only a selection of the additional material available. Barlett, A. and S. Ghoshal ‘Matrix management: Not a structure, a frame of mind’, Harvard Business Review (July–August) 1990, pp.138–45. Boddy, D. Management: An Introduction. (Harlow: FT Prentice Hall, 2008) Chapter 3, pp.85–93, Chapter 10. Gordan, G.G. and N. Ditomaso ‘Predicting organisational performance from organisational culture’, Journal of Management Studies 29(6) 1992, pp.783–98. Hales, C. ‘Leading horses to water? The impact of decentralisation on management behaviour’, Journal of Management Studies 36(6) 1999, pp.831–51. Needle, D. Business in Context: An introduction to business and its environment. (London: Business Press, 2004) Chapter 5 ‘Organisational aspects of business’.

This chapter focuses on the business organisation itself and the different elements within it.

Introduction When we considered how a business organisation could be defined in Chapter 1, we concluded that many different kinds existed. When we investigated what a manager does (or is supposed to do) in Chapter 3, we concluded that this partly depended on the sort of business organisation they worked in. But what makes businesses different? What factors contribute to the internal environment of the organisation? The business environment is the focus of this section of the course and is also a theme important to the whole of this course. We will now begin to explore the relationship between the firm and environmental factors in more detail.

6.1 Organisational dynamics What do we mean by ‘business environment’? How would you define this? Do you think that the ‘business environment’ includes what goes on inside the company itself? Yes it does. The environment is the sum total of all those factors that can influence the way we live and develop. One way of understanding the environment of the business organisation, then, would be: 126

Chapter 6: Key internal elements of the firm the conditions within which the business operates, the sum total of all the factors which can influence the behaviour of the business and how it develops.

One key area for understanding the business context is the internal environment of a business. This is made up of the particular influences on behaviour that come from within the organisation; together these make up the internal terrain or context within which activity occurs. Elements can include: • type of business • ownership • strategy • size • structure • technology • culture. Can you think of more internal factors? What is the danger of having a list like this? Think for a moment before reading on. It is vital to recognise that these elements are not isolated. They cannot be understood individually and then simply added together to gain an understanding of the environment. To understand the internal organisation, think about these elements working together, overlapping, and influencing each other. Furthermore, these elements are not static, but are changing, and the relationships between them are changing. It is the combination of these elements and the interaction of them which account for the uniqueness of each business organisation. Activity 6.1 In this activity you will be drawing three diagrams. Let us consider how these internal factors, or elements, can manifest themselves in an organisation. 1. Think about three businesses you know. Try to think of good examples that you know quite well and that are very different from each other. We will be referring to these three examples throughout the chapter. How are they different? Make a list of the factors that make them different from each other. 2. Which are the most important internal factors? Arrange your list in order of importance. 3. Draw arrows to indicate which factors you think can have an impact or can influence other elements of the internal environment. Keep your list to hand, because we will be exploring these interactions and influences throughout the chapter. In the next chapter we will also be considering external factors. Next, we consider the different factors we have identified. Remember, though, that in practice you must take into account: 1. the dynamics 2. the inter-linkages. This discussion will be relevant to your first reading, in Activity 6.5.

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6.2 Type, ownership, strategy and size Type of business By organisational type, we are mainly referring to the type of product offered by the business, whether this be goods or services. Examples of different types of business would include software producers, canned drink manufacturers, plumbers, butchers, stationers, bus operators, financial consultants, and mining companies – the list could go on and on. It is clear to see the importance of this difference, for the type of organisation we are discussing will have a great impact on the internal environment and also on the work of the managers in that business. Activity 6.2 Think back to your three examples: 1. Are these three different types of businesses? 2. How significant was this factor in your list?

Ownership of the business The ownership of a business organisation is another factor to be considered. This is one that can also make a considerable contribution to the internal terrain. By ownership we are referring to the structure or pattern of owners, the person or the group that have legal possession of the business. Activity 6.3 Continue with your three examples. 1. Thinking about your three example businesses, who owns each of these? 2. Can you think of any other ways in which a business can be owned? 3. In what ways do you think the activities of the organisation, or the management of it, may be affected by who owns the business? 4. Who owns businesses? Make a list of the different sorts of owners of companies before continuing. Businesses can be owned by a single person, often the person who began the business (an entrepreneur), or a member of that person’s family who has had the business passed on to them. What implications do you think this has for management? Again, pause before reading on. If one person owns a business it is very likely that they will wish to retain the majority of the control over operations and so be actively involved in the management process. It is very common for sole owners to be the main manager as well. As for decision making, the sole owner would be setting the mission of the organisation and have a direct input into operations. When would this be impractical, though? Think for a second. If the owner did not have expertise in the area of management, or where a single person owned a complex or large organisation, then it would be necessary to delegate duties to professional managers. This is also the case when businesses are owned by many different people, all of whom hold shares in the company. 128


This may include, for example, just four directors, or hundreds of shareholders who invest in the business. In the latter case the corporation is usually governed by a board of directors, often made up of nonexecutives, who do not work at the company, and executive directors who are part of the top management working in the business. The chief executive officer (CEO) will head this board. Activity 6.4 Does ownership matter? 1. What differences do you think there may be between a business where the manager is also the owner, and a business where managers are not owners but receiving a salary? Think about this in terms of: • degree of freedom for making decisions • influence on the overall mission of the business • degree of commitment to the organisation’s goals • ability to manage and level of professional skills • levels of job security and satisfaction • priority given to the long-term goals of the organisation. 2. Do you think it would make a difference if a salaried manager was given a proportion of company shares? Why would this matter? A further element of ownership is whether the business is publicly owned (owned by the State) or privately owned as above, either by one person or a group. It was mentioned in Chapter 1 that publicly owned organisations are increasingly under pressure to adopt management strategies and practices similar to those used in private businesses as they strive to improve efficiency. This is also true for the ‘not-for-profit’ sector, organisations such as charities and religious groups (churches, for example). For these types of organisations, the overall mission may be different – for example, to raise funds for charitable causes or to provide a public service rather than making a profit. If the group is raising money for charity, why do they need to act in a ‘businesslike’ way? See if you can write a sentence that precisely answers this question before reading on. Such groups still need to achieve their missions through strategies and practices that facilitate the most effective use of resources for organisational efficiency. With regard to State-owned companies, this trend to copy private business has been taken a step further by some countries through programmes of privatisation – the selling of public companies to the private sector. The logic put forward to defend this is the ideology of the free market where competition is seen as necessary for achieving efficiency. Examples of countries where this has occurred include France, Australia, the UK and Canada. The issue of privatisation offers a good illustration of the importance of ownership because it is seen as closely related to the performance and success of an organisation, and so can be regarded as a significant contributor to the internal environment of the firm.

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Activity 6.5 Reading The first reading, from your main key text, discusses further the elements of organisational type and ownership: • Mullins (2010) Chapter 3 ‘The nature and context of organisations’, pp.82–87. As you read this, think about your three example businesses.

Business strategy Thinking back to the issues discussed in Chapter 4, can you see how the organisational strategy can contribute to the internal environment of the business? It was stressed in Chapter 4 that the overall mission of a business will have an impact on the way work is organised and the activities of the organisation, as well as the decisions managers make. Strategy is therefore an important element in the make-up of the internal environment of the firm. However, strategy is a factor in the external environment as well as the internal environment. Think about the types of information that we identified as necessary for managers to develop the business strategy and to make strategic decisions. Some of those sources of information related to the external environment, such as the behaviour of competitors. We return to consider strategy and the external environment in Chapter 7.

Size of the business Is size on your list of factors that make organisations different? Let us think about how important this is. The size of a company can be measured in a number of different ways, including: • number of workers employed • production levels • profit levels • annual capital used • size of the market provided for • size of the premises • number of outlets • whether outlets are located locally, regionally, nationally or globally. Activity 6.6 Reading This short reading recognises that size is not a simple variable, and considers how this links to performance: • Mullins (2010) Chapter 15 ‘Patterns of structure and work organisation’, pp.588–89. (See also Boddy, 2008, Chapter 10, pp.341–42.) The size of an organisation is also not a static factor. A clear goal of most organisations is to grow and expand, thereby increasing profit levels. 130


However, there is also the possibility that the organisation will reduce in size, possibly through forced change for survival or through a planned strategy to specialise. Often the force for change of size is from the external environment. How does a change in size influence the rest of the internal environment of the organisation? Look at the list of internal factors and think about your three example firms for a few minutes. (Hint: think especially about the interlinkage between size and ownership). Write down a few ideas, then read on. The ownership and the size of a company are two factors which are interrelated. For example, a company owned by one person is often, although not always, a relatively small business. Note that in Chapter 8 we will consider the management of small businesses again. • As a business grows it is common for further investment to be needed to continue this increase in size, and one way of achieving this is to invite investors to buy a share of the business. This facilitates business growth and also increases the number of owners. • It is also possible that growth of this kind would involve diversification, meaning that a business would expand its product range and so have separate business areas or units for each product. The size of a business is therefore a good illustration of how the dynamics of the organisation are interdependent and have to be seen as working together. The next section looks at the structure of the organisation, which will allow us to consider further the importance of business size.

6.3 Organisational structure What does the word ‘structure’ mean to you? Think of the structure of a house, or the structure of your family relations. Pause for a minute and then read on. The structure of an organisation refers to the pattern of relationships that exists between the different parts of the business and between the different people who work within it. The structure therefore provides the framework for organisational activities and facilitates the management of them. Decisions about the organisation’s structure will involve deciding how power and control of operations will be divided and how the activities will be coordinated to best achieve business goals. Traditional structures relate to the ideas of classical management theory and involve a clear hierarchy of control and a chain of command, which is top-down. Can you think of an organisation that works in this way? What about your three example companies? Do they have chains of command? Work needs to be divided up among the members of the business organisation, and the formal way of doing this is in the design of the organisational structure. Ideally this will then require strategic decisions being made by top-level management working together with human resource managers, because this involves the allocation of people and definitions of what their jobs will be – job descriptions. As people are one of the major resources of the organisation, investing in the design of a sound and suitable organisation structure is a very important activity that has direct bearing on the internal environment of the firm. 131


Activity 6.7 What do you think could be the result if a business operates without a clearly defined structure or one that is not suitable? Make a list of possible effects. Feedback The consequences could include: • low productivity • inefficient use of resources • unmotivated staff and low morale • ineffective communication channels • slow decision making • conflict between different groups or parts of the organisation • development of unofficial groups outside the structure • lack of coordination between activities and so failure to achieve goals.

Types of structure Many different ways of structuring the organisation exist, and the rest of this section will discuss a number of model structures. The difference between these depends on what the structure is based on, for example the product, function or location of the business. To represent the design of a structure, and to communicate and explain that design to the rest of the company, managers use an organisation chart. This is a visual representation of the organisation of the business, including the lines of authority. This can be displayed on the premises for staff to see. New staff are often given their own copy during their induction into the business, so that they can understand the organisation of the business and their place in it. The types of structures and varieties of organisation charts described here are also discussed in the Essential readings. The examples in the readings complement and offer a comparison for your charts. Activity 6.8 Have you ever seen or been given a copy of an organisation chart? Try to find some examples, either from places where you have worked or organisations that you belong to, or from other people who work in organisations with access to charts. You could also approach organisations to ask if they will let you have copies of their charts. 1. Think about your three example organisations from the first exercise in this chapter. Write down how each one is structured. 2. What are the main differences between the structures of these organisations? We will now look at five examples of how an organisation can be structured and see what an organisation chart for each may look like. As you look at these, compare them to the charts that you have found. Which models are they most like?

Functional structures These divide the activities of the organisation into the different functional areas. Each functional area would have its own management structure. In Chapter 5 we discussed the roles of the managers in changes of functional areas such as these. Figure 6.1 is a chart that represents a functional structure. 132


Strategic Management Team Managing Director

HRM

Recruitment

Finance

Training

R&D

Marketing

Sales

Logistics

Production

Manufacture

Promotion

Assembly

Figure 6.1 A function-based structure

Product-based structures Within these the activities of the organisation are divided on the basis of the different products – the goods and services produced by the business. When might this be a good way to structure the business? Think for a few minutes before reading on. This could be a suitable structure when a company produces diverse products, each of which need parts of the organisation to be dedicated to them. For example, if a motor vehicle manufacturer produced motor cars, commercial vans and motor homes, then it may be more effective to divide the organisation on the basis of these products. This could be particularly important if new models in these areas require, for example, different job skills, production methods and marketing. Can you think of a business you know which is organised in this way? Figure 6.2 is an example of a chart for this kind of structure. The chart is split into two for convenience. The first part shows the upper levels in the hierarchy. The second part shows how each product division, here the Motor Home division, has its own separate, functional subsections.

Strategic Management Team

UPPER LEVELS Managing Director

Motor Homes

Cars

Vans

General Manager

General Manager

General Manager

MOTOR HOME DIVISION LEVEL General Manager

Model A

HRM

Finance

R&D

Model B

Marketing

Logistics

Production

Figure 6.2 A product-based structure For clarity and space this chart is only fully developed for the motor homes part of the business, but similar structures would exist below the commercial van and motor car divisions as well. 133


Within this example management would have to decide between several different options. What are they? For example, the same units for all the motor home products could provide the specialist functions, or each model could have its own as is the case in this chart. It can be seen, then, that the larger a business and the more diverse its product range, the more complicated the structure can be.

Location-based structures These structures can be used when a business has operations in more than one place. The business may be divided into parts in a number of different ways depending on the operations of the organisation. This could include divisions on the basis of: • branches in different towns or cities, for example Delhi, Mumbai and Chennai • operations within a particular region, for example Northern Territories, West Coast • operations within different countries, for example Singapore, Malaysia, Australia • operations in global areas which include more than one country, for example South-East Asia, North America, Europe. What is the logic of using location? Think for a minute. The logic behind the use of this type of organisational structure often relates to differences in the way business is organised in the different parts, and when those belonging to each part share activities or suppliers or distribution chains. In the next chapter we will consider national differences in managing business organisations, which can be an important reason for utilising this type of structure. Then in Chapter 9 we will further consider the international nature of large corporations. An example of a geographically based or location-based structure is shown in Figure 6.3. This chart shows only the upper levels. Each region has separate subsections dealing with each function, like the motor home division shown in Figure 6.2. Strategic Management Team Managing Director

North America

Regional Manager

Central America

Regional Manager

South America

Regional Manager

Figure 6.3 A location-based structure: upper levels See if you can think how to add refinements to the location structure above. For example, another layer could be added at the general level above the regional divisions, to include units that would coordinate or monitor the activities of, say, all the HRM units. It may also be more complex if each region was broken down into the different countries where the business had operations, such as in Brazil, Argentina, and Chile for South America. 134


Activity 6.9 What are the problems with a location structure? Draw an organisation chart for an example of a company that is structured on the basis of location and has operations in either different regions or countries. If you do not know of one then you can make one up, and try to add some variations in addition to the example in Figure 6.3, such as a mix of regional and country breakdowns. Now look at your organisation chart and Figure 6.3: what problems do you think the top management could face in their job of coordinating available resources for the achievement of goals? It may help you to think, for example, about how the top management will know what is happening at the local or regional level and also about the possibility of agreeing on a single mission.

Holding companies This type of organisation is formed when a business expands by acquiring other companies. The overall business is therefore divided into several different and relatively independent business units. An example of this is presented in Figure 6.4. This chart is also used as an opportunity to examine how an organisation can be structured on a number of bases. Strategic Management Team Managing Director

The Steak House

North Region

Burger Bar

Coffee Shop

Veggies

South Region

functions

Figure 6.4 A holding company structure: ABC Holdings Group In the example of ABC Holdings presented above, the organisation consists of four different businesses. Let us see how this structure could have come about. Let us say that it began as The Steak House, but then a further three companies were bought, also in the catering industry. Only the unit of The Steak House is shown in detail on this chart, but each would have its own structure within the organsiation. For The Steak House, structure is based on location first, and then within this, each region has its own functional groups. Can you think of different ways that the other three business units could be arranged? As a holding company, another consideration is how far ABC should coordinate the activities of each business. It is likely that a management group would exist at the strategic level to coordinate to some degree, even if minimally.

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It might be appropriate for a very general organisational mission to be developed for ABC and then more specific missions and goals set for each individual business unit. Do you know any business that is organised like this?

Matrix structures These are complex structures which involve multiple lines of authority, rather than hierarchical lines of command. The matrix structure came into prominence during the 1970s. However, one of its original advocates later concluded, as the matrix fell out of use, that it was ‘unnecessarily complex’ (David and Lawrence, 1977, p.21). It is still useful to know of the matrix structure, however, because it can be particularly suitable for combining a functionally based structure and a project-based one. An example of this is shown in Figure 6.5. The managing director, in overall charge, is not shown. Functional managers Purchasing

Production

HRM

Finance

Marketing

Project manager 1 Project manager 2 Project manager 3 Figure 6.5 A matrix structure The addition, within this type of structure, is the line of project authority held by each manager in charge of specific projects. Barlett and Ghoshal (1990)1 discuss the complexity further, and stress the need of a matrix structure to be taken on board and integrated into the internal environment as it is ‘a state of mind’ rather than merely a structural tool. Project managers are directly responsible to the CEO, but for the different functional areas of the project there is also a need to coordinate with the functional managers whose lines of responsibility run downward through all the activities and projects in the business. More examples of different organisational forms are found in Chapter 15 of Mullins that you will read for Activity 6.10. But there are problems with using organisational charts. Can you think what these might be? Stop for a few minutes to consider this before continuing. Organisation charts: • only represent a static picture of the organisation • are often out of date • show how an organisation is formally structured, not the informal structure, which may be more important • cannot explain fully the position or authority of individual employees if it is a large or complex organisation (a chart is only in two dimensions). It is also important to note that not all organisations have a formalised organisation structure and so would not have a chart to represent this. The idea of an organisation chart assumes that managers have a choice over how an organisation is structured and also assumes that managers are capable of creating, implementing and maintaining the structure of the organisation. 136

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In Chapter 3 we examined research studies which suggest that managers often have little time for planning because of the demands of their job. Therefore the process of formally planning a structure may be important during the establishment of a business, or at times of strategic change, but monitoring or updating the structure plan may be less likely to happen as things get busy. Consider, then, whether you agree with this statement: The more dynamic the situation, the less time managers have to update their organisational chart.

Centralised and decentralised structures As well as the type of structure, it is important to consider the different levels within the structure. Organisations with many levels can be seen as a hierarchy, where each level has the control and power over those below. This is a top-down approach, and has significant implications for decision making because this is usually done at or near the top level of the business, and so control is centralised. An example is shown in Figure 6.6, taking one chain of command. Note also the concept of the span of control, which refers to the number of subordinates reporting to a particular position. In the diagram, for example, the supervisor’s span of control includes three subordinates. Managing Director (MD) Deputy to MD HR manager Recruitment manager Manager of psychometric testing Supervisor of testers Tester A

Tester B

Tester C

Figure 6.6 A hierarchical chain of command An alternative approach to that of centralised control is a decentralised structure. This is a business that has fewer levels and so can be described as a ‘flatter’ organisation. If control is decentralised then it is delegated downwards. Decision making will therefore also be delegated and will happen here more at the lower levels of the organisation than in the traditional structure. So, if the example given above was adapted to a flatter structure, the chain of command could be redrawn as in Figure 6.7. Top management group

Human Resources group

Psychometric testing team

Figure 6.7 An example of decentralisation 137


It can be seen that within a decentralised organisation there are fewer levels, but more people at each level, and decisions will be delegated rather than being the main duty of top management. There has been an increasing trend towards decentralisation for two reasons, among others: • fewer levels can mean cutting out middle management and therefore reducing costs • more opportunity to capitalise on the creativity and problem-solving skills of more employees and enriching their jobs by involving more of them in decision making; however, this can be criticised if not accompanied by a system for recognising the additional contributions employees make. Hales (1999)2 warns of the assumptions sometimes made about the management behaviours that underpin the concept of decentralisation. Changes to a decentralised structure may only be formal ones, whereas the actual management practices are not significantly affected. The problem of change is discussed in the next section. Activity 6.10 Return to the organisation chart that you drew in Activity 6.9. Is control in this centralised or decentralised? Take one section of the organisation from the chart and draw out the lines of command: 1. as if this was a hierarchical business 2. as if the organisation had a flatter structure. Look at the two examples given above to help you. What is the difference in the number of levels for each of your charts? Reading Now read: • Mullins (2010) Chapter 14 ‘Organisation strategy and structure’. This reading is a full chapter, and offers further examples of some of the structures presented above. As you go through this reading, compare the examples and sample charts you have drawn with the ones in the chapter. It will also be helpful to make notes on the interactions of the different elements, particularly identifying the other elements of the internal environment. These elements can influence or be influenced by the structure of the organisation. (An alternative source for this topic can be found in Boddy, 2008, Chapter 10 ‘Organisation structure’.)

Structure and change As mentioned above, the ways that organisations are structured change over time. The matrix structure, for example, was adopted by some organisations, only to be found that it was often too complicated and so it was abandoned. We have also discussed the trend towards decentralisation, showing that an organisation’s structure is not static but reacts to other changes and other elements of the environment, both internal and external.

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Linking structure and change Activity 6.11 In Chapter 4 we looked at organisational change and how to manage it. 1. What do you think the relationship is between strategic organisational change (planned or unplanned) and the structure of the organisation? 2. If a change programme requires a different organisation structure, what implications or problems do you think managers could face in implementing this change? Feedback Most strategic changes relate to the way the organisation is structured. In times of difficulty, for example, an organisation may have to reduce the number of employees by consolidating two areas of the business. In times of success and growth, an organisation may need to expand the structure by creating regional or location-based divisions. This need for change, and the ability to react to the pressures for change, mean that it is beneficial to have a structure that is flexible.

The flexible firm The model of the flexible firm refers to a business organised to consist of a core and a periphery. This idea is associated with the research of Atkinson (1984) and can be represented as in Figure 6.8. Core: Permanent managers Permanent workers

Periphery

Regular suppliers

Periphery:

Core

Short-term consultants Temporary workers Part-time workers Contract workers

Periphery

Contract suppliers

Figure 6.8 The flexible firm The diagram offers some examples of the groups included in the core and the periphery of the organisation, and as can be seen by the makeup of the periphery the model is appropriate for growing trends towards contracting out work. Atkinson suggests that this way of organising the firm allows the business to respond to change because it offers three levels of flexibility, as follows. • Numerical flexibility – managers can make speedy changes to the number of workers by established access to temporary workers to supplement the core staff. For example, if a manufacturing order is required urgently, temporary workers can be used. However, if order levels decrease then managers are able to shed the additional workers, because they do not have permanent contracts with them.

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• Functional flexibility – core employees are invested in and trained to do a range of tasks. This is known as ‘multi-skilling’ and the result is that the core can be moved from one job to another as the need arises. • Financial flexibility – the pay scheme for employees will be designed to reflect the nature of the workforce. For example, only permanent employees will receive regular wages and their pay will need to include reward for multi-skills training. However, the cost of peripheral workers will only be paid out when they are needed. Have you come across a flexible firm? Do you know any organisations that work like this model? Can you think of any problems that could be encountered if a business is organised in this way? For example, you could think about motivation and quality issues. Activity 6.12 Reading Now read the extract about flexibility in Mullins (2010) Chapter 15, pp.605–11. You will meet another form of flexible firm, namely Handy’s Shamrock organisation – compare that with the model above. Finally, as you read about organisation structure it is important that you continually consider how each force or element in the internal business environment is interlinked. • Designing and adapting the structure of the organisation is one of the main ways that managers coordinate the activities of other people – one of the roles of management (see Chapter 1). • Structure is directly linked to organisational strategy, and so any strategic changes can also involve changes to the organisation structure. • One of the likely changes relates to the size of the business, whether this is increasing or reducing. • Related to this is the way that the business is owned. A sole owner who is also the main manager is likely to utilise a simple organisational structure with the majority of control and decision making located with him or herself. • A large business, owned by a large group, is likely to require a more complex structure and a more flexible one.

6.4 New technology and business organisations Activity 6.13 Within the next reading you can find detailed explanations of the topics concerning technology that will be raised in this section. Reading Read the following chapter from your main key text: • Mullins (2010) Chapter 16 ‘Technology and organisations’, pp.622–32, 634–46. Read through the extracts fairly quickly. You will find the synopsis on pp.645–46 useful. As you read, think how technology contributes to the internal environment of the organisation, and how it interacts with the other elements. 140


Technology is a broad term used in different ways. When you use the word ‘technology’ about a business, what do you mean? Think for a few minutes before reading on. The Concise Oxford Dictionary definition is: 1. The study or use of the mechanical arts and applied sciences. 2. These subjects collectively.

This covers a lot of ‘technology’ in business: production machinery, computers, telephone systems, email, statistical software programmes to aid decision making, quality control equipment, etc. However, in business, technology refers not only to the equipment itself, but also to the processes for using it and the ideas or theories behind it. In other words, we should add to the definition: … and ways or processes of doing things.

(Don’t forget to add this definition to your glossary.) Technology is an important factor or element of the internal environment of the organisation because it can have significant impact on: • the way the business operates • how competitive it is • how successful it is. It is important to note that, as well as being internal, technological developments in the external environment closely influence the business. We look at technology in this section and leave it to you, when you work on Chapter 7 of this guide, to return and make the links.

Sorting out ‘technology’ Activity 6.14 Write down your own definition of technology. If your own definition is not in the glossary yet, add it now. Go back to the three example organisations that you identified at the beginning of this chapter. Write down the types of technology used by each of these businesses. (You might have to guess this.) What differences are there in the technology used? How can you explain this? Think about the other differences between the organisations that might help you to do this, such as size or type. All types of organisations use technology of some form. It is the job of managers to understand the nature of the relevant technology and to make appropriate decisions about whether to adopt ‘new’ technology. It is important to recognise what a difficult task this is though! Can you think why? Pause for a few moments and jot down the main reason. Technology is changing all the time. For example, it is not enough to assess the value of a particular computer system and then decide to introduce it. Better software is constantly being developed. This must be monitored and leads to further changes. Hardware also improves rapidly.

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As a result, technology becomes out of date before it is worn out through use. In consumer goods industries, businesses change styles and product specifications every year to retain their competitive edge. Consumers are buying goods that will rapidly become technically obsolete. Activity 6.15 Think about how often you have purchased a piece of equipment only to find a new version or update available soon after – for example, mobile phones, laptop computers, camcorders. Can you think of any more? Now think of all the operations that a business can be involved in. What impact can such changes have? For example, what about budgets and competitiveness? What other internal factors or elements might technology be linked to? Write down some of your ideas. Can you think of any technologies that have been made obsolete by new technologies? (Hint: think of something like a car or a television set, and then ask yourself what people used before: horses and theatres). Feedback Here are some thoughts about the impact of technological change on the organisation. • In a large and/or complex organisation, or one that relies on technology or indeed is itself in the technology business, it will be necessary to have specialist support. For example, this could involve each department including a technology unit or a technology department of experts who can monitor technological developments, advise departments and support implementation. • Structure and size of the business might alter as technology alters. • Once a decision has been made to adopt a new technology, management must decide on the process of introduction. This can be related to the changing management role (see Chapter 4), since advances in technology always bring change. • The organisational structure may have to change, or it could be the case that necessary change may be facilitated by improvements in communications technology, for example video conferencing and email.

Resistance to new technology Change is often fast when new technology is introduced. Why? How do you think this could affect employees? Within the organisation, people have to adopt and use the technology and adapt their activities to it. Just as we evaluate the problem of resistance to change, employees may also resist the introduction of new technology. • This resistance may be based primarily on a fear that the new technology will replace the need for some employees, for example when robotics are used to do work previously done manually. • Resistance may also be linked to fear of a change in the skills needed by employees. This can include a reduction in the skill needed and can lead to boredom for the employee (de-skilling), or it could involve the need for employees to develop new skills, which may be intimidating. However, if managed in the right way it is possible for new technology to be used to motivate employees by increasing their capabilities and by increasing their skills base.

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6.5 Understanding organisational culture The culture of an organisation is something that has been mentioned several times already during this guide. In this section we will be investigating this in more detail, considering what the concept means and the components of culture. Think back to Chapter 2, where we looked at the different disciplines that have contributed to our understanding of business organisations. Two of these have particularly influenced the study of organisational culture. These are anthropology and sociology; both study social organisation and relations within societies and groups. The beliefs, traditions, values, activities and attitudes of a group or organisation make up the culture. Charles Handy has investigated culture in relation to business organisations, and states that, by spending time in different organisations, a person: … will be struck by the differing atmospheres, the differing ways of doing things, the differing levels of energy, of individual freedom, of kinds of personality. (Handy, 1993)

Think for a few minutes before reading on. Why do you think culture is such an important aspect of the internal organisational environment? Culture can be understood as: the system of shared beliefs, norms, values and attitudes which pervades the organisation. It is within this that all activity takes place and all decisions are made.

However, it is difficult to get a single precise definition of culture, for culture can be defined in very different ways. Furthermore, defining a particular culture is a subjective activity dependent on personal experience of that culture. Recall, from Chapter 2 of this guide, the criticisms that early Western anthropologists faced when they tried to interpret the different cultures they studied. Activity 6.16 Look back at the differences you described between the three example organisations that you chose. Do you think that they have different cultures? In what ways do they share the same or have different types of culture? Think of an organisation that you have belonged to, perhaps as an employee or a student. How does it feel to be part of that organisation? Do you feel that there is a shared sense of values or attitudes? How would you describe that organisation’s culture?

Managing and changing culture Does an organisation’s culture just develop or is it made? This is an important question, for it has implications for the manager’s role and the possibilities for changing a culture or aspects of it. Needle (2004) makes a useful distinction between organisational culture and corporate culture, defining the latter as: Those cultures deliberately created by management to achieve specific strategic ends. (Needle, 2004)3

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Approaching the concept of culture in this way, the internal culture of a business corporation could be created or at least modified. Therefore the possibility of managing culture emerges. Why would managers want to create a different culture or change the existing one? One reason is that the existing culture could be seen as an obstacle to planned strategic change. Another reason could be the perceived link between organisational performance and culture. Peters and Waterman (1982)4 included a strong organisational culture as one of the ingredients necessary to be an ‘excellent company’. Gordan and Ditomaso (1992)4 also discussed the importance of this link and the possibility of predicting performance by studying the culture. The significance of corporate culture is strongly linked, therefore, to the need to make the most effective use of human resources. Looking back to Chapter 5, two approaches to HRM were placed on a continuum, described as ‘hard’ and ‘soft’. The latter involved gaining employee commitment rather than merely the compliance of workers, and therefore managing the organisational culture could be seen as a possible way to achieve the goal of commitment. For example, if the culture could stress the value of the employee, a sense of working together for the good of everyone and a culture of high standards and hard work, then commitment and efficiency could be seen to result.

Finding out about different organisational cultures Activity 6.17 This is another good opportunity to talk to people – you are encouraged to discuss the issues you read about for this course as often as possible and with as many people as possible. Try to talk to several people who work in different organisations. They need not be managers. Try to choose people who have worked there for at least a year. Ask each of them: • How would you define the culture of your organisation; what is it like to work there? (You might have to explain culture to them!) • What sorts of things contribute to your organisation’s culture? • Do you enjoy working in this type of organisation? Do you like or dislike its culture? Now compare your notes for each person, and develop a list of examples or points that illustrate the organisation’s culture. The suggestion made by those who link culture to performance is that corporate culture can be controlled and that this can bring positive benefits in terms of employee commitment and overall organisational success. But what is involved in creating or managing the culture? How would managers go about doing this? Again, decision making is important. • An assessment has to be made of the existing culture, its possibilities, and areas that need to be adapted. • Management must decide on what type of culture could overcome current problems and also what culture helps the business strategy. • The new culture then needs to be communicated to the rest of the organisation. 144

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This process of communication involves activities and messages that aim to instil a new or adapted system of shared beliefs and values, etc. The list below indicates some of the methods that can be used and the ways in which an organisation’s culture can be understood. Look out for these and other points when you come to your reading for Activity 6.19 at the end of this chapter. In particular, look at the other constituents of the cultural web on pp.743–44 in Mullins. • Mission statement – this gives a shared vision of where the business is heading and what it wishes to achieve. • Myths and stories – these can be from the origins and history of the company or about a particularly charismatic leader. Often about overcoming problems and great difficulties, these aim to instil pride and determination in employees. • Rituals – although these can often be an obstacle to changes to work practices, they can also be cultivated to result in a positive contribution to achieving goals. Examples include rituals involving precise and exaggerated attention to detail that can improve quality. For motivational purposes, some large companies have developed the ritual of regular assemblies where the mission is read or a company song is sung. Award ceremonies to recognise and encourage commitment can also be ritualised. • Symbols – these can be used to develop a shared sense of belonging, such as an organisational uniform or logo. Members of the organisation associate themselves with the symbol and so are encouraged to be proud of belonging to the organisation, and to ensure that their behaviour and what they produce would reflect well on the organisation and so also on themselves and their work colleagues. Compare this list, and those extra factors mentioned in Mullins, to the one you developed from your interviews in the last exercise. Can you add others? As you have seen, many more points could be added to this list: what is appropriate depends on each business. Putting them together can be described as making a ‘cultural web’, which Mullins (2010) represents visually on p.743, Figure 19.1.

Difficulties when trying to change a culture What criticisms can you make of the idea of managing and changing corporate culture? What problems do you think management would face in trying to implement a change to the existing culture of an organisation? It may help you to think about the organisations described to you by the people you talked to for Activity 6.17. One of the first problems to consider concerns the link between organisational performance and the culture adopted. The research conducted by Peters and Waterman (1982) sets out the key characteristics of those large corporations seen to be ‘excellent’. A strong corporate culture, meaning one that is actively managed, was seen to be an essential part of this success. However, in the years after that research, many of the businesses studied were unable to sustain their success. If they pursued and managed organisational culture in the same way, but were no longer seen as ‘excellent’, then it seems that the link between performance and culture may be more complicated or may not have been an important contributing factor. 145


The desire or attempt to change people’s values and attitudes can also be questioned. Do you think it is up to managers to instil values in employees? Pause for a moment. Of course, it depends to what extent this activity is pursued, but questions can be asked with regard to who benefits from the dominant corporate culture. As with decentralised decision making, if employees are given more responsibilities or are expected to demonstrate more commitment to the organisation, then that may need to be rewarded. This leads on to the final point, which is whether it is actually possible to change the culture of an organisation. If culture is so difficult to define and understand, then how realistic is it for a manager to attempt to create and control it? The final section of this chapter considers how culture is influenced by the other internal elements of the organisation. We looked at change in Chapter 4 of this guide. Look back at the section about Total Quality Management (TQM), and especially look at the diagram on p.783 in Mullins. This provides a view of how organisational culture fits into organisational change.

Culture and links with the rest of the internal environment Culture can be understood as pervasive and so interacts with, and is influenced by, all the elements of the internal environment. Activity 6.18 Think about what you have learnt about organisational culture and make a list of all the ways in which culture interlinks with the rest of the internal environment. Spend a few minutes thinking about these links before reading the bullet points in the feedback. Feedback • It has already been mentioned that attempts to change a culture would have to consider the organisational strategy. • The size of the organisation has a direct bearing on how it ‘feels’ to work there. • The structure of the organisation is also important: it can influence the degree to which a culture is formal or informal. For example, within a very hierarchical organisation, formal codes of dress and official modes of communication may be common. Within a flatter structure, more informal attire and norms of moving about the premises freely to integrate with people from different sections could be the accepted practice. • Similarly, the way the business is owned can relate to its culture: if one person or a small number of individuals own it, then it is likely that their personalities will be reflected in the culture. • Likewise with managers, their style and approach can impact on the way organisational life is experienced. However, it is important to recognise that an organisation’s culture is not necessarily homogenous and agreed. Conflict may emerge between different subcultures – smaller cultures within the different areas, departments or groups of the organisation. Can you relate this back to the stakeholder model? (See Chapter 2 of this guide.) 146


From what you know about the stakeholder model of the firm, you can see that the coalition of members may not all share the same sense of culture. In addition to this, the culture cannot be static; instead all the organisational dynamics change continually: When we are observing a culture, whether in an organisation or society, we are observing an evolved form of social practices that has been influenced by many complex interactions between people, events, situations, actions, and general circumstance. Culture is always evolving. (Handy, 1993, p.139).

This summary of culture can be broadened to apply to the whole of this chapter on the internal environment. We have seen that the forces or elements are interlinked and dynamic. It is not possible to create a single, best culture any more than a single best structure, size, strategy, and so on. Instead, the business must understand, account for and monitor the dynamic forces acting from within it. Activity 6.19 In this last reading for the chapter, you will read more about approaches to defining and understanding organisational culture, and evaluation of different cultural types. Reading Read the following section of your main key text: • Mullins (2010) Chapter 19 ‘Organisation culture and change’, pp.739–48. (Boddy, 2008, Chapter 3 ‘Organisation cultures and contexts’, pp.85–93, provides an alternative source for this topic.) You will encounter two classifications of culture, developed by Harrison and Handy, and Deal and Kennedy. Go back to the three example organisations you have used in the previous activities. Can you identify their cultures? Do they fit into either of the two classifications you have read about? What factors influence the development of culture? Think about your three examples organisations again – can you see the links here? As we go on to consider the external environment of the business in Chapter 7, it will be important to reflect on what you have learnt about the internal dynamics in order to understand the relationship between the two.

Chapter review Key points • All business organisations are unique depending on the combination of different variables, and this has significant implications for our understanding of how they work and how they are managed. • A variety of elements make up the internal environment of the firm, all of which are interconnected and changing. • The way a business is organised is particularly important for our understanding of it, because organisation structures provide the framework for dividing and coordinating organisational activities and control over them.

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• Technology contributes to the ever changing nature of the internal environment, but it refers to processes and ideas as well as to equipment. • Organisational culture is a contested area of study, as managers attempt to control and create culture to facilitate greater employee commitment and better performance. • The dynamics of the business cannot be seen in isolation, for it is in the influences they have on each other, and their interconnectedness, that the internal environment of the organisation can be appreciated.

A reminder of your learning outcomes Having completed this chapter, and the Essential readings and activities, you should be able to: • evaluate the importance and significance of different elements of the internal business environment • identify different ways of structuring organisations, and evaluate when these are most useful • construct an organisation chart for a variety of different business structures, but also assess its limitations • discuss the relationship between business and technology • explain the concept of organisational culture and identify the ways in which this can be communicated by management • evaluate the effectiveness of attempts to manage corporate culture • examine the links between elements in the internal environment and also links to the external environment.

Sample examination questions When considering these, remember the guidance given in the Introduction about exam preparation. Each question is designed to be answered fully in approximately 45 minutes, under examination conditions. 1. a. Describe what is meant by ‘size’, ‘strategy’ and ‘structure’ in the context of the business environment. b. Discuss how these three elements are interrelated. Support you answers with reference to theory and practice. 2. ‘Businesses can be classified into different types; those within each type are essentially the same.’ Evaluate this statement and include in your answer examples of how businesses can be different. 3. a. Explain what is meant by ‘organisational culture’. b. Does organisational culture evolve or is it made? Discuss. 4. Discuss why it is important to study the internal environment of a business as a whole, rather than only focusing on individual elements. Support your answer with reference to theory and practice.

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Advice on answering a question To help you further with your exam preparation we offer below some suggestions for one of the answers. However, it is very important to remember that there is no model or correct answer to any of the questions. It is more important to demonstrate what you have learnt by developing your own response to the question, supported by evidence from the relevant parts of the chapter. 3. (a) Explain what is meant by ‘organisational culture’. (b) Does organisational culture evolve or is it made? Discuss.

In your answer to this question it would be important to start with the definition of organisational culture and the problems involved with this. It would be useful to establish why culture is an important issue in the study of organisations, perhaps linking this back to the influence of sociological and anthropological approaches. It would be relevant to consider the factors that influence the development of a culture, as different factors can be used for different sides of the argument, ‘evolve or made’. Culture is a major element in the internal environment of the firm and, as this is the focus of the whole chapter, it will be important to relate the element of culture to the other factors and how they interact. This debate can lead on to show why managers might want to create or change a particular culture. Handy’s typologies of cultures could be discussed and the decisions that managers will need to make to define the culture that they wish to implement. The methods of communicating a culture should be included because these are the methods available to management in ‘making’ a culture; for example, rituals, adopting a logo, publishing myths or stories, perhaps through a newsletter or at an awards ceremony. It is important to consider the evidence that cultures cannot be created or should not be created because this is too controlling. Finally, to strengthen your debate and demonstrate greater understanding, you could illustrate your answer with examples of companies thought to have different cultures. By the end of your answer, you should have demonstrated, by evaluating the relevant evidence, whether organisational culture evolves or is made.

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Chapter 7: Key external elements of the business context

Chapter 7: Key external elements of the business context Aims of the chapter Chapter 7 aims specifically to: • establish the importance of the business environment • explore the links between the economy and business • evaluate the role of the state and the importance of politics • consider the impact of technology, building on the previous chapter by exploring technology as an external element of the business context • evaluate the importance of culture, particularly in relation to different countries, and the impact this can have for business and management behaviour • identify methods of analysing the environment and assess the value of these for aiding the decision making process.

Learning outcomes By the end of this chapter, and having completed the Essential readings and activities, you should be able to: • identify elements of the external environment that interact with the business organisation, and evaluate their significance • appreciate differences in the economies of countries and assess the impact that economic conditions could have for the operations of the firm • offer examples of how the political context can affect business behaviour • explain how technological factors contribute to the external business environment • evaluate the differences that may exist in access to new technology and the implications this can have for the operations of the firm • identify the elements that make up national culture and the ways in which this can influence business behaviour and management • conduct an analysis of the external environment of a particular business by utilising one of the aids designed for this purpose.

Essential reading The first three readings for this chapter are short sections from chapters of the main key text for this course: Mullins, L.J. Management and Organisational Behaviour. (Essex: Pearson Education Limited, 2010). Chapter 1 ‘The nature of organisational behaviour’, pp.22–33, from ‘Globalisation and the international context’, up to and including the synopsis. Chapter 3 ‘The nature and context of organisations’, pp.88–96, from ‘The primary activity of the organisation’, up to and including ‘The informal organisation’. Chapter 16 ‘Technology and organisations’, pp.634–45, ‘ICTs, networks, organisations and society’. 151


The final reading is a chapter from a textbook we have previously used, which is specifically focused on the issue of business and its environment: Daft, R.L. New Era of Management. (Mason, Ohio: South Western: Cengage, 2008). Chapter 3 ‘The environment and corporate culture’.

Further reading The readings below are a selection from a variety of works written on the environment of business. Again, it is important to remember that it is the Essential readings that make up this course. Beugre, C.D. and O.F. Offodile ‘Managing for organisational effectiveness in sub-Saharan Africa: a culture-fit model’, International Journal of Human Resource Management 12(4) 2001, pp.535–50. Boddy, D. Management : An Introduction. (Harlow: FT Prentice Hall, 2008) Chapter 3 ‘Organisation cultures and contexts’, pp.93–103; Chapter 4 ‘Managing internationally’, pp.120–34. Hofstede, G. Culture’s Consequences: International differences in work-related values. (London: Sage Publications, 1980). Needle, D. Business in Context: An introduction to business and its environment. (London: Business Press, 2004) Chapter 3 ‘The environment and business: economy, state, technology and labour’, pp.292–96. Perman, R. and J. Scouller Business Economics. (Oxford: Oxford University Press, 1999) Chapter 14 ‘The firm and the macroeconomic environment’.

Introduction The aim of this course is to introduce you to the study of business organisations and the management of them. We have already considered the role of management and different ways to view the organisation. Then, in the last chapter, we discussed the different elements that contribute to the internal environment of the firm, those that make it different from others. In this chapter we study the external environment within which businesses operate.

7.1 Studying business within its external environment It is important to bear in mind that organisations do not operate in a vacuum. A business must be analysed within its environment. To facilitate an examination of the business environment, within this chapter we will consider four main areas of the environment and their impact on the organisation. These are the economic, political, technological and cultural environments. Categorising the external environment in this way can help our understanding of what it is. In Chapter 6, we established that the concept of the business environment could be defined as: the conditions within which the business operates, the sum total of all the factors which can influence the behaviour of the business and how it develops.

We focused on the internal environment, looking at those influencing factors that come from within the business itself. Here we are interested in the external environment, which can be understood as: the sum total of the factors external to the organisation, which can influence the behaviour of the business and how it develops. 152


Activity 7.1 Reading The first reading is concerned with the organisation’s environment and uses the view of the firm as an open system to explore this. Read: • Mullins (2010) Chapter 3 ‘The nature and context of organisations’, pp.88–96. The importance of technology is also reintroduced in this reading. This and also PEST analysis (PEST stands for political, economic, socio-cultural and technological factors) will be considered more closely later, so it will be useful for you to make clear notes on these topics. In particular, keep Figure 3.6 on p.90 in mind as you continue to work through this guide. Also make use of Figure 3.7 on p.91 as a checklist. Notice that the analysis in Mullins is called PESTEL analysis. The further E and L represent environmental (green issues, etc.) and legal aspects. In this chapter these areas are absorbed into the four original elements mentioned above. You can use either framework. (See also Boddy (2008) Chapter 3, Figure 3.5, p.97, and Chapter 4, Figure 4.4, p.120, for similar checklists.) 1. Imagine that you are a manager within a shoe factory. Adapt the diagram in Figure 3.4 on p.88 to represent your shoe business as an open system. 2. How can the open systems model help you to view the business within its environment? Refer to Section 1.4 of this subject guide and to your study notes. 3. As you learned in Chapter 1, the historical context of approaches is important. Can you remember the development of systems approaches, and its relationship to contingency theory? If not, look back over your notes, for these connections are very important. Every business operates within different environmental conditions. To understand this environment in more detail it is possible to deconstruct it into different layers for examination. However, it is then necessary to recognise how these work together to make up the environment of the firm, which is ever changing. This is not only a one-way process: All firms are to a greater or lesser extent constrained by the environment within which they operate, but the activities of businesses themselves also change that same environment … For the business manager, the environment therefore comprises a number of key variables, which interact with the business either singly or jointly. (Needle, 2004, p.75)1

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Some external variables: type of industry, competition, location One factor in the external environment is the industry within which the business is operating, for example the fashion industry, shipbuilding, catering, and so on. Industry competition influences the behaviour of the organisation. Different industries are competitive in different ways. Activity 7.2 Think of the fashion, shipbuilding and catering industries. Each one will have many divisions within it, but what would be the main areas of difference between the three with regard to their competitive nature? Hint: It may help you to think about the number of competitors that may exist, the likely relationship between the competitors, or how the competitors can be differentiated.

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As well as considering where a business is placed competitively, the firm’s environment will also be influenced by where the business is placed geographically. In Chapter 6 we considered how an organisation’s formal structure could be organised, and one of the ways was around the location of different elements of the business. Can you remember the different levels that could be involved in considering location? When considering location, the different levels involved could be local, regional, national or international. In a similar way, businesses can be seen to interact with the environment at the local level, national level and also the international or global level. Later in this chapter we will consider the geographical element of the environment in more detail, as we explore the influence of national culture. Before this, however, the economic, political and technological aspects of the external environment will be considered. The chapter will conclude by looking at the different methods available to managers for making an assessment of their company’s environment, which will also illustrate the ways in which these elements interact dynamically.

7.2 The economic environment As well as offering us an approach to understanding internal organisational behaviour as outlined in Chapter 2, economics also provides us with an approach to understanding the business environment. Macroeconomic conditions are the wider economic conditions within which a business operates. These differ depending on where a firm is located, and these conditions can have a number of implications for the limitations and the possibilities facing the organisation. During your time studying for this degree you may also complete the course 02 Introduction to Economics, during which you will become more familiar with economic terms and approaches. However, here it is helpful for us to consider the contribution that the economy makes to the business context. This can be broken down regionally for illustration and will be linked to a later section of this chapter, but for now we will consider a country. Vast differences exist between the economies of different countries.

Macroeconomic conditions Activity 7.3 1. What do you already know about the economies of different countries, or about your own? 2. Can you describe or compare them in any way? For example, can you think of a country that is considered to have a better national economy than your own, and an example of a country that is seen to have a poorer national economy than your own? 3. What factors do you think could be considered to help economists measure the success of different economies or to make comparisons between them? Gross domestic product (GDP) One measurement used to indicate macroeconomic conditions is GDP. Have you heard of this? Do you know what it means? The letters stand for gross domestic product, and this refers to the total value of all goods and services produced within one country during a specific timeframe, usually a year.

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Why is this important for a business? Think for a minute. GDP gives an indication of a country’s general economic conditions and this can, for example, greatly influence the purchasing power of consumers; in other words, how able people are to buy the products marketed to them. The GDP is the total value of all the goods and services made in the country, and to enable us to make comparisons it is helpful to divide this total by the population of the country, since countries vary enormously in size. When the GDP is divided in this way the resulting figure is called the GDP per capita, so it represents the proportion for each person in that country if divided equally. This offers a good indication of the huge differences between the economic conditions faced in different places. In Table 7.1 a few countries have been selected to give you an example of their GDP per capita. The figures apply to 2006. Values are given in US$ to aid comparison. Country

GDP per capita 2006 US$

Afghanistan

319

Bermuda

80 676

China

2 055

Hong Kong, China

26 575

India Jamaica

784 3 823

Russian Federation

6 877

Singapore

30 159

Sri lanka

1 425

Switzerland

50 247

UK

39 207

USA

43 562

Vietnam

673

Zimbabwe

133

Table 7.1 A comparison of GDP Source: adapted from UN Secretariat and Labour Office 2009

From the information presented above, it can be clearly seen that huge differences exist in the buying power that people have, depending on where in the world they are. It is important to remember that the GDP per capita is the average and within countries there will again be great variations between the buying powers of individuals: rich people can live in the poorest countries and poor people can live in the richest countries. Notice also that the GDP statistics take some time to become available. Given the present global financial situation (2009), it would be interesting to see how the ‘credit crunch’ has affected the GDP values. For this and any other issue, we need to bear this in mind when using statistical information that generalises about a whole country, but it does give a point of comparison, since already we can see how the macroeconomic environment could affect the business context.

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Activity 7.4 Return to the example of the shoe factory and your reading in Activity 7.1. If you were manager of product design or marketing, how would your work be affected by the national economy? How would it be affected if your factory were located in, for example, India or in Switzerland?

Other economic measurements The GDP is only one measure of a country’s general economic situation. GDP refers to the total value of products, goods and services produced in a country, but the GNP is the gross national product. This is the total value of the products, goods and services produced only by the productive forces of that country. There are, then, many ways to measure or indicate the macroeconomic conditions of a country and to make comparisons using these. A number of important ones are listed below: • GDP (gross domestic product) and GDP per capita (per head) • GNP (gross national product) and GNP per capita • GNI (gross national income, used sometimes instead of GDP or GNP) and GNI per capita • consumer expenditure, for example retail sales, levels of consumer credit • investment expenditure, for example number of houses being built • employment conditions, for example number of people out of work, levels of wages • inflation • interest rates • currency exchange rates. Activity 7.5 Think of your shoe factory for a few minutes. How could you use information about: 1. prices of raw materials 2. interest rates 3. the value of a currency? Make a few short notes before you read on. Feedback 1. A direct impact of economic conditions can be on the price of materials; these in turn have a potential impact on the profits of the business. Changes may occur in the price a company has to pay for raw materials, for example due to a general downturn in the economy or a supply crisis when fewer raw materials are available to purchase. The price of materials is dependent on the supply and demand levels of the input market (those selling the raw materials). 2/3 Changes in interest rates and in the value of the currency in relation to others also have a dramatic affect on the pricing of products and the profits a company can make. In addition, the value of a currency can devalue in a country: it becomes worth less, overnight. The impact of this is that if you have costs to pay in that country – for example, if you pay workers for their labour there – then your wages bill will be less. If, however, you sell your product in that country or are a worker or supplier in that country, then the amount of money you will be receiving for your product or work or materials will be less than the set value. 156


It is important to recognise that these economic influences on the environment work together to create the ‘economic environment’ in which businesses operate. You also need to see the economies of different countries as being interconnected. What occurs in one economy can have profound effects not only on its neighbouring countries, but increasingly all around the world. This is particularly evident at the moment. We will return to this in Chapter 8 of this guide.

The ‘economic environment’ in your country Activity 7.6 Find out about the economy of your own country, using some of the indicators mentioned above. Information such as the GDP and GNP can often be found within government reports that are often stored by local libraries, published on websites such as the United Nations source used in Table 7.1 or www.worldbank.org, and in financial journals. 1. How do you think the economy of your country is affected by or influences those of the neighbouring countries or those on the other side of the world? 2. Can you think of any examples when a failure or success of another economy has had a clear affect on your own? Perhaps think of how confidence levels could be affected when an economy collapses. These questions are particularly relevant at the present time. In Chapter 8 we consider changes in the structuring of the world economy which have led to increased trade and connections beyond the boundaries of individual countries. As this type of trade has increased, the importance of understanding the interconnectedness of economies has also increased. In Chapter 8 we explore in particular the concept of globalisation and the increasing dominance of multinational companies. The point being made at this point in the guide is that the firm can only be understood by considering the economic environment within which it operates. Now look again at the PEST checklist in Mullins, Figure 3.7 on p.91, and see what other economic factors you can identify from this list in addition to the ones dealt with here.

7.3 The political environment The political environment can be made up partly by: • the type of political system in a country • the approach of the dominant political party • the policies and activities of government • the wider political environment beyond individual countries. Again, the objective here is to view the business within its macro environment rather than on its own, and the political dimension is an important element of this. Activity 7.7 How might the political environment within which a business operates actually affect its activities and the work of the managers? Which political factors count most in your country? 1. Draw a box, with a circle inside to represent the firm. This diagram will be used to represent the business within the political environment. Imagine this is a business within your own country. If you were the manager of this business, in what ways 157


could political factors affect how you run it? Think, for example, of the limitations that may be placed on what you are able to do or the opportunities that could be available. Draw these influences into the diagram around the business. 2. Also add arrows between the political factors and your business, but think whether this should be a one-way or two-way arrow: Does each element only affect the business or does the business also influence the political factors? 3. Can you think of a different country where the political environment would affect the business in different ways or would create a different type of environment for the business?

National political factors The political environment can be examined by looking first of all at the political influences on the firm from within the country in which it operates, and secondly by looking at wider political influences that are not country-based. Within the first scenario the State is the main actor, and so it is important for us to understand what this means. This is usually a nation state, and comprises all those who officially represent the country. What would this include in your country? In Britain, for example, it would include: • the judiciary (laws, court cases and judgments that affect our business) • Parliament • the Civil Service (state administration) • local government (in locations important to our business) • law enforcers, for example the police • the protector of the country (the armed forces). By specifying these different components, it is easier to see the role of the State and that this is directly linked to the economic environment. The government of the day is involved in trying to control and promote the most favourable economic conditions for economic growth. The extent to which a government will intervene in attempting to do this depends on the policies of the government, but intervention and the impact of these policies can involve a number of different activities. These range from positively promoting industries or products, especially in other countries, to direct impact through the setting of interest rates and taxation levels. Looking back to the list of elements that make up the State, it is clear that one role is to provide and enforce the legal framework and legislation to regulate the activities of business. The areas covered are wide-ranging and affect the company in many different ways. Some of these are set out below.

Types of regulation that affect the business context 1. Labour law regulates activities involved in hiring, employing and ending an employment contract. For example, this would include recruitment, equal employment conditions, trade union activities and appeals against dismissal. 2. Company law refers to the setting up of a business, the running of it, and the closing down of a company. Different regulations exist for different kinds of business. For example, a business owned by one person would be regulated differently from a public company or 158


one owned by many shareholders. Think back to Chapter 5 and the company accounts that often have to be made public by law. 3. Patent law regulates ownership claims on new ideas and the use of these by other companies. This is particularly important for businesses that invest substantially in research and development, such as pharmaceutical and IT businesses. 4. Trading law is a broad category which includes the laws regulating the safety of products and consumers’ rights when purchasing them. Here consumers include other companies as well as the public. Trading law can also refer to laws on the import and export of goods, and the law relating to foreign companies operating within the country. 5. Environmental law regulates company activity so as to protect the natural environment, both locally where operations are based and also more generally, as in relation to the raw materials a company can use. Regulations regarding the disposal of waste and pollution resulting from production processes, and this includes noise, have been increasingly important issues for management. As the world’s natural resources are being consumed at a rate previously unknown, interest in the issue of sustainable development is growing; this is development based on renewable resources and energy-efficient production methods. The first area of regulation in the list is that of labour law, but the government’s involvement in employment issues goes far beyond legal regulation. Activity 7.8 Consider how the laws of child labour affect a business in your country. What is the minimum age at which people can work? How far is this rule enforced, or do businesses ignore the rule? What differences are made to society by the law and whether or not it is enforced? The education policies of a government have a great impact on business activities. Can you think why? Consider this for a moment. Businesses need to be able to choose from a pool of skilled labour that can be matched with the requirements of the work. The education and training policies of a country have a direct effect on whether this pool is available. For example, if a government invests more in academic institutions there may be a shortage of vocational, more practically based skills. The right balance needs to be sought. Beyond school, opportunities need to be available to keep down unemployment levels. For example, the government can intervene to provide incentives to encourage people who are out of work to gain the skills that industries need, or to encourage those who left a career, perhaps to have a family, to return to work through the provision of child care facilities and refresher courses. The governments of different countries pursue different policies, depending on their perception of the needs of industry and also on the vision they have for the future of the economy. They could, for example, wish to encourage high-tech industry and so invest in the types of skills it requires, or they may wish to attract foreign investment in the low-skills manufacturing industries.

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Activity 7.9 How does your government affect business? 1. Can you think of examples where different governments seem to have actively pursued different types of industries though their education and training policies? 2. Think about your own government. How do its policies affect the behaviour of businesses within your country? It may help you to think, for example, of the type of educational investment made, strategies to lower unemployment and to encourage equal opportunities. 3. Have you noticed any changes in the policies pursued, perhaps as different political parties become dominant? 4. Finally, try this question. If you were part of the strategic management team of a business in a neighbouring country, what information would be useful to help you decide whether to open a branch in your country? For example, how might the education and training policies pursued by the government affect your decision?

International political factors The second part of the political environment to be examined goes beyond the boundaries of a country, but is very much interconnected with the State level. This wider political context includes the contribution made to the environment by trading blocs. Groups of countries develop regulations for trade within the bloc. Agreement will be made, for example, on what can be traded across borders and the lowering or abolition of tariffs (financial penalties on trade between member countries). This opening up of the market results in freer flows of trade and more potential consumers, but also greater competition. Examples include the European Union (EU), the North America Free Trade Agreement (NAFTA) and the Association of South East Asian Nations (ASEAN). Which international agreements are important for your country? Have you already heard of the agreements mentioned above? What do you know about them – for example, what is their purpose? How do you think the existence of these could affect the external environment within which businesses operate? The example of ASEAN The example of ASEAN illustrates the importance of the wider political context. This was set up in 1967 and member countries now include Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei Darussalam, Vietnam, Lao PDR and Myanmar and Cambodia. On setting this up, the aims were set out as follows: The Association represents the collective will of the nations to bind themselves together in friendship and co-operation and, through joint efforts and sacrifices, secure for their people and for posterity the blessings of peace, freedom, and prosperity. (ASEAN 1967)

Although these aims seem quite general, economic cooperation was a major component of the arrangement. The main objective was to increase trade between the member countries, which only totalled about 12–15 per cent at the beginning of the agreement. Initiatives since that time have involved favourable tariff regulation to encourage flows of goods between these countries, and policies to encourage greater economic integration. For example, in 1992 a summit was held in Singapore and the ASEAN Free 160


Trade Area was agreed on (AFTA). This removed tariff barriers for trading between member countries in this area, and was designed to promote the competitiveness of the ASEAN region. This example therefore illustrates how the wider political community can impact on the limitations and the possibilities faced by individual businesses. Beyond regional trading blocs, other international organisations exist with the aim of encouraging trade that will increase economic success. One such example is the World Trade Organisation (WTO). You will return to this issue again in the next chapter. To sum up, the political environment constitutes an important element of the business context, both at national and international levels. • Business organisations are subject to the regulations placed on them by the State and by the agreements that states make. • Businesses are also affected by the policies of the government. • Businesses themselves can pressurise for the adoption of certain policies. This is a dynamic environment, and in Chapter 8 we will consider further those business organisations that operate in more than one country and so are exposed to a more complex political environment; these are the multinational companies. Activity 7.10 Reading Your next reading is from the secondary key text for this course. Read: • Daft (2008) Chapter 3 ‘The environment and corporate culture’. This chapter in the book is the first in a section focused on the business environment. The first part of the chapter is useful as it brings together the different elements which have so far been discussed. Daft then goes on in the remainder of the chapter to make links with the internal culture of the organisation. You may find that this helps you to reflect on the previous chapter; however, note that it is not an essential part of the reading.

7.4 The technological environment In Chapter 6 we considered the relationship between technology and the business organisation. We now want to return to this issue to consider technology as a factor that is also part of the external environment. New innovations, discoveries and developments that occur outside the business all contribute to the technological environment within which it operates. The emphasis given to this factor can depend on a number of variables, such as the type of industry and whether the products themselves, or the production processes used by particular businesses, involve a great degree of technological input. Activity 7.11 Reading Re-read the following section of your main key text: • Mullins (2010) Chapter 16 ‘Technology and organisations’, pp.634–45. The selection of pages here will be familiar to you, as they are part of the Essential reading for Chapter 6. However, here we revisit the section of the reading that is specifically concerned with technology as part of the external environment of the firm. Once you have read the extract, try this next activity. 161


Technology and business – an example What differences do you think could exist in the technological environments that different businesses operate in? To help you think about this, consider the cases of two different companies. • Case A – excellent communications technology exists, such as speedy internet and email access, good landline and mobile phone network coverage, and an efficient postal system. • Case B – no internet service exists and, even if it did, few or no staff were trained to use it, regular power cuts occur and interrupt machinery, postal services are irregular. These examples are concerned not only with technological differences: relating to these are differences in the infrastructure that can deliver technology such as the electricity network. 1. What functional areas of the business could be affected by these differences between the two cases? 2. Think of yourself as a marketing manager, a production manager and as a finance manager. How would your work be different in each of the two cases, and in particular how might your decision making role be different? It can be seen, then, that the business context is different for all organisations, and depends on the interactions of different elements. The technology element is partly determined by the macroeconomic conditions of a country and also by the role of the State, through the infrastructure it provides and the training policies it adopts. This therefore highlights the interconnectedness of the different elements. Advances in technology have had significant impact on the wider business environment and this can be related to the increases in trade beyond borders, described above. As a result of changes in transportation and communications, it is often easier, quicker and cheaper for most goods, people and information to travel around the world. This can work to open up new markets for products – think of the possibilities of advertising even a small business through the internet. However, this can also work to increase the number of competitors in the marketplace. In Chapter 9 we will consider e-business in more detail – those organisations based on the concept of internet business. From this section, though, it can be concluded that the technological environment contributes a dynamic and fast-changing element to the environment, but the type of business and access to technology will determine the degree to which this is important.

7.5 The cultural environment The final element of the external environment to be considered is culture and how this can impact on business behaviour and management. In Chapter 6 we introduced the concept of culture as we considered the importance of organisational culture, the internal culture of the business. Here we focus on the external cultural context within which the business operates. Differences in culture may occur at a local, regional or national level, and it is the last of these that we will be concentrating on to illustrate the importance of the cultural context (i.e. difference between countries). What elements do you think contribute to make each national culture distinctive? 162


Some of the ways a national culture can be defined include the following: • language • traditions • the historical context of the country • religion • values • social organisation, including family patterns • the system of law • food tastes • entertainment tastes, such as music, dance, theatre. Can you think of any others? Pause for a few minutes before reading on. Again, you should remember that although we are focusing on national culture, it is unlikely that every resident in a country will share these elements. It is likely that there will be regional differences, or groups within a country that share their own subculture. For example, think of large countries such as China or the USA; the north and south and the regions between will have their own regional foods, possibly languages, entertainment tastes, history and traditions. A national culture, though, is composed of the dominant elements of a country, and those perceived to be important by those describing the culture. Activity 7.12 Think now about the important cultural factors in your country. 1. Write a short paragraph to describe the national culture of the country you are from, specifically thinking about the elements mentioned above. 2. What is your impression of other national cultures? Choose two foreign cultures from the list below and write a short paragraph detailing what you know about each of them. • American • French • Singaporean • Turkish • German • Japanese • Portuguese • Swedish. 3. How do you think these differences in culture could affect the operations of the businesses working in those countries? In Chapter 3 we mentioned the possibility of national culture affecting management. Also, within this current chapter, we have considered differences in the economies, political situations and technological advancements of different countries. Each of these contributes to the external environment of the firm and all of them make up part of, or influence, the national culture. The cultural environment is therefore a good example of how these different areas are continually interacting. In relation to the business organisation, then, national culture can affect the activities of the firm in the following ways. 163


1. Organisation of business – different countries traditionally organise their businesses in different ways: for example, small family operations may be more common, or business growth to corporate level may be the accepted goal. 2. Types of products – traditions, religion and legislation may restrict or encourage the production of certain types of products, for example the production of alcohol is rare where a dominant religion forbids drinking it. 3. Ways of promoting products – marketing managers need to consider what is appealing and what is not and this often requires knowledge of the culture, for example to avoid causing offence. 4. Ways of doing business – some countries have different traditions for making deals or for communicating with each other, which could involve the following of certain protocols or rituals like making small talk or gift giving. 5. The business mission – culture may influence what a business is expected to do, particularly in relation to its social responsibilities, which will be discussed further in Chapter 10. For example, some cultures may expect businesses to focus only on making profits, whereas others may expect businesses to provide employment for family members or to improve the community for the good of all. 6. Motivations to work – as in the above point which details the motivation for business, culture may influence why people want to work or how great a priority it is for them. For example, some cultures could value loyalty and commitment to the employers, whereas others could approach work as just a means to enjoy the other areas of life but not to gain status. 7. Management style – the style of management can be influenced by the culture, in that it will need to take all the above into account, including the motivation of employees, expectations placed on the business, and traditions concerning business organisation. Also, managers themselves belong to the culture so can influence behaviour, as can cultural traditions regarding systems of authority.

Hofstede’s dimensions Hofstede2 published the results of a detailed study, in 1980, of how national culture can influence work. Hofstede studied businesses in 40 different countries, trying to identify differences in the cultural values that could influence the management of organisations. In doing this he identified four dimensions that create differences in the type of management in each country. 1. Individualism versus collectivism – loyalty to self and family or to the wider group. The extent to which people are expected to take care of themselves and to choose their own affiliations as opposed to preference for a closely bonded social framework where people look after each other and organisations protect their members’ interests. 2. Power distance – relates to the acceptance of the distance between those with power and those without; for example, low power distance cultures value a lesser gap between. The extent to which the less powerful members of organisations expect and accept that power is distributed unequally.

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3. Uncertainty avoidance – relates to tolerance of uncertainty and ambiguity. For example, low uncertainty avoidance cultures would be more tolerant of uncertainty and so not avoid it. High uncertainty cultures prefer rules and structured circumstances. 4. Masculinity verses femininity – or quantity of life versus quality of life – relates to the degree to which a culture values assertiveness, competition and materialism (stereotypically associated with masculinity) versus the degree to which people value relationships and show concern for others (stereotypically associated with femininity). It is unfortunate that Hofstede used such sexist connotations and some later writers prefer to substitute the terms ‘quantity of life’ versus ‘quality of life’. Once these dimensions were identified, Hofstede was able to measure each country to gain a score for each dimension. The result was a clustering of countries with similar scores and therefore similar types of management. From this Hofstede (1980, p.336) suggests a typology of eight clusters. (These will be detailed in table form in your next reading.) 1. More-developed Latin: high on power distance, uncertainty avoidance and individualism, but medium on masculinity; for example, Brazil, Argentina, Spain and France. 2. Less-developed Latin: high on power distance and uncertainty avoidance but low on individualism, and no consistency in masculinity; for example, Peru, Portugal, Mexico and Chile. 3. More-developed Asian: high on uncertainty avoidance and masculinity, medium on power distance and individualism; for example, Japan. 4. Less-developed Asian: high on power distance, medium masculinity and low on uncertainty avoidance and individualism; for example, Taiwan, Hong Kong, Singapore and India. 5. Near Eastern: high on power distance and uncertainty avoidance, but low on individualism and medium on masculinity; for example, Greece, Turkey and Iran. 6. Germanic: high on uncertainty avoidance and masculinity, medium on individualism, and low on power distance; for example, Germany, Israel and Austria. 7. Anglo: high on individualism and masculinity, low on power distance and low–medium on uncertainty avoidance; for example, New Zealand, USA, Canada and UK. 8. Nordic: Medium on individualism, low–medium uncertainty avoidance, and low power distance and masculinity; for example, Finland, Denmark and Norway. Hofstede’s study is a useful one because it highlights the need to recognise differences in the cultural context of every firm. However, as with all studies and theories, it is necessary to evaluate what they claim and question how their conclusions were reached. Every time that you read about a piece of research you should ask questions about the results. For example, in the case of Hofstede he was researching values. This is a difficult topic to quantify and measure and so any indicators used to measure them will inevitably have a subjective element. His study also does not allow for difference within countries although regional variation may exist, especially when a number of strong cultural groups exist within the geographical boundaries of one country.

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Do you think that any changes may have occurred since the study was done? Other studies have tried to link national culture and business and one has been included in the Further reading suggested for this chapter. This is the study by Beugre and Offodile (2001). These researchers considered the need for a ‘cultural fit model’ of management. This would involve the development of a business strategy and management techniques that take into account both indigenous or local styles and also the techniques of modern management, so assuming that indigenous management is not modern or effective on its own. The development of this model came from their research within sub-Saharan Africa, where existing cultural patterns were used in a positive way to promote the adoption of techniques such as just-in-time and total quality management. See also the framework suggested by Fons Trompenaars – this can be found towards the end of the reading in the next activity. Activity 7.13 Reading Read the following section from your main key text: • Mullins (2010) Chapter 1 ‘The nature of organisational behaviour’, pp.22–33. This reading further considers the work of Hofstede and provides a useful diagram representing the cultural environment of the firm. It also summarises Trompenaars’ framework. Boddy (2008) Chapter 4, pp.130–32, discusses Hofstede’s framework. After reading this, answer the following questions. 1. Think about the cultural influences on management in your own country. Where do you think your culture fits into Hofstede’s analysis? 2. Return to the descriptions you made of your own and two other cultures at the beginning of this section. Do you think there is any match between the general culture that you described for these countries and the categorisation provided by Hofstede? The cultural context is important in understanding the behaviour of the business organisation and how it is managed. Where a business is located has a great impact on the external environment – the political, economic, cultural and technological environments. How do you think that the cultural environment of a country could affect a business’s decision on whether to expand there? Think for a few minutes about a company moving to a remote region of your own country where cultural factors are different and important (e.g. a different language is spoken or a different religion predominates).

Interconnections We have completed our consideration of culture, the fourth element of the external business environment. At the beginning of this chapter we stated that businesses could not be understood in a vacuum but that the different elements of the environment needed to be recognised. To facilitate this, the environment has been broken down into sections for analysis, but it is important to stress that each of these is interconnected with the others. In the sections you have been studying, some of these links have been highlighted, such as the close relationship between the economic and 166


political elements. The cultural context has also been found to penetrate all elements of the environment. Next, in the final section of this chapter, we look at how the environment of particular businesses can be assessed and how this can help the decision making process.

7.6 Analysing the business environment In this last section we briefly describe three tools to help managers to analyse the business environment when decision making. Two you have met before: SWOT and PEST. The third is taken from the work of Michael Porter (1980) and his team at Harvard. You can find other tools used by managers to analyse the external environment but these three are sufficient for this course.

SWOT analysis How can managers ensure that they are aware of their company’s environmental context and so consider it when making strategic decisions? In Chapter 4, we introduced some aids to decision making which are relevant here, including the SWOT analysis. Can you remember what this means and what it is used for? If not, then go back to your notes for Chapter 4. Why do you think a SWOT analysis could be useful for viewing the business within its environment rather than in isolation? Each area of the SWOT could relate to both the internal and external situation of the firm. For example: • a strength could be that it is situated in a country with a stable political system and one where the government actively encourages economic growth • a threat could be from the increased competition resulting from reductions in trading tariffs between countries • however, the above threat could also represent an opportunity to expand into new markets • finally, a weakness could be that the business produces a type of product that is only marketable in some countries because it could be seen as offensive in some cultures. Can you think of other examples?

Porter’s five forces model Another tool of this kind is provided by Michael Porter (1980), and is particularly relevant to analysis of the current environmental situation within a specific industry. The model put forward by Porter would mainly aid decisions about what strategy to use for the success of a particular product. (You have already read about this tool in the Essential reading for Chapter 4 – Daft, 2008, in the chapter on strategy formulation and implementation. It might be a good idea to refresh your memory by reading this passage again. An alternative source is Boddy, 2008, Chapter 3, pp.93–97.) The five competitive forces are listed below: 1. potential new entrants as competitors in the same market 2. the bargaining power of buyers 3. the bargaining power of suppliers 167


4. the threat posed by similar or substitute products 5. the rivalry among competitors marketing their goods to the same audience. Managers must consider these forces in order to understand the competitive environment within the industry. Porter links the analysis to actual business strategies, so illustrating the relationship between the understanding of the environment and decision making. Once the competitive forces have been examined, and depending on what is found, Porter puts forward three possible strategies: 1. Differentiation, when a product offers something different from the competition, such as in the actual capabilities of the product, the marketing, or the after-sales service 2. Cost leadership, when competition is based on the price of the product 3. Focus, when a strategy is taken to specialise, for example, in a single product or for a particular market.

PEST analysis You have already come across the final analysis tool to be discussed, during an earlier Essential reading in this chapter in Activity 7.1. A PEST analysis3 is roughly tailored to the four different areas that we have examined: the political, economic, socio-cultural and technological. Within each area a checklist is provided for exploring how each element of the environment could affect business in the future.

7.7 Summing up The point of this chapter has been to highlight the importance of the external environment and to show that an appreciation of it can not only help to understand the constraints the business faces, but also the opportunities available to it. Recognising that businesses exist within different external environments is also important, and helps comparisons, especially across countries. Finally, as you view the business within this external context, recognise its changing nature. Within each element we have identified factors which are constantly changing and adapting, and we also highlighted how different elements in the environment impact on each other. It is therefore not enough to see the business within its environment, examine this and then go back to concentrate on studying the internal workings of the firm. The environment is constantly shifting and so the business has always to be seen within this context, and for the manager this means regular assessments of the environment on a continual basis. Activity 7.14 Reading For the final reading, look at: • Mullins (2010) Chapter 3 ‘The nature of organisations’, p.91. 1. Study the checklist for a PEST(EL) analysis presented in Figure 3.7. From the notes you have made during this chapter, could you add any elements to each checklist? 2. What difficulties do you think a manager might face in trying to assess the elements in each checklist? Imagine yourself as a manager trying to do this. 168

3

Refer back to Activity 7.1.


3. For what sort of decisions or for what level of management do you think a PEST(EL) analysis would be most useful – top, middle or junior management? Activity 7.15 Case study exercise This case study is taken from your secondary key text by Daft, and appears at the end of his chapter on managing in a global environment. The company it is based on is an oil company, facing particularly challenging environmental factors. Some of the issues raised in this will also be relevant to the next chapter as we consider international business, and also to Chapter 10 when we discuss the social responsibilities of businesses. Reading Now read: • ‘Case study: Unocal Corporation’ in Daft (2008) at the end of Chapter 4, p.133–35. 1. How would you describe the business environment within which Unocal operates? Think about the risks faced within different elements of the external environment. Try to prioritise these risks in order of importance. 2. Considering your answer to the above, try to do a more systematic analysis of the environment using the PEST analysis model. 3. Write a short evaluation of the strategy adopted by the management of Unocal, considering its strengths and weaknesses. 4. How do you think that the management should proceed? Considering the risks you have outlined above, develop a strategy that you could present to the management team, incorporating your PEST analysis to support this.

Chapter review Key points • Business organisations do not exist within a vacuum but need to be understood within the context of the wider environment. • The business environment is made up of many external factors that influence each other as well as the activities of the firm. • The main areas of the business context can be categorised as the economic, political, technological and cultural elements. • National culture is a particular element which pervades the external environment of the firm and can have significant impact on business management and behaviour. • Understanding the external business context is important for decision making, especially at the strategic levels, and to aid this several tools are available to managers.

A reminder of your learning outcomes Having completed this chapter, and the Essential readings and activities, you should be able to: • identify elements of the external environment that interact with the business organisation, and evaluate their significance • appreciate differences in the economies of countries and assess the impact that economic conditions could have for the operations of the firm • offer examples of how the political context can affect business behaviour 169


• explain how technological factors contribute to the external business environment • evaluate the differences that may exist in access to new technology and the implications this can have for the operations of the firm • identify the elements that make up national culture and the ways in which this can influence business behaviour and management • conduct an analysis of the external environment of a particular business by utilising one of the aids designed for this purpose.

Sample examination questions When considering these, please remember the guidance given in the Introduction about examination preparation. Each question can be answered fully in approximately 45 minutes, under examination conditions. 1. Discuss why knowledge of national cultures is important in understanding the ways businesses operate in different countries. Support your answer with reference to the appropriate theory, and illustrate with examples from your own country and at least one other. 2. Discuss how the macroeconomic conditions of a country impact on the businesses that operate within it. Consider in your answer the role of the state in attempting to control the economy. Illustrate your answer with practical examples. 3. ‘Organisations do not exist in a vacuum.’ Discuss what points can be made in support of this statement and what implications it has for the management role of strategic decision making. Support your answer with reference to theory and practice. 4. a. Describe the different elements of the external environment of a business organisation. b. Discuss how the different elements of the external environment of the business organisation interact. Support your answers with practical examples.

Advice on answering a question To help you further with your exam preparation we offer below some suggestions for one of the answers. However, it is very important to remember that there is no model or correct answer to any of the questions. It is more important to demonstrate what you have learnt by developing your own response to the question, supported by evidence from the relevant parts of the chapter. 4.

(a) Describe the different elements of the external environment of a business organisation. (b) Discuss how the different elements of the external environment of the business organisation interact. Support your answers with practical examples.

It would be useful to begin with an explanation of what the external business environment is, perhaps differentiating this from the internal environment. The importance of the external environment could be established early on, and why it is necessary not to see the business as acting in a vacuum. 170


The main elements of the environment could be identified as the economic, political, technological and cultural. A brief explanation of each could be offered with examples. The interconnectedness of these elements is the focus of the question and so the remainder of the answer should be directed towards identifying how they interact. An example of this would include how the general economic conditions of a country can be influenced by political intervention, both at the State level and international level. A further example could relate the link between the technological element and the policies of the State, including whether investment can be made in research institutes or in technical training. Access to technology could be related to the economic success of a country and the infrastructure provided by State policies. A final example could be that of culture and how this can pervade the whole environment, such as in influencing the values and policies of the government, and so influencing the economy. By the end you should have demonstrated a good understanding of the different environmental factors that make up the business context and also have established the dynamic nature of the interactions between them.

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Chapter 8: The diverse and dynamic nature of the business context

Chapter 8: The diverse and dynamic nature of the business context Aims of the chapter Chapter 8 specifically aims to: • draw together the analysis of the internal and external environments of the business organisation • consider the international context of business and the implications this has for the internal terrain of the organisation • explore the concept of globalisation and assess the relevance of this to business and management • examine the links between the internal and external environments of multinational companies • examine the links between the internal and external environments of small business organisations • through analysis of these specific issues, reflect on this section of the course and appreciate the dynamic and diverse nature of the business context.

Learning outcomes By the end of this chapter, and having completed the Essential readings and activities, you should be able to: • perceive businesses as a whole, identifying the different elements within them and also the interactions with the wider business environment • discuss the types of events which can affect the international business context and develop a system for continuously updating your knowledge of this, particularly in relation to how such events affect businesses in your own country • explain the concept of globalisation, and develop your own view on the issue based on evidence you have read and your observations of changes that have occurred • evaluate the particular challenges facing multinational corporations and small businesses as they interact with the business environment.

Essential reading In this chapter, the Essential reading consists of two relevant chapters from Daft and a short section in Mullins. You will also be encouraged in this chapter to spend some time finding sources specific to business and management in your own context. Daft, R.L. New Era of Management. (Mason, Ohio: South Western: Cengage, 2008). Chapter 4 ‘Managing in a global environment’. Chapter 6 ‘Managing small business start-ups’. Mullins, L.J. Management and Organisational Behaviour. (Essex: Pearson Education Limited, 2010). 173

107 Introduction to business and management Chapter 1 ‘The nature of organisational behaviour’ pp.22–24 ‘Globalisation and the international context’. Your own collection of articles. Material from the business section of national newspapers and business publications (as mentioned in the Introduction to this course, you are encouraged to read sources such as these regularly).

Further reading Books and journal articles on subjects such as globalisation, international business and small business abound. The following are a few suggested readings that will be referred to during this chapter. The final three are particularly recommended for further understanding of globalisation. However, in addition to these, if you wish to read more widely it is recommended that you search for sources that are particular to your part of the world, possibly offering case studies of companies located there. Agmon, T. and R. Drobnick Small Firms in Global Competition. (New York: Oxford University Press, 1994) Chapters 1 and 2. Boddy, D. Management: An introduction. (Harlow: FT Prentice Hall, 2008) Chapter 4 ‘Managing internationally’, pp.112–20, 134–40. Grint, K. The Sociology of Work. (Cambridge: Blackwell, 2005) Chapter 9 ‘Globalisation and Work’. Held, D., A. McGrew, D. Goldblatt and J. Perraton Global Transformations: Politics, Economics and Culture. (Stanford: Stanford University Press, 1999). Lowe. J., J. Morris and B. Wilkinson ‘A British factory, a Japanese factory and a Mexican Factory: An international comparison of front-line management and supervision’, Journal of Management Studies 37(4) 2000, pp.541–62. Needle, D. Business in Context: An introduction to business and its environment. (London: Business Press, 2004) Chapter 3, pp.43–73, and Chapter 5, pp.227–37. Scholte, J.A. Globalisation: A Critical Introduction. (Basingstoke: Palgrave, 2005). Stonehouse, G., J. Hamill, D. Campbell and T. Purdie Global and Transnational Business: Strategy and Management. (Chichester: John Wiley and Sons, 2004) Chapter 5 ‘Analysis of the global macroenvironment’. Waters, M. Globalization. (London: Routledge, 2001).

Introduction This is the last chapter of the section concerned with business and its environment. This section of the course began by considering the different disciplines that contribute to our understanding of business organisations. The different elements of the internal organisational environment were then identified and seen to be working together in Chapter 6. The different elements of the external environment were then identified in the last chapter, and seen to be interdependent. Some links were also made here between the elements of the environment, particularly showing the impact that wider changes have on the internal workings of the business. In this chapter you should begin to see the business organisation as a whole, made up of many different elements and existing within and as part of the wider business environment.

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8.1 The international context The aim of this chapter is to provide an opportunity to reflect in more detail on what you have learnt in this section of the course and the importance of the business environment. To assist you in this, a number of issues will be introduced where the internal and external environment can be seen as interacting. Leading on from the discussion of national culture in the last chapter, we will consider: • the international context of business • changes in the way that business is organised will be examined through a discussion of globalisation as a second issue, which is closely related to the third issue • the growth of multinational companies • finally, the issue of how a small business interacts with the environment. Remember, all these topics are interrelated and dynamic. In this chapter, your knowledge should be drawn together, giving you a comprehensive understanding of business and its environment. Activity 8.1 Take a moment, before we go further, to reflect on what you have learnt already. Have a look through the notes that you made for Chapter 6 and then for Chapter 7. Make a list of the main ways that the internal elements of the firm can either be influenced by or can influence the external environment of the business. What connections can you make between the two chapters that dealt with these separately? It may be useful to draw a diagram of a business, which would include the internal elements and the elements of the environment. Try to make this a diagram of a particular business that you know, and then you can be more specific. Can you add some arrows to represent the relationships between the external and the internal factors that we are trying to identify? For example, think about how the national culture could affect the internal culture of the organisation. What others can you think of? In this section we want to stress how important it is to develop an awareness of the international context. In Chapter 7, we looked at the political, economic, technological and cultural elements of the business environment. But each element has an international dimension. The importance of this international dimension will depend on the extent to which the business is active across borders, but even a locally based business will still be affected by activities in the international context. The political and economic environments go beyond the internal policies of governments, to include their interactions with different countries. The importance of trading blocs and the involvement of international organisations such as the World Trade Organisation (WTO) also illustrate the impact of the international environment (see Chapter 7). For all businesses, the external environment is not just limited to a single country, because they are affected by factors beyond the national boundaries in the international arena.

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Collecting articles from the press and internet As suggested in the Introduction to this course, it is very helpful to read the business sections of different national newspapers and business publications. It is also helpful to use information and archive search facilities on business websites, such as the Financial Times, www.ft.com, the Economist, www.economist.co.uk, Wall Street Journal, www.wsj.com. Look for the sites most local to you, for example in Singapore there is the Singapore Business Times, www.businesstimes.com.sg, or in India, the Economic Times, www.economictimes.indiatimes.com Activity 8.2 You should now look at the collection you have built up, or search these sources now. In particular, sections on international business will be useful here. Read through a number of articles and try to use a range of sources. The aim here is to get an idea of the issues reported and to gain knowledge of how international issues particularly impact on business within your own context. When you feel you have done this sufficiently, answer the following questions. 1. Identify the main types of stories and information that are offered by these sources. Who do you think each type would be of interest to: for example, is it useful for a manager? What type of manager? Or is it more relevant to a shareholder or investor? 2. Can you find articles that relate to the political situation in different countries or to international relations between countries? What reasons are put forward as to why this is relevant to business, or why do you yourself think it is? 3. What are the main types of businesses that are commented on in what you have read? Can you note any similarities between the companies featured in the articles? If one company is mentioned by different sources, it can be useful to build up a portfolio of information about it. Why is this company in the news and what information on it is seen to be important? 4. Can you find any articles on regional trading blocs or international organisations? What sorts of issues are seen as important or of concern? 5. Imagine yourself as the manager of a company which is based in your own country but which sells overseas. What benefits would you gain from continually keeping yourself up-to-date on business news, international developments and the activities of the companies reported in these publications? Two particular developments dramatically increase the importance of the international context, and these are very much related. The first is the process of globalisation, which relates to changes in the way business is organised, and the second is the growth in multinational corporations, whose endeavours are based on international activity. These issues will be the focus of the next two sections of this chapter, to establish further the relevance of the international context.

8.2 Globalisation and business In this section, we consider the concept of globalisation, focusing in particular on how this relates to business. The concept is a contested one. It is confusing because it is used in many different ways. Specialists, especially in the social sciences, refer to particular processes. Others use the word ‘globalisation’ to mean a specific issue such as the expansion of American-style fast-food restaurants. The concept has also entered the more public arena as it becomes more common in everyday language, such as in advertisements and news reports. 176


Getting to grips with ‘Globalisation’ Activity 8.3 Think about your own understanding of globalisation. The questions below may help. 1. Before you continue with this section, take a moment to think of where you have heard the term globalisation. Write down all the places you can think of. 2. What do you understand globalisation to mean? Write a few lines to define this in your own words. We will be returning to this later. 3. Now find a few other definitions of the concept from dictionaries and business glossaries, and make comparisons between them. How do they compare to your own explanation? In particular, look at the definitions given in Mullins and Daft – are they saying the same thing or are they different? (See also the definition given on p.134 in Boddy.) 4. Make a list of the ways in which you think that globalisation is relevant to our study of business and its environment. As you will have learnt by answering these questions, a search of the literature finds that globalisation can be defined in many ways. The discipline of sociology has been a major influence in the development of the concept, as globalisation from that perspective is seen as a social process. Here is a definition by Marshall from the Oxford Dictionary of Sociology: Globalisation has been described, therefore, as ‘the concrete structuration of the world as a whole’: that is, a growing awareness at a global level that ‘the world’ is a continuously constructed environment. (Marshall, 1998, p.258)

Despite differences in definition, most explanations would associate globalisation with a move towards convergence in economic, political and cultural activities. Differences are seen to be reducing and similarities are seen to be increasing, in many different aspects of organisation and life experience. Many definitions also stress the changes that have resulted in the world being a smaller place, not literally, but psychologically, because we now have the ability to picture the world as a whole, and practically, because it is possible for people, goods, information and money to travel further distances at greatly reduced timescales. Technology has made a big contribution to this, and continues to do so.

Technology and globalisation Activity 8.4 Think for a moment about how technology has helped to change the way we live and increase the interaction we have across national borders. For example, think of how the technology of business communications has improved over the years. • Up to 1800: letters, meetings reached on foot, by horses, carriages, ships • 1800–1900: addition of trains and telegraph • 1900–1980: addition of cars, cable telephones, aeroplanes • 1980–2000s: addition of email, fax, mobile phones (cell phones) video conferencing, personal web cameras, digital photographs. What other examples of transportation and communications technology can you think of that have contributed to globalisation? 177


What implications does this technology have for the globalisation of business and the activities of business organisations across national boundaries? Does it make the interaction of managers easier or harder? (We will look at how managers can deal with the explosion of data and information in Chapter 9 of this guide.)

Theories of globalisation One of the main reasons why the definition of globalisation is contested is that there is disagreement over its extent and about whether these processes are something new or just a continuation of old processes. It is relevant here to consider a short background to the different approaches, so that the contested nature and importance of the concept can be understood. Also, as well as relating to many aspects of social life, the study of globalisation is dominated by an interest in economics and business. Approaches to globalisation abound, and it can be helpful to view these contributions on a spectrum. • At one end, some people question whether globalisation has occurred at all and even if change is occurring. They argue that cross-border trade is by no means new but rather that it has been occurring for hundreds of years. An example of this is Hirst and Thompson (1996), who argue that all we are seeing now is a continuation of long-term processes. • Towards the middle of the spectrum are those who view globalisation as a recent phenomenon, representing a shift in organisation, but as a continuing process, such as Dicken (1998) and Sklair (1991). • At the other end of the scale are those who believe that the world is now integrated, and so borderless, with the nation state not being relevant any more. An example of this extreme view that is often cited is explained in Ohmae (1990). Activity 8.5 Your first reading is the introductory section of the chapter in Daft on this issue, and in particular considers the idea of the borderless world. Reading • Daft (2008), Chapter 4 ‘Managing in a global environment’; see the section on the borderless world at the beginning of the chapter. Think about where the ideas you read about would fit on the continuum of approaches discussed above. Where do you stand on this issue? What do you think? Considering the changes you have seen or read about in the way the world is organised and the way that people experience them, what type of approach to globalisation do you think has most merit? Recommended readings If you would like to read further about this topic, the Further readings listed at the beginning of this chapter, by Boddy (2008), Waters (2001), Held et al. (1999) and Scholte (2005) have useful introductory sections. You may also be able to find other texts that specifically relate globalisation to your own context. Only a basic understanding is necessary for your examination, but this is a contemporary issue and one relevant to other sections of your degree. If you are studying 21 Principles of sociology you will explore the concept further.

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The globalisation of business In what ways is the concept of globalisation relevant to our study of business and management? Think for a few minutes before reading on. Globalisation influences not only the external environment of the firm but also the internal environment. As we saw above in the previous illustration of how messages have been sent throughout history, technology contributes to the globalisation of the business environment, both internal and external, and also to the way goods and money can be transported more quickly and easily, and to production techniques – the organisation of the process of production is affected too. One result has been an international division of labour, created as different types of work are conducted in different parts of the world. The more technical, research-based and service-related skills are often sited in developed countries, with the so-called third world or developing countries being used as manufacturing bases, using low-skilled labour. The concept of a global commodity chain can be used to understand how the stages of producing one product can be carried out in several different parts of the world. The commodity chain refers to the production process as well as the backwards and forwards linkages, such as product design and then sales. It is globalisation that makes this possible, as goods and materials can be transported cheaply to take advantage of cheaper sources of labour and to capitalise on marketing potential. The case of the footwear manufacturer Nike Corporation illustrates this well, because the company itself does not manufacture any footwear. A quote from Neal Lauridsen, when he was Vice President for Nike Corporation (Asia-Pacific region), expresses their strategy: We don’t know the first thing about manufacturing … We are marketers and designers. (Lauridsen quoted in Korzeniewicz, 2000, pp.158–59)

The Nike Corporation, and many other companies, ‘outsource’ their manufacturing to a range of different companies, leaving them to concentrate on research and development, and marketing. An advantage of this is that only contracts hold Nike to working in one particular part of the world, because they do not own machinery and have not invested in factories. Therefore they have more flexibility and geographical mobility to move manufacturing to wherever the most lucrative contract can be made, and so they can react quickly to changes in the wider business and international environment.

What managerial problems does outsourcing involve? Can you think of any problems that could result from this strategy? Have you heard or read of any problems that managers of companies like Nike Corporation have encountered? It may help to think about the structure of the business, and the manager’s roles of controller, motivator, planner and leader. How could these roles be restricted by outsourcing all production, as in the case of Nike Corporation?

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Also with regard to production, global benchmarking is an issue that links globalisation to business. This is seen to result from increased interaction between businesses in different parts of the world and the sharing of knowledge between them (Grint, 2005, p.302).1 This occurred particularly in the 1990s when interest was particularly high in what were considered the best working practices, to be used as benchmarks for companies around the globe.

1

Recommended reading

2

Recommended reading

Look at indexed references to benchmarking in Mullins (2010). Be sure to include the term in your glossary. One particular industry to be affected significantly by globalisation is that of the global financial markets, for not only can investments be made worldwide around the clock, but also money and assets can be moved around the world at an amazing speed. As pointed out in Chapter 7, though, this interconnectedness can also lead to instability because problems in one market can quickly spread to another. The expansion of consumer markets is the other major influence that globalisation has had on business. Fewer trading barriers at national level, the ease of transporting goods and the advanced technology for marketers to reach wider audiences, have all contributed to give companies access to more consumers. This also relates to the globalisation of culture as citizens of the world are seen to have more in common and are able to recognise similar symbols related to consumer goods, such as the logos and brands of MacDonald’s, Coke, Nike, Mercedes-Benz, Sony, BA, and others.

The effects of globalisation on contemporary capitalism Scholte (2005)2 summarises contemporary global capitalism as being made up of two forces: 1. expanded ‘commodification’ – this results from increased consumerism, expansion of finance capital and the emergence of information and communications capital 2. reorganisation – owing to the creation of offshore arrangements which increase profit, corporate networks are also developed which extend across borders, company mergers and acquisitions are commonplace and a small number of competitors dominate the market, creating oligopolies. (Adapted from Scholte, 2005). Remember, not every business or country is affected by globalisation to the same extent. Can you think of situations or places that may not be affected or are affected to a limited extent by the changes described above? As with all the business environmental factors considered, the impact of globalisation will be dependent on the context of each individual business, the way it is organised, its size, geographical location, product and industry type, and so on.

Does globalisation lead to convergence? Although many theorists argue that globalisation results in a convergence of practices, cultures and consumer demand, others believe that globalisation also brings a need to protect identity and an interest in the diversity of cultures. These differences in culture also create problems

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for the transfer of practices to different places. The global benchmarking mentioned above, for example, assumes that the best working practice is appropriate to production anywhere in the world. As established in Chapter 7, though, cultural differences and priorities can act as a barrier against this. This convergence/divergence debate is an important one for managers of companies that have operations in more than one country because they are faced with decisions about whether to impose global policies and practices or adapt them to the local environment. The issue is taken up in the next section of this chapter; the rise of multinational companies is a key feature of globalisation.

Globalisation and consumption Food and drink are important parts of our culture. Look at what you eat and drink, and when and where you have meals. Do your dietary habits differ from those of your parents and grandparents? How far can you relate any changes to globalisation? Think of the same comparison for other aspects of consumption: the music you listen to, the fashions in clothing and hairstyles, the way you spend your leisure time. If there are changes, how did they come about – by business activity or for some other reason?

8.3 Management of multinational companies (MNCs) Multinational companies are those organisations that have business operations in more than one country. Confusingly, the term is used differently by different people. Some use MNC interchangeably with international company, global company or transnational company. You can distinguish between these forms of organisation as follows. • An international company has its base (headquarters) in one country, and trades overseas from that single base. • A multinational company has a home base in one country (referred to as the home country), but has then established operations in a number of other countries (referred to as host countries), so it trades from a number of bases. • A transnational company (TNC) is an organisation that is consciously attempting to be global by disassociating itself from one home country. There may be one or more main bases but the company does not see itself as in any way ‘belonging’ to those countries. This type of company has taken a strategic decision to become global but is still seen as coming from one or more countries. • A global company has no national identity whatsoever. It is debatable whether or not any company has reached this stage. MNCs such as Microsoft, Ford Motor, Toyota, Daewoo and Shell are still viewed as having a residual national character. The companies that come closest to being global are usually those that have merged a number of different firms, each with different original home bases. It is difficult to associate these companies with just one country, and the more companies that merge, the more complex their affiliation becomes.

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As stressed in Chapter 1 of this guide, it is important to identify how an author is using the term when you read their work, and also to be clear what definition you are applying in your own writing. For the purposes of our analysis in this guide, we are using the term MNC to refer to companies that have operations in more than one country, which is a common usage. The next exercise again provides the opportunity for you to work with material from the business section of national newspapers and business publications, as you document your own case study of a multinational. Activity 8.6 Go through the sources you have gathered and identify one multinational company for which you have information. You may also have collected other literature for previous chapters that could be relevant here. Treat this as your own MNC case study. Study the MNC you have chosen, to gain an understanding of how the business is structured, the aims, the products, the challenges faced. Try to gain more information by visiting the company’s website, and remember that the Global Fortune 500 website (www.cnn.com/ magazines/fortune/global500/) also provides company information that is searchable. As you study this case, the aim is to gain a comprehensive understanding of the business by identifying the ways in which the internal elements of the business interact with the external environment. For example, the company website and literature may give you an understanding of internal elements of the business, but then the news reports may demonstrate the interactions with the environment, such as when a company needs to close an operation due to economic or political problems in a certain country. See what you can find. Thinking about MNCs Now answer the following questions about MNCs. 1. What multinational companies do you know that have their home base in your own country? 2. Which multinationals does your country act as a host country for? 3. Do you know of any examples of companies which can be described as transnational as they have no clear home base and are actively presenting themselves as a global organisation? Again, it may help you to revisit the Global Fortune 500 website again, to scan the lists of the largest global companies. Why is it important for us to think about MNCs? Think for a few moments and jot down an answer. Then read on. Not only is the number of multinational corporations increasing but the power base they represent is increasing. Therefore it is important to understand the development of the multinational and the different issues facing managers within MNCs. This business activity beyond national borders, therefore, is a major contributor to globalisation. However, it is important to recognise that multinational organisations are not a new phenomenon. Think for a moment about the history of your country. What roles have MNCs played? What are the good and bad sides to MNCs? For example, the early businesses to develop operations overseas include the Moscovy Company (1555), the Spanish Company (1577) and the East India Company (1600) (Grint, 2005, p.307). The First and Second World Wars created more multinationals and these were mainly concentrated on the extractive industries for raw materials. Since then advances in technology have been a major contributing factor to the growth of MNCs. 182


Grint (2005, pp.309–13) puts forward eight reasons why MNC activity now is different or novel from earlier examples. Take a few minutes to write down your suggested reasons before reading what Grint suggests in the list below. 1. Knowledge – MNCs previously developed as a result of the need to discover raw materials for the manufacture of goods. However, growth now is related more to the services and knowledge industries, so there is a difference in emphasis. 2. Competition – MNCs previously entered into foreign markets to take advantage of cheaper labour markets and more lax regulation. This is still true for some areas, but changes in some parts of the developing world mean that this is not always the dominant reason for MNC investment. 3. Markets – the developing nations actually offer a market for products themselves now, rather than only providing the opportunity for manufacturing. 4. Information technology – the recent growth in MNCs is seen to be closely linked to rapid technological innovations that allow events and processes to be experienced simultaneously throughout the world. 5. Governance – no ‘world police officer’ exists, no universally recognised global form of governance. This means that it is difficult to hold multinational corporations to account for their actions, when their affiliation to one country is unclear. 6. Nation states – the argument put forward is that nation states are either irrelevant now or their power is reduced due to the increased power base of the MNCs. Again, the result is less regulation of the multinational’s activities, although it is recognised that international organisations such as the WTO do to some extent offer this. 7. Risk – a further change is that the early companies that could be described as multinational aimed to accumulate wealth. The changes experienced through globalisation, however, are said to change this aim to a focus on avoiding risk. 8. Virtual economy – the final change is seen to be related to space, because the MNCs are seen to work against being associated with one particular place, and require the flexibility of being able to move money and operations to the country which can offer the most beneficial terms (think back to the example of Nike Corporation).

The internal environment of an MNC One of the first factors to come to mind when thinking of the MNC is often the size. It is usual that a company operating in a number of different countries is a large organisation. This is not always true, for small businesses can also be multinational, and these will be discussed further in the final section of this chapter. However, it is usually the case that if a company has expanded overseas, it is of a significant size. The size can relate to a variety of measures such as the number of products and levels of production, the number of employees and sites of operations, or the level of turnover. This makes the organisation structure an important consideration. The organisation structure may have to reflect the reason why the business developed into a multinational company. Massie (1987, pp.206–07) suggests that the following factors influence a company to take on a multinational structure. 183


A wish to: • secure a stable supply of raw materials, so the structure would have to facilitate a link to distribute them from the country where the raw materials are to all other operations. • develop new markets, so the marketing department and sales team, and possibly the research and development sections, would ideally have bases in each country to understand the requirements of consumers in each. • reduce production and transportation costs of parts, so again the structure would have to facilitate clear flows between the countries where costs are the lowest and all other operations. Structure is partly dependent on the type and number of products. As MNCs often grow by merging or taking over other businesses, this can lead to a complicated mix not only of products, but also of businesses. Activity 8.7 Think back to Chapter 6. Which organisation chart could best represent a corporation that comprises different businesses? Re-examine the example of ABC Holdings that was given, and see if any of the other organisation charts you collected were suitable for MNCs. Now look at the MNC you chose for a personal case study and draw your own organisation chart for it. It is also likely that a division on the basis of geographical location will be necessary. This is because certain functions may need to be specific to each country and so have a division within each. Take for instance the human resources division and the finance division of the MNC. These two divisions probably need to work to the specific regulations or customs of each country. Similarly, the production division may need to be organised differently to take into account the production facilities, suppliers and distribution opportunities in each country. As with all complex or large organisations, the structure is important because it provides the main mechanism of coordination and control, and so it can be seen how this is vital to the coherent operations of an MNC. Related to this is strategy, and the need for it to be clear and relevant to all parts. It might be that each country of operations, or each product group, has an individual strategy, but these must be in line with the overall strategy of the MNC. A strong strategy that is communicated well can serve to give the whole organisation direction and to coordinate activities as they are guided by an overall aim which links them together. Due to the often diverse nature of the MNC, developing a sense of cohesion is a more difficult challenge than in smaller or more integrated businesses. Conscious effort to promote a positive corporate culture can be a way of overcoming fragmentation, with the aim of gaining cooperation between the different parts and a sense of commitment from employees. Organisational culture is therefore particularly important for MNCs, but at the same time difficult to develop because it involves people from different national cultures. It can be seen, then, that within MNCs a number of elements of the internal environment are affected by the fact that these organisations operate in more than one country and so directly integrate with the wider international environment. These specific dynamics of the MNC also affect the process of decision making. 184


Decision making in MNCs As in all businesses, decision making is a vital activity. In MNCs, additional variables must be taken into account. Can you think what these new variables are? Think for a moment. • As the operations and structure of MNCs are more complex, so the information required to make decisions will be increased and decision making will be a more frequent activity because more variables are involved and more changes will occur. • Receiving information to make decisions, and also assessing the situation of the business and the environment, are complicated processes and good communications are vital for senior management to understand the situation in many different countries. • It may be necessary or desirable to delegate more decisions to the managers in different locations, who are best able to assess local situations, and so this could help to take into account the wider environment in each country. • This brings us back to the need for a clear structure and lines of communication and control, so demonstrating how the internal elements of the business are again interdependent and integrating with the wider business context.

Keeping in touch through airport meetings Large companies with many operations scattered around the world often use airports for management meetings. Managers fly into a big airport (like London Heathrow or Singapore Changi) and after the meeting, and perhaps a night in an airport hotel, they fly home. Think about using this technique for communicating between managers. What sort of message is suited to such meetings? What cultural problems may arise? How does such a technique compare with using a website on the internet for a video conference? Would the airport suit some functional managers more than others? (Look back at Chapter 5 of this guide.)

The external environment of the MNC The wider business environment of MNCs is greatly complicated by the fact that they operate in more than one country. What external factors do you think are especially important to MNCs? Think for a few minutes before reading on. The company will be regulated by and affected by the actions and policies of all the governments in the countries it operates in. It is also possible that it will be regulated by international bodies and will be under the scrutiny of international observers and pressure groups. We return to this in Chapter 10 when discussing the responsibilities of business. The MNC also operates in places with different national cultures, which can have an influence on both what the consumers desire and on organisational behaviour, since practices and employee attitudes and skills may be culturally bounded. This is particularly an issue that links the wider environment of the MNC to the internal policies of the HR department. In the last section, the convergence/divergence debate was 185


introduced, and in relation to HR, managers face the dilemma of whether to adhere to the working conditions and practices found in the home country, or to develop global strategies that are adopted everywhere, or to adopt the dominant practices of the host country.

The ‘convergence’ argument again Are management practices converging on one global model? If this is so, is it a good or a bad thing? Does your country offer any good management practices that you think others should adopt? Are there any practices in your country you would like to see eliminated? These questions raise the issue of transferability. Is it possible for the policies and work practices of one country to be transferred to operations in another country and culture, and be equally successful? A relevant study was done by Lowe et al. (2000)3 and makes a comparison of front-line management and supervision in different countries. It focuses on factories in Britain, Japan and Mexico, which all belonged to a Japanese electronics company and all attempted to implement a Japanesestyle supervisory system. It was found that the success of transferring the system was different in Mexico than in Britain and depended on local conditions. The system was not appropriate to the British factory but was relatively well integrated into the Mexican factory. It cannot therefore be assumed that a best practice or the practices of the home country can be seen as more efficient and then transplanted to operations overseas, because conditions would have to be similar. The decision to use local or expatriate employees is also related to this, and in the study by Lowe et al. it was found that the commitment of both local and expatriate managers was an important factor for the successful transfer of practices. The other major element of the external environment that is particularly important for MNCs is competition. Those MNCs who market to more than one country need to have an awareness of the target audiences in each, as well as the best way to convey their message to them.

MNCs and strategy – your personal case study Activity 8.8 Look back at Porter’s ‘five forces’ model in Chapter 7 of this guide. Try to analyse your personal case study of an MNC by drawing such a diagram. The economic, political and cultural situation in each country’s market may affect the priorities that consumers have, such as the importance of price or quality, and it may also affect how best they can be persuaded to buy a product. Exposure to competition will be greater and more complex, and different strategies for gaining competitive advantage may be relevant to different countries. Therefore, this again demonstrates how the interaction of the environment will impact on the strategies and decisions made within the business.

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MNCs and market entry strategy As the environment in which organisations operate becomes increasingly global, one of the major challenges they face is to enter international markets successfully. This is not simply just a case of applying home strategies. International markets are complex and have to be considered carefully. There are many new factors to consider, such as import regulations, financial and political stability of prospective markets, etc. There are logistical problems. There are different methods of entering markets such as direct and indirect exporting, franchising or licensing, joint venture or direct investment. Different markets need different entry policies and marketing mixes. With the changes in the political scene – new alliances and new markets – there is a constant challenge to the MNCs and their marketers to be there when the opportunities present themselves. Activity 8.9 Reading Now read the remainder of the chapter from your secondary key text: • Daft (2008) Chapter 4 ‘Managing in a global environment’. This reading considers the different elements of the international business environment and discusses ways of entering the international markets. As you read this, think back to what you learned in Chapter 7 and also think about your own case study. Note too the benefits and limitations of the different methods of market entry. In the next section we look at small businesses and how the business environment affects them. Note that a company does not have to be large to be an MNC operating around the world. Many consultancy firms, for instance, are small yet highly international in their operations.

8.4 Small business organisations In this final section of the chapter, we specifically reflect on how the business environment relates to smaller businesses. The aim here is to give you the opportunity to reflect on the diversity of the business environment and to expand your understanding of different business types. As mentioned previously (see Chapter 6 of this guide), the size of a business can be measured in many different ways, including the profit or sales levels, the number of outlets or products, or the number of employees. The last of these is a commonly used measure, but how many employees constitute a small or large organisation? The number is arbitrary but the most important factor is to be clear about what measure is being used by you or in the work of others. For the purposes of this chapter, businesses with 50 employees or less are described as small. One step up from that is the unit of an SME, which refers to small and medium-sized enterprises, and we define this as employing 51–250 people. These definitions are very arbitrary, and it is important to remember that very different management problems face companies of differing sizes within these groupings; think, for example, of the different situations of three companies employing 1, 10 and 100 people. Daft (2008) suggests a figure of 500 employees or less for a small business, so always make it clear which definition you are adopting.

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It is particularly important to consider SMEs, because much of the research and literature in the area of business and management is based on large and multinational companies. In 1994 it was reported by Agmon and Drobnick (1994, p.9)4 that ‘close to 90 per cent of American firms employ fewer than twenty persons, and almost half the workforce is employed by companies with fewer than 500 employees’. In other countries too, SMEs make up a vital part of the economy. These small businesses, just like the multinationals, face environmental challenges particular to them, and so offer a further opportunity to study the interaction of the internal and external factors of the business context.

Small business and the environment Look at the next example, or make one up for yourself, and then try to answer the questions. Activity 8.10 Townsend Tables Ltd. is an office furniture manufacturing business that owns one factory. The company employs 40 people and mainly sells locally, but with some customers further afield, although all within the UK. Three directors started the business. Director A is now the managing director and is also in charge of marketing and sales, as well as managing the four part-time administration staff. Production is divided into two sections. The first is the machine shop where parts are made, and Director B, who is also in charge of product design and human resources, manages this. The second section is the assembly shop where the furniture is assembled. Director C, who is also in charge of quality control and transportation, manages this. 1. How could the fact that this is a small company affect the internal elements of the business? Think, for example, about the culture, strategy, decision making, use of human resources, production and structure – it may be helpful to draw out an organisation chart. 2. How could the fact that this is a small company affect the interaction of the business with the external environment? Think, for example, of government policies, regulations and schemes, the competition faced, technology, national culture, and so on. 3. List the ways in which being small affects the way the company interacts with the business external environment. (Hint: make a diagram and use different-sized arrows for the direction of impacts. A small company has little impact on the external environment but the external environment has a big effect on a small company. Now try to continue this argument).

The internal and external dynamics of a small business Within small businesses, the way the organisation is structured needs to make optimum use of very limited resources. It is often the case in very small businesses that a number of functions have to be undertaken by each manager, as in the case above, or by one general manager. Maybe expert assistance is needed from the outside for certain functions. For example, a business may pay an external accountant to fulfil the finance function, or could use a recruitment agency to fulfil the HR function, and perhaps pay a lawyer for advice on the legal requirements placed specifically on small businesses by the government of the country. Small businesses are also more suited to flatter structures. Certainly communication and coordination can be easier in a small business. However, this still needs planning and organisation, and is also dependent on the structure and the role of the owner of the business (the boss). 188

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A well understood strategy is useful in coordinating activities and ensuring the business has direction. This sense of direction needs to be communicated to the organisation. When the direction is just in the mind of the boss, this can prove difficult. All of this cannot be fully appreciated until the business is viewed in its wider environment. Small businesses operate in an environment where a greater number of competitors are faced, all in similar positions. Smaller businesses can also be seen as more fragile, since slight changes in currency rates or economic conditions, or the demise of a customer, can have severe affects on the small business, which is less likely to have large assets in reserve. How can a small business handle this problem of instability? Think about the small business you know from the last exercise. Spend a few minutes on this before reading on. Thinking back to the discussion of organisation structures in Chapter 6, you may remember that one major advantage that small businesses can capitalise on is flexibility. Through a flatter organisation structure and by being in a good position to analyse the competition relevant to their organisation, small business managers are often able to react quickly to changes in the wider environment. This position is enhanced when staff and managers are multi-skilled and so the structure is flexible enough to adapt to new needs. Good use of technology can also aid this; however, it is recognised that small businesses are also limited financially as to what they are able to adopt, and also in terms of personnel time for training. Whelan and Maxelon (2001) stress the advantages that can be enjoyed by those SMEs who invest in new technology, and the fact that this can again help to overcome the challenges of competition and environmental instability. Finally, the company culture can also enhance flexibility, and integration of this should be easier when the business is only based within one country and often one region of that country. The flatter organisation structure can again interact to promote the culture by encouraging employee participation. However, some small businesses are involved in more than one country, either through trade or because they have operations there. Agmon and Drobnick (1994) state that the area is under-researched. They state that: … 37 per cent of US firms with fewer than 500 employees are exporting overseas, and that one-quarter of all exporting companies, or more than 16 000, employ fewer than 100 people. (Agmon and Drobnick, 1994, p.9)

Just as in large multinationals, these small multinationals face the difficulty of developing an organisational culture that integrates people from different countries. However, in smaller businesses the possibility of improved communication, because fewer people are involved, will aid this process. Therefore, the specific context of the small business offers both challenges (especially in the form of instability) and opportunities (especially in the form of flexibility). This example again illustrates the importance of viewing the business not as a static, isolated entity, but as a dynamic one, constantly interacting with the environment. We will pursue this theme in the next chapter. 189


Activity 8.11 Reading The final reading is again from your secondary key text: • Daft (2008) Chapter 6 ‘Managing small business start-ups’. This is a useful chapter because it considers the specific challenges facing small businesses, including issues surrounding starting a small business and how organisations can change as they grow. As you read this, consider the example business that you used in Activity 8.10 and how the issues described could be applied to it.

Chapter review Key points • Business organisations need to be seen as comprising dynamic and interdependent elements, and as existing and interacting with the wider business environment. • It is only by seeing how these different elements interact together that a comprehensive view of a business can be gained. • The international context is relevant to all organisations, and managers need an awareness of world events and the international business environment. • Globalisation is a relevant concept to business and management and has had a significant influence on the wider environment, particularly through changes in the organisation of business and product markets. • Both multinational and small businesses are cases where the internal elements of the firm interact in particular ways with the external environment, to illustrate the dynamic and diverse nature of the business context.

A reminder of your learning outcomes Having completed this chapter, and the Essential readings and activities, you should be able to: • perceive businesses as a whole, identifying the different elements within them and also the interactions with the wider business environment • discuss the types of events which can affect the international business context and develop a system for continuously updating your knowledge of this, particularly in relation to how such events affect businesses in your own country • explain the concept of globalisation, and develop your own view on the issue based on evidence you have read and your observations of changes that have occurred • evaluate the particular challenges facing multinational corporations and small businesses as they interact with the business environment.

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Sample examination questions When considering these, remember the guidance given in the Introduction to this course about examination preparation. Each question is designed to be answered fully in approximately 45 minutes, under examination conditions. 1. a. Briefly describe what is meant by the term ‘globalisation’. b. Explain what is meant by the ‘global commodity chain’. c. Discuss what problems might result from a strategy of outsourcing. Illustrate your answers with reference to practical examples. 2. ‘Convergence is occurring in both the desires of consumers and the way we work.’ Critically evaluate this statement, considering the implications it has for management in a multinational corporation. 3. Small businesses will be different in nature to large or multinational organisations. Reinforcing your answer with reference to theory and practice, discuss how being a small company might: a. affect the internal elements of the business b. affect the interaction of the business with the external environment c. present particular challenges and advantages for its managers. 4. Discuss the extent to which globalisation has had an impact on HR practices. Illustrate your answer with reference to practical examples. Also, look back at question 3 at the end of Chapter 5.

Advice on answering a question To help you further with your exam preparation we offer below some suggestions for one of the answers. However, it is very important to remember that there is no model or correct answer to any of the questions. It is more important to demonstrate what you have learnt by developing your own response to the question, supported by evidence from the relevant parts of the chapter. 2. ‘Convergence is occurring in both the desires of consumers and the way we work’. Critically evaluate this statement, considering the implications it has for management in a multinational corporation. An answer to this question could begin by explaining the idea of convergence and linking this to the counter-argument of divergence. This could be linked to an evaluation of the concept of globalisation, focusing particularly on how the convergence/divergence debate relates to business and management. The importance of this debate could be associated with the need to understand the wider environment of business, in particular the international context. A section could be used to consider specifically whether product markets have converged, with examples of globally recognised products offered. This can then be related to changes in culture as more people across the world recognise the same symbols, names and items, and could be linked to the implications for MNC marketing managers. If convergence has occurred, then the same product can be marketed to multinational audiences and in the same way. If convergence has not occurred, then variations either in the product or the marketing message will necessitate a local knowledge. 191


A section could then specifically consider whether work practices have converged, for example mentioning the idea of global benchmarking and the transferability of practices and management styles. The implications for management in multinational corporations will relate to whether the same practices should be used throughout their operations, or whether these should be adapted to local conditions. By the end of your answer it will be important to have demonstrated to the reader that you understand the relationship between business and the wider environment, and it should be clear whether your assessment of the relevant evidence suggests that convergence has occurred and what the implications of your argument are for management in multinational corporations.

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Section 4: Contemporary issues in business and management

Section 4: Contemporary issues in business and management This is the final section of the course. Section 4 focuses on the emerging issues in business and management. This is an important conclusion to your studies because it offers you the opportunity to reflect on what you have learnt, and to consider contemporary developments and how they relate to what you have learnt. By this stage you will be able to recognise the influences that have helped to shape these new developments and you will also be able to consider the implications these issues have for the business organisation and the role of the manager. The section is organised into two chapters. In Chapter 9, three contemporary issues are considered. These are knowledge management, electronic business and the learning organisation. We will be exploring the meaning of these terms, and whether they are significant contributions to the field. This will be an opportunity to apply what you have learnt about the role of the manager in implementing change, and also about the importance of the changing business environment. In Chapter 10 the focus is on the social responsibilities of business, which is a developing issue and one which managers are increasingly expected to consider. We will consider what the responsibilities of business might be, and to whom businesses are responsible. This issue is closely related to the business environment, since pressures to be responsible come from a range of sources. We will in particular be considering the expectations on managers to be ethical. It can therefore be seen that, again, the themes of decision making and the strategy of the business organisation are central to our studies.

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Chapter 9: Contemporary issues; knowledge management, learning organisations, e-business

Chapter 9: Contemporary issues; knowledge management, learning organisations, e-business Aims of the chapter This chapter specifically aims to: • investigate organisational knowledge • evaluate the concept of the learning organisation, and the implications it has for the management of operations • consider the phenomenon of e-business (electronic business) and the particular challenges it presents to management.

Learning outcomes By the end of this chapter, and having completed the Essential readings and activities, you should be able to: • demonstrate an understanding of business and management as a dynamic subject area, and provide examples of the ways this continues to develop • evaluate the concept of organisational knowledge and discuss why business managers actively try to manage it • identify the requirements of the learning organisation, to assess approaches to achieving this model and the associated problems that managers could face • evaluate the significance of e-business growth and reflect critically on the impact it has on management.

Essential reading The readings for this chapter are taken from the key texts and you will be advised when to read the required sections. These are the readings that are essential because they make up part of your course. However, in this section we are considering the current development of organisations and it is likely that additional materials will be produced regularly as new research is done; a number of sources are suggested in the Further reading list. Mullins, L.J. Management and Organisational Behaviour. (Essex: Pearson Education Limited, 2010). Chapter 1 ‘Introduction’, pp.20–21, ‘The nature of organisational behaviour’. Chapter 5 ‘The nature of learning’, pp.171–76, 187–200. Daft, R.L. New Era of Management. (Mason, Ohio: South Western: Cengage, 2008). Chapter 2 ‘The evolution of management thinking’; see the section: ‘New management thinking for turbulent times’. Chapter 10 ‘Designing adaptive organisations’; see the section: ‘Digital technology’ at the end of the chapter Chapter 15 ‘Information technology and e-business’. 195


Further reading Below are a number of suggestions if you wish to read further about the issues discussed in this chapter, in particular one from the secondary key text. As stated above, research continues on these topical subjects and so you may find it helpful to search recent journals to understand how the developments continue. Three of the suggested readings are taken from a special edition of a management journal, which was dedicated to knowledge management. You should remember that all of the readings listed here are suggestions from the vast literature available, and also that it is the Essential readings on which you should concentrate. Alvesson, M. and D. Karreman ‘Odd couple: making sense of the curious concept of knowledge management’, Journal of Management Studies 38(7) 2001, pp.995–1018. Boddy, D. Management: An Introduction. (Marlow: FT Prentice Hall, 2008) Chapter 10, pp.343-45, Chapter 12. Daft, R.L. New Era of Management. (Mason, Ohio: South Western: Cengage, 2008) Chapter 2; see the section: ‘New management thinking for turbulent times’. Easterby-Smith, M., M. Crossan and D. Nicolini ‘Organisational learning: debates past, present and future’, Journal of Management Studies 38(7) 2001, pp.783–96. Mann, C., S. Eckert and S. Knight The Global Electronic Commerce. (Washington DC: Institute for International Economics, 2000). Needle, D. Business in Context: An introduction to business and its environment. (London: Business Press, 2004) Chapter 3, the section on e-commerce. Senge, P. The Fifth Discipline: The art and practice of the learning organisation. (New York: Doubleday, 2005). Swan, J. and H. Scarborough ‘Knowledge management: concepts and controversies’, Journal of Management Studies 38(7) 2001, pp.913–21. Tissen, R, D. Andreiseen and F. Deprez The Knowledge Dividend: Creating high-performance companies through value-based knowledge management. (London: Pearson Education, 2000). Tsoukas, H. and E. Vladimirou ‘What is organisational knowledge?’, Journal of Management Studies 38(7) 2001, pp.974–93.

Introduction Your study of this course is nearly complete, as you begin the final section of the course. You have already completed your studies of the core areas of business and management, and in this final section the emphasis changes to considering contemporary issues in the subject.

9.1 Dynamics of business and management In this chapter we look at three issues of importance to business and management: 1. knowledge management 2. learning organisations 3. electronic business. New issues in business and management arise frequently as a result of the changes that take place in the world economy and in science and technology. 196


Stop for a few moments and, based on what you have learnt so far, think of a few changes that create new issues for business and management students. We refer to a number of these in the course – new ways of structuring companies, new ideas for managing staff, new goods and services, new processes in manufacturing and distribution, new consumer demands that require changes to business. The three issues we consider in this chapter of the guide are relevant today; new issues will arise tomorrow. A continuing trend generally attracts research and academic publications on the topic, in addition to ‘how-to’ books for managers. The three issues chosen for this chapter have been selected because they are already established as important concepts and interest continues to grow. Each has become an academic area of interest as well as one taken up at a practical level by managers. The first two, knowledge management and the learning organisation, relate to new approaches to management and organisation in the workplace. Evidence of the third, e-business (electronic business), is particularly observable because this refers to a recently developed type of business and the associated management thinking. As you go through the sections that describe these three issues, reflect on what you have learnt about the main theoretical approaches to understanding organisations, the roles and functions of management and the business environment. Consider how these contemporary trends link with what you have learnt about the subject of business and management.

9.2 Knowledge management The first issue to be considered is concerned with organisational knowledge and how it is managed. We should begin by looking up ‘knowledge’ in the dictionary. The Concise Oxford Dictionary has many ideas. Summing these up, knowledge is what someone knows (there is a very long entry for ‘know’). Having knowledge means being informed, aware, being familiar with something. It can be gained by experience, getting information or theoretical understanding. It is opposed to ‘opinion’. If you know something, you have it in your mind and have learnt it. You can distinguish something you know from other things of which you are ignorant. (We look more closely at ‘organisational knowledge’ later, so leave this for the moment.) Now add these ideas, in your own words, to your glossary.

Defining knowledge management The concept of knowledge management has been much discussed as a current issue since the mid-1990s. Those who write about it do not agree on a single definition or a precise meaning for the term; however, there are several key characteristics of the explanations: • the acquisition of knowledge • the sharing of knowledge • the development of knowledge. This knowledge is to be captured, formalised, stored and shared. Much of the knowledge management literature also stresses the contribution and importance of technology for the management of organisational knowledge. 197


Alvesson and Karreman (2001, p.995) describe knowledge management as: the creation and distribution of knowledge in organisations through technological novelties such as the internet, intranet, and email.

Activity 9.1 Look at the definition of knowledge management in the glossary in Mullins (2010) and Daft (2008). Add their definitions and that given by Alvesson and Karreman to your own glossary and then try to answer the following question. (See also Boddy, 2008, p.393 for a definition.) Can you add to these definitions an explanation for your glossary that uses the words: 1. ‘strategy’ 2. ‘channels of communication’? Spend five minutes on this, and then read on. Feedback Some characteristics of knowledge management can be described as follows: • Knowledge management is a response to the increase in new technologies and stream of information that computers can handle. • It is a strategy to overcome the problems of flatter forms of organisation structures. • The channels of communication and hierarchical connections that link employees in more traditional organisation structures are replaced. Instead, in an organisation with knowledge management based upon new technology, there are more informal contacts and more autonomy for staff. On the one hand, this means that staff can act more flexibly; on the other hand, it can result in less physical contact between people. As knowledge management involves the process of sharing, it can be designed to overcome this problem and lead to better communications. Add these ideas, in your own words, to your glossary. Is knowledge management a passing fashion? Well, not if, as it is argued, knowledge management offers organisations a way to facilitate adaptation to the business environment. As the wider business external environment continues to change, as discussed above, knowledge management will continue to have long-term usefulness. Swan and Scarborough (2001, p.914)1 claim that knowledge management is not just one thing, but refers to: • a management discourse • a set of practices • a field of academic enquiry. Castells (1996) links knowledge management to a trend towards a ‘knowledge society’, with greater emphasis given to ‘knowledge workers’. Think for a few minutes for evidence to back this statement up. The decline of manufacturing industries and the rise of the service sector, in conjunction with a more positive relationship with increasingly innovative technology, are all seen to contribute to this situation. Gibbon (1994) suggests that knowledge is now developed at the point of application rather than only in academic ivory towers, and so it can be created within businesses and treated as a resource to be used to gain competitive advantage. 198

1

Recommended reading


Add these ideas of Swan, Castells and Gibbons to your glossary, which should be expanding nicely by now with your knowledge about ‘knowledge management’.

Add to your glossary.

Organisational knowledge Activity 9.2 Before you continue to read, write down answers to these questions to see how much you have learnt so far. 1. What do you think organisational knowledge is? 2. Why do you think business needs knowledge? 3. How do you think this knowledge can be managed? Comment We address these questions in the remainder of the section. As you complete each subsection, come back to the ideas you have recorded here. That allows you to reflect on what you learn. It becomes part of your own ‘knowledge management’ system. Knowledge management focuses on the importance of knowledge, whether in regard to the creation, storage or sharing of it. The knowledge that is being managed is called organisational knowledge. There is a difference between information and knowledge. Look up ‘information’ now in your dictionary. Think how you would explain the differences. Although explanations vary, the main difference is that information is something you gain by being told – either by someone else or a reference source – and knowledge is something more than just data because there is a need to understand and it can involve experience. This distinction is important if managers are going to promote the sharing and accumulation of knowledge. Relating this to the business setting, how can knowledge be described as organisational? This was the question asked by Tsoukas and Vladimirou in their article, ‘What is organisational knowledge?’ (2001).2 The writers investigated the difference between general knowledge and organisational knowledge. They define knowledge as:

2

Recommended reading

… the individual capability to draw distinctions, within a domain of action, based on an appreciation of context or theory, or both.

Organisational knowledge is defined as: … the capability members of an organisation have developed to draw distinctions in the process of carrying out their work, in particular concrete contexts, by enacting sets of generalisations whose application depends on historically evolved collective understandings. (Tsoukas and Vladimirou, 2001, p.973)

Therefore organisational knowledge is concerned with the collective understandings built up from the experiences of the members or employees. It exists within the organisation, rather than an individual, and it is the sum of these individuals’ relevant knowledge being shared and developed together.

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We need also to make the distinction between explicit and tacit knowledge. Explicit knowledge is ‘that which is easily communicated, quantified and systematic’, and tacit knowledge is ‘ knowledge and wisdom which is not easily communicated or quantified but is gained through experience and communicated on an informal basis’. (Mullins, 2010).

The need for knowledge in business organisations What is the use of organisational knowledge, and why is it important for businesses? Well, as you ‘know’, the business environment is ever changing. It is because of the need to respond to this and to be as efficient as possible, that developing and managing the resource of knowledge can be beneficial. It is from sharing knowledge that innovation can come, and ideas can be pushed further. It is also vital for decision making, which has been a theme throughout the course. The most successful companies are seen to be those which not only create knowledge, but actually aim to ‘add value’, which is a coming together of increased levels of both service and knowledge. Organisational knowledge is important for all organisations because it can facilitate responsiveness to environmental change, can promote innovation and increased efficiency, and supports the decision making process. It is possible for some organisations actually to develop competitive advantage by making knowledge central to organisational activities.

The management of knowledge The next question to be asked, then, if organisational knowledge is so important, is this: can knowledge be managed? Think about this for a few moments before reading on. The approach of knowledge management suggests that it can, and it offers several methodologies and tools for doing this. An example is that put forward by Scarbrough and Tanembaum (1998) who state that knowledge can be managed in organisations, through two different types of initiatives: 1. supply-side initiatives 2. demand-side initiatives. The first of these, supply-side initiatives, are concerned with allowing knowledge to flow through the organisation. The knowledge is already seen to exist, but it is necessary to facilitate the movement of it and access to it by the relevant parties. Management activity will therefore involve the promotion of clear communication channels and opportunities to share knowledge. In contrast to this, demand-side initiatives aim to satisfy a need for knowledge. Management activities will be involved in these initiatives to achieve the following steps put forward by Scarbrough and Tanembaum (1998, p.43): • release of knowledge • search for knowledge • application of knowledge • exchange of knowledge • development of knowledge. 200


Tissen et al. (2000, p.18) put forward three possible methodologies for putting knowledge management into operation. 1. Knowledge plans and control cycle – this involves planning, organising, budgeting, steering and controlling to acquire new knowledge, to manage existing knowledge and to learn while using knowledge. 2. Knowledge mapping – this involves the creation of a knowledge map that aims to identify the knowledge that needs to be shared, who it should be shared with and where the knowledge can be found. 3. Transferring expert knowledge – this involves extracting expert knowledge and then publishing this knowledge used in the work process, to build up support for accelerated performance. A case study is useful here of a business that not only developed and managed organisational knowledge to increase efficiency and promote innovation, but which has developed value-added knowledge, for it has now been able to market its ideas and processes. This is therefore further evidence that knowledge can be managed, and this can bring significant benefits to the organisation.

Knowledge management in practice As reported in an article ‘The light from Amsterdam’ in Handelsblad (29 May 1997), Amsterdam Schiphol Airport has established itself as one of the best airports in the world, and as an authority on how to create one of the best airports in the world. A customer-focused approach has resulted in improved signposting, more space, better light and excellent passenger facilities that are easy to negotiate. As a result of this success, Schiphol Management Services (SMS) has been set up as a business unit with the aim of exploiting the knowledge gained and marketing this to other airports who would like to initiate improvements. The organisational knowledge has therefore clearly been managed and marketed as a product internationally: customers for SMS include airports in Beijing, Vienna, Brisbane and Kuala Lumpur. Activity 9.3 Find an example of where an organisation is successfully developing and managing its knowledge. What methods do they use? How is their success demonstrated? It is possible to find examples on one of the many websites that are concerned with knowledge management. Knowledge management is an area that continues to develop, as more companies, such as the above case, are seen to gain from it. However, problems of definition and also questions of ownership of knowledge arise, as organisations benefit further from the intellectual capital and innovations of employees. The idea of ‘communities of practice’ links knowledge management to the next section of this chapter, on the learning organisation. These groups emerge from a desire to share knowledge and learn together (Stewart, 1999). Therefore, although these communities cannot be forced and formally managed, managers can do much to encourage them and promote their existence. Possible ways of doing this are: • to provide time and opportunities for groups to meet 201


• to facilitate their work by the provision of space and budgets. Knowledge management is therefore not only an important issue in the business literature, it is one that has brought benefit to business and also one that relates to other developments. The learning organisation is the next issue to be considered, and is closely linked to knowledge management.

The use of terms: what buses can I catch? This is an illustration of the use of terms. Say you have to catch a bus to and from work. 1. Data are the undifferentiated records of bus times that are put together (the number of buses, times, fares, routes). 2. This is organised and put into useful patterns in a timetable. In other words, the data are used to produce information. You can consult this and become better informed. 3. You consult the timetable (use the information) and work out the numbers and times of buses, and where to catch them, in order to get to work on time. This is knowledge. 4. Next, you find out what the cost is for different buses and times (maybe you have a bus pass) – more knowledge. 5. You do the same for the return trip home. 6. You learn what buses are best for you, which are possible and which impossible – more knowledge. 7. On the basis of this knowledge, you make a decision. 8. Finally, you manage your knowledge: • first, you write the knowledge down and keep this with you • secondly, you watch for changes in the timetable and ticket prices • thirdly, you look out for any new opportunities: trains, new buses, a bicycle for sale, and so on. Note how bus timetable information is ‘what you are told’, whereas knowledge is ‘something useful you learn from the information’. You can see that knowledge comes from learning, a theme we take up in the next section. Note also that having knowledge allows us to make better decisions. Before moving on, try something similar to the bus decision yourself – how to use information, gain knowledge and thus make a good decision about booking a holiday, entertaining friends to a meal or buying a wedding present for someone. Activity 9.4 In this chapter, we study part of Mullins (2010) Chapter 5, but in two parts. This is the first part. Reading Now read: • Mullins (2010) Chapter 5 ‘The nature of learning’, pp.171–76, 187–93 start at ‘The meaning and nature of learning’, and read up to and including ‘Emerging technologies and learning’. In this first part of the chapter, the reading begins with an introduction to learning in organisations, which will also be relevant to the next issue, and then goes on to focus 202


directly on knowledge management and the management of organisational knowledge. (Alternatively, see Boddy, 2008, Chapter 12, pp.393–96.)

9.3 The learning organisation The second current issue to be discussed is that of the learning organisation. Have you heard of this term before? What do you think it might involve? First, look at the glossary in Mullins and add his definitions of ‘learning’ and ‘learning organisation’ to your own glossary. As with knowledge management, the term ‘learning organisation’ is a contested one and writers continue to use it in different ways. Most agree that a learning organisation involves an interaction between the development of the organisation and the development of employees. The majority of the literature on the learning organisation began to emerge in the early 1990s. One of the most influential writers in this area is Peter Senge (2005), who made a significant contribution to the literature on this issue in his text The Fifth Discipline: The art and practice of the learning organisation.3 In this work he defines learning organisations as:

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… organisations where people are continually expanding their capacities to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning how to learn together. (Senge, 2005, p.3)

You should add this definition to your glossary as well. Links can be made here to the last section, as both the learning organisation and knowledge management are concerned with the continual development of employee skills and knowledge. Both aim to generate learning. However, the idea of the learning organisation is seen to precede knowledge management, and is partly responsible for that development. Think about the bus timetable example, which illustrates that learning leads to knowledge. In practice, schemes to introduce a learning organisation emphasise: • attitudes and support for staff to undertake learning that helps the organisation increase its knowledge base (see Chapter 4 of this guide, where we discuss organisational development). Schemes to introduce knowledge management, in contrast, are dominated by: • introducing new technologies and new strategies involving better internal communications.

Models of the learning organisation Are there any drawbacks? So far, it seems from the ideas discussed that this is a very positive notion, bringing benefits to both the organisation and employees. However, remember that it is important to question the ideas you read about. You may find it helpful, as you read, to consider the ideas in relation to an organisation you know. This allows you the opportunity to reflect on whether the approach could work in reality and who would actually benefit in a real business situation.

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Think about this for a few minutes, and then read on. Senge (2005) puts forward five ‘disciplines’ that converge together to create a learning organisation. He suggests that, to become a learning organisation, all five must be put into practice. 1. Systems thinking – businesses are seen as systems, so each part is not to be studied in isolation, but within the relationships it has to other parts. The whole is seen as greater than the sum of these individual sections. It is also necessary for all parts of the organisation to understand the consequences that their behaviour has for other sections. Senge states that ‘we learn best through experience but we never directly experience the consequences of many of our most important decisions’ (2005, p.23). 2. Personal mastery – this involves a commitment to continual development on an individual basis, with mastery referring to proficiency in our skills. The concept of lifelong learning is relevant here, as it is used to describe an enduring determination to pursue personal development. 3. Mental models – these are the ways we have of seeing things. It is important to identify them so that they can then be scrutinised and deconstructed with others, to understand how others see things and to facilitate adaptation. 4. Building shared visions – it is important to note here that this cannot be forced: people cannot be told to share the same vision, it must be something they truly wish to aspire to. This is significant because a dominant element in the learning organisation is that there needs to be a linking between the goals of the individuals and the overall mission and goals of the business. 5. Team learning – collective learning is another focus of the learning organisation, where emphasis is placed on the development of positive relationships to foster learning and development. This is seen to be beneficial to the individuals, the teams, and so also to the organisation. Senge states ‘when teams are truly learning, not only are they producing extraordinary results but the individual members are growing more rapidly than could have occurred otherwise’ (2005, p.10).

It is when these five disciplines come together and are found in one organisation that Senge believes it can be described as a learning organisation. Jones and Henry (1992) offer an alternative to this model. The idea they put forward is that to become a learning organisation it is necessary to undergo certain phases of learning. These also number five, and are explained as follows. 1. The foundation phase – at this level the emphasis is on developing basic skills within employees, such as numeracy and literacy, so that employees begin to learn how to learn. 2. The formation phase – building on the foundation phase, employees are encouraged to initiate their own learning and development. 3. The continuation phase – less support is needed at this stage, as employees grow in confidence and ability. At this level employees are able to make their own decisions about the learning they will embark on. 204


4. The transformation phase – at this level a relationship between the individual and the organisation can be identified; together decisions are made about what needs to be done to promote further progression. 5. The transfiguration phase – it is within this final stage that the learning organisation can be seen to develop, when the business and its workforce are sufficiently skilled at learning and processes of continual learning are in place, so they can respond to the changing needs of the organisation as it reacts to the wider environment.

Evaluating the models Activity 9.5 What similarities and differences can you identify in the two different models you have been presented with? Remember that it is important to evaluate critically what you read, and again it may be helpful to consider an organisation you know. What problems would be faced by your example organisation if it tried to adopt each of these models? Do you know any businesses that could be described as learning organisations?

A culture of learning To develop a learning organisation, it will be necessary to change the mindset of employees and managers, and this requires a major organisational change needing the support of senior management. A culture of learning is required between managers, of all levels, including the very top, and all other staff, down to the very bottom of the hierarchy. This is where a number of problems can occur. Put simply, not everyone wants to learn! You can find relevant ideas in this guide in Chapter 4 (on organisational change) and Chapter 6 (on organisational culture). As stated above, the idea of the learning organisation seems to describe an ideal situation of benefit to both the organisation and the employees. However, think back to what you have learnt about implementing change and about managing or changing organisational culture; then complete the next activity, which explores the links between organisational learning, culture and change. Activity 9.6 1. What strategies could you use as a senior manager to promote a culture of learning? 2. What problems do you think you might face in trying to implement this change? 3. How might you overcome or minimise these problems? Feedback At the end of Section 9.2 the concept of communities of practice was mentioned (p.199). Encouraging the development of these is one way for management to promote a culture of learning. As Stewart (1999) states, communities of practice provide an efficient method of encouraging staff to learn from one another and of supporting their self-development. A further example of how managers can encourage a learning culture is through the implementation of employee development schemes. Consider this term for a moment. What do you think employee development schemes might involve? Spend a few minutes on this.

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These schemes can be organised in many different ways, but the central idea is that employees are supported and encouraged to embark on a course or some sort of selfdevelopment. This support may be in the form of a budget towards fees, time off work to attend classes, or the course may be provided by the firm itself. It should be noted that these schemes do not usually require that the learning is related to the employee’s job, initially at least. The idea is to develop a desire to learn in the employee, which it is then hoped will lead to the employee wanting to improve their workplace skills.

Employee development schemes Have you ever been part of an organisation that runs an employee development scheme? Do you know of any others that do? If you were an employee within a company that sponsored learning in this way, do you think you would take advantage of it? What sort of course would you do? Do you think that after completing this course, you would feel more motivated to undertake work-related learning? Would it make a difference if many others were doing this? Payne (1992) conducted a study of large organisations, where the managers had initiated employee development schemes of the sort discussed above. The businesses were found to have five key characteristics in common. These are explained below. 1. The organisations were operating in more than one country, so they were MNCs. 2. They were facing problems at the time in their recruitment of professional and technical staff. 3. The respective managements were aware of a need for new skills. 4. They had been in consultation with trade unions. 5. They had links with both further education colleges and higher education institutions. The learning organisation offers a way for managers to link the needs and development of the organisation with those of their employees. This is relevant to human resources – think back to the ‘soft versus hard’ debate about human resources in Chapter 5. The learning organisation requires the development of an allencompassing culture, with learning and continual development central to this. Along with knowledge management, the learning organisation offers a strategy to ensure that the business can react to the changing environment and involve all sections of the business. Supporters of the subject argue that this makes the learning organisation an issue of continued importance in the study of business and management. Do you think the learning organisation is just a passing fashion, dreamed up by management writers? You can have your own opinion about this. One indication of the value or otherwise of the idea is to see if it spreads to many organisations.

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Activity 9.7 Reading Now read: • Mullins (2010) pp.779–82, the section on ‘The learning organisation’, and pp.196– 200, ‘Facilitating learning’ to the end of the chapter. • Daft (2008) Chapter 2 ‘The evolution of management thinking’; see the section: ‘New management thinking for turbulent times’. The first of these readings offers you a broader understanding of the learning organisation and learning within organisations. The first section considers the learning organisation concept and offers further definitions, whilst the latter part offers more insight into the ways people can be enabled to learn. Understanding this is important for managers who wish to develop initiatives to promote effective learning in employees. This reading is complemented by the reading in Daft which discusses the learning organisation and leads onto the subject of the next section, that of e-business.

e-learning e-learning is a development that has made the concept of a learning organisation more easily achievable. You know from your own experience how much easier it is to access learning resources through the internet. Think how an organisation might use online facilities to encourage and support a culture of learning. Activity 9.8 Read Mullins (2010) Chapter 5, pp.190–93. Think about the first discussion question. The second question requires you to have read the whole chapter, which you are not asked to do here. But it doesn’t stop you looking at it if you are so inclined!

9.4 Electronic business (e-business) The final issue to be considered in this chapter of the guide is that of e-business, which is also sometimes referred to as e-commerce (electronic commerce). What is e-business? Think for a few moments. Once again, definitions vary and change. It is particularly difficult to explain the meaning of this term because the technological environment is changing so rapidly, with new developments continually advancing the relationship between the internet and consumers. Here is a broad definition from Mann et al.: Electronic commerce is a shorthand term that encompasses a complex of technologies, infrastructures, processes, and products. It brings together whole industries and narrow applications, producers and users, information exchange, and economic activity into a global marketplace called the internet. (Mann et al., 2000, p.9)

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An alternative definition makes a distinction between different levels in the exploitation of technology. This includes a distinction between e-business and e-commerce. The four levels are as follows. • Level 1: internet/email – at this level messages are sent and received electronically • Level 2: World Wide Web (WWW) – information can be published and accessed around the world • Level 3: e-commerce – goods and services are bought and sold over the internet • Level 4: e-business – at this final level technology, processes, information, suppliers and others are all integrated so as to enable the business to understand and respond more effectively to its customers. (adapted from Mann et al., 2000, p.xvi) Both the first definition above and the levels defined suggest that e-business is a fast-moving environment and a significant new area for the study of business and management. e-business reflects changes in the wider environment, such as those previously discussed in the technological sphere and those due to processes of globalisation. e-business therefore provides a good illustration of how wider changes can influence the way business organisations operate and are managed.

The development of e-business Advances in internet technologies, bank and finance systems and also increased access to the internet have all contributed to the growth of e-business. For people who live in countries where the internet is readily available, it is now part of everyday life to search for goods online, purchase them online via credit card and have them delivered directly to your door. This can work particularly well for the delivery of services, since these do not need to rely on traditional methods of transportation and distribution, but can also be delivered via the internet. The growth of online banking is an example of this, either as part of a traditional banking organisation or a fully online bank. Traditional business can benefit from the new developments because some processes can be simplified and made more efficient, such as by using email to contact customers, and for e-businesses new markets and new marketplaces are created. Whelan and Maxelon (2001) point to five different types of e-business. e-shopping

selling electronically

e-procurement

electronic tendering and procurement

e-auction

electronic bidding

e-mall

a collection of e-shops

portal

an integrated range of services

Table 9.1 Models of e-business Source: Whelan and Maxelon, 2001, p.23.

It seems that many opportunities therefore exist for new businesses wanting to build on the technology available, and also for more traditional companies who can integrate new ways of doing business into existing operations. There has been much hype about the growth of e-business, especially when investors are sought. It may present a new market, but competition 208


is high and initial outlay can also be high due to the technological needs of such a business. It is important to note that although there have undoubtedly been successes, many e-businesses have failed or faced severe operational problems. The World Wide Web does provide access around the globe and the internet is a technology that has developed and reached a great number of people quickly. Mann et al. (2000) point out the length of time it has taken for different technologies to reach 50 million users: Media of communication

Years to reach 50 million users

Telephone

74

Radio

38

Television

13

World Wide Web

4

Table 9.2 Mass access to technologies This suggests an accelerating pace of change. Does this mean everyone is changing? Bear in mind that, even in the twenty-first century, there are still people around the world who do not have access to the internet, do not have the knowledge of using it and so are not affected by the internet revolution. The success of e-business relies not only on people having access to the internet, it is also dependent on them using it. This involves changing consumer habits that are already integrated into our culture. The ways we bank, shop and communicate, for example, have been established as set practices. These can of course be changed, but rarely do so quickly. The rate of this change is also likely to be different for different generations and different levels of education. Activity 9.9 1. What e-businesses do you know? Make a list of the ones you can think of. 2. Have you dealt with any of these businesses, perhaps bought from them? If so, why did you use an e-business? 3. What are the differences between dealing with a traditional business and dealing with an e-business? 4. Do you know whether any of the e-businesses on your list have faced problems? Did you come across any stories of e-businesses during your search of business publications and news stories? If so, what types of issues were these businesses facing?

e-business management This final section is provided for you to reflect on the special features of management in an e-business. Can you think what issues may be important? Spend ten minutes looking back through your notes and then read on. All e-businesses are relatively new, and this affects the competitive environment. It will be particularly important for managers to be constantly aware of changes in the environment, so that they can be quick to respond to new opportunities and threats, and be aware of both competition and advancements in technology. Therefore, the organisation 209


will need to be structured in a flexible way. Promoting a creative and dynamic culture would also be an aid to the manager to ensure innovation and commitment from employees. A clear strategy will be particularly important so as to give the business direction, and this can also help to establish a competitive advantage for the firm. Whelan and Maxelon (2001, p.168) stress that the electronic dimension of business cannot be seen as an additional ‘bolt-on’ to traditional ways of managing. It is necessary for e-businesses to be managed with a clear mission, which fully integrates and draws on the benefits of being an e-business. Particular benefits that can be experienced by e-businesses include: • reduced supply chain costs because they deal directly with consumers • due to the above, an ability to respond more quickly to changes in customer desires • increased speed of delivery to consumers due to direct dealing • a wider market for goods and direct access to potential customers • reduced overheads due to a reduced need for premises. As noted earlier, it is also important to recognise the particular problems that managers of e-businesses face, including: • initial outlay is high • technological expertise is needed • technology continues to advance, so expertise, equipment and methods need updating • legal issues with regard to privacy and copyright remain unresolved • security problems need to be overcome so that customers can pay online in confidence • the issue of language and also culture may mean that products or marketing methods are not applicable to all markets • delivery of goods has to be coordinated with technical operations • delivery options may again limit the markets that can be supplied. It can be seen, then, that managers of e-businesses face a particular type of challenge because of the nature of the e-business environment and their technological focus. You should be able to make connections here to the interactions between the internal elements of the firm and the wider business environment discussed in the previous section of the course. Activity 9.10 Use the internet to find out about e-business. Can you think of more to add to the lists above, perhaps particular to certain types of companies? To facilitate this, look again at the list of e-businesses you made. Choose two e-businesses as case studies and research the websites of each. 1. What differences can you identify between the two companies? Think of the products they offer, the services they provide and the way that the goods are marketed. 2. What do you think would be the difficulties and the benefits you would face as manager of each of these companies, compared to the situation if they were not ebusinesses?

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Reading Now read the chapter in your secondary key text: • Daft (2008) Chapter 15 ‘Information technology and e-business’. An alternative reading is Boddy (2008) Chapter 12 ‘Information technology and e-business’. Again, we can see how important it is to view the business as a whole and as part of the wider context. Knowledge management and the concept of the learning organisation can also be linked to the management of e-business, due to the need of e-business to react to changes, particularly in the technological environment, and its need for continual learning and innovation. As new issues in business and management are related to changes in the wider business environment, they are often related to each other. In particular, the growth in e-business is likely to affect both ways of working and consumer behaviour. Therefore, new methods of organising e-business and adaptive management techniques will continue to develop.

Chapter review Key points • Business and management is a developing area of study, with new trends, theories and practices, as well as gurus and fads, continually emerging. • Knowledge management is an important trend in business and management as it involves the acquisition, sharing and development of organisational knowledge, which can serve to promote innovation and efficiency. • The concept of the learning organisation involves the need for a continual commitment to development and links employee needs with those of the organisation. • E-business is a significant development in the way business is organised; it can take a number of forms and represents a particular challenge to management because of its rapidly changing environment and technological focus.

A reminder of your learning outcomes Having completed this chapter, and the Essential readings and activities, you should be able to: • demonstrate an understanding of business and management as a dynamic subject area, and provide examples of the ways this continues to develop • evaluate the concept of organisational knowledge and discuss why business managers actively try to manage it • identify the requirements of the learning organisation, to assess approaches to achieving this model and the associated problems that managers could face • evaluate the significance of e-business growth and reflect critically on the impact it has on management.

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Sample examination questions When considering these, remember the guidance given in the Introduction about exam preparation. Each question can be answered fully in approximately 45 minutes, under examination conditions. 1. ‘All successful organisations are learning organisations.’ Discuss the meaning and merit of this claim, including an evaluation of the ways in which managers can promote a culture of learning. 2. a. Explain what you understand by the term e-business. b. Discuss the particular benefits that can be experienced by e-businesses. c. Explore the problems that managers of e-businesses might face. Illustrate your answers in (b) and (c) with practical examples. 3. a. Explain what is meant by the term ‘learning organisation’. b. Describe methods by which an organisation might attempt to achieve this status. c. Discuss the impact of e-learning on the development of such an organisation. Reinforce your answers with reference to theory and practice. 4. a. Explain what you understand by the concept of ‘knowledge management’. b. Evaluate its importance in securing competitive advantage for organisations. Support your answer with reference to practical examples.

Advice on answering a question To help you further with your exam preparation we offer below some suggestions for one of the answers. However, it is very important to remember that there is no model or correct answer to any of the questions. It is more important to demonstrate what you have learnt by developing your own response to the question, supported by evidence from the relevant parts of the chapter. 1. ‘All successful organisations are learning organisations.’ Discuss the meaning and merit of this claim, including an evaluation of the ways in which managers can promote a culture of learning. An answer to this question could begin by defining the learning organisation, and could explain this as a current issue evolving from the changing needs of business. You could then go on to evaluate models put forward to explain the different elements of the learning organisation, and it would be possible to make links to the concept of knowledge management, to show an appreciation of how this trend relates to others. It would be important to comment explicitly on whether these elements of the learning organisation are necessary for a business to be successful, so linking your answer to the question. What is meant by a culture of learning could be explained and ideas put forward as to how managers could promote this culture, such as through employee development schemes and encouraging the sharing of knowledge and learning by facilitating communities of practice. 212


In evaluating the possibility of creating a culture of learning, the problems that managers would face and ways to overcome these could be discussed, and you could draw here on previous sections of the course. By the end, you should have made clear what the statement in the question means, whether you think that the evidence supports it, and what management strategies could be used to develop a learning organisation.

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Notes

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Chapter 10: The social responsibilities of business organisations

Chapter 10: The social responsibilities of business organisations Aims of the chapter In particular, this chapter aims to: • find out why businesses have social responsibilities • evaluate ethical approaches to business operations, and the need for managers to act with integrity • examine the meaning and nature of business–social responsibilities • identify who it is that businesses are responsible to and in what ways • explore the concept of corporate citizenship and what being a good citizen involves.

Learning outcomes By the end of this chapter, and having completed the Essential readings and activities, you should be able to: • explain how businesses change over time and in relation to wider changes in society as well as to the cultural context • apply the concept of ethics to the business situation and evaluate the relevance of agreed moral codes for informing management decision making • describe the pressure on managers to design socially responsible strategies, and the relationship this growing pressure has to change linked to globalisation • evaluate different approaches that managers can take to promoting ethical behaviour and to fulfilling their social responsibilities • identify the potential benefits of acting ethically, responsibly and as good corporate citizens, and also assess the costs this can have and the possible impact on the work of managers.

Essential reading The final Essential reading for this course is from your key texts. Mullins (2010) offers a short section relevant to this discussion and Daft (2008) a full chapter. However, as in the last chapter, this is a developing area and so new research and publications will continue to become available. Some suggested sources are contained in the Further reading list if you wish to pursue this further. Finally, you will again have the opportunity to research existing companies, and the last reading will be part of a future exercise. Mullins, L.J. Management and Organisational Behaviour. (Essex: Pearson Education Limited, 2010). Chapter 18 ‘Corporate responsibility and ethics’, pp.712–28, from ‘Corporate social responsibilities’ to the end of the chapter. Daft, R.L. New Era of Management. (Mason, Ohio: South Western: Cengage, 2008). Chapter 5 ‘Ethics and social responsibility’. Your own collection of articles. Company literature and websites, to be used in a future exercise. 215


Further reading Listed below are a number of suggested sources, which give a flavour of the types of work available. However, the topic of business responsibilities covers many areas, of which those listed below are only a small sample. Two of these readings are taken from a recent new journal on corporate citizenship. Such business journals are often a good place to read about developing research. Do remember that the Essential readings are the ones to concentrate on first. Boddy, D. Management: An Introduction. (Marlow: FT Prentice Hall, 2008) Chapter 5. Jackson, T. ‘Management ethics and corporate policy: A cross cultural comparison’, Journal of Management Studies 37(3) 2000, pp.349–69. Needle, D. Business in Context: An introduction to business and its environment. (London: Business Press, 2004) Chapter 8, pp.331–51. Pearson, G. Integrity in Organisations: An alternative business ethic. (London: McGraw Hill, 1995). Robbins, P. Greening the Corporation: Management strategy and the environmental challenge. (London: Earthscan Publications, 2001). Scholte, J.A. ‘Globalisation, governance and corporate citizenship’, Journal of Corporate Citizenship (1) Spring 2001, pp.15–23. Shimomurs, M. ‘Corporate citizenship: Why is it so important?’, Journal of Corporate Citizenship (1) Spring 2001, pp.127–30. Sklair, L. The Transnational Capitalist Class. (Oxford: Blackwell, 2001).

Introduction You have now reached the final chapter in this course, and so your studies are almost complete! The last issue to be examined is the social responsibilities that business organisations are seen to have. It is an important one, as every business is now recognised to have social responsibilities. Although this topic has always been relevant to business and management, there has recently been considerable growth in the literature and interest in this area, and it is an issue which managers are increasingly expected to consider.

10.1 Business in society The focus of this chapter is the responsibilities that business organisations are seen to have. This concerns the relationship that business has to society, since we know it does not exist in isolation to, but as part of, the wider environment. When looking at the relationship that business has to society, it is important to recognise that the term ‘society’ can have many meanings. You might consider this further if you study course 21 Principles of sociology, but a selection of alternative definitions is offered below. Society means the totality of human relations. Any self-perpetuating, human grouping occupying a relatively bounded territory, possessing its own more or less distinctive culture and institutions, e.g. a particular people. (Collins Dictionary of Sociology, 1991) Society is the state or condition of living in association, company, or intercourse with others of the same species; the system or mode of life adopted by a body of individuals for the purpose of 216

Chapter 10: The social responsibilities of business organisations harmonious co-existence or for mutual benefit, defence, etc. a. With reference to man. Society is the aggregate of persons living together in a more or less ordered community. (Oxford English Dictionary, 1989)

We refer here to society in its widest context, closer to the first of the above definitions. However, ‘society’ is hard to pin down. Different cultures exist within each society and it is important to bear these differences in mind as we study the expectations placed on business by ‘society’. Different sections of society often have different expectations of business. We define the responsibilities of a business towards society as: … those beyond the basic requirements of the law and the purpose of making a profit.

We will explore this concept further in a later section of this chapter. However, it is useful here to categorise the different types of responsibilities that a business can have, which may include being (socially) responsible: • by being ethical and conducting its activities with integrity • by being responsible to wider society, including a variety of stakeholder groups • by behaving like a good citizen. The remainder of this chapter is divided into three sections, and each will consider one of the above areas. In each section we will be considering why the issue is important and the reasons for the recent growth of interest in these topics. As part of this course, the issue is deliberately designed as the final chapter because it links together many of the areas we have now covered. As you go through the chapter, be aware of these connections. In particular, the stakeholder model of the firm introduced in Chapter 2 is of relevance, as was mentioned then. The issues of culture, strategy and mission are also relevant, as well as the theme that has run throughout the course, that of decision making. You should be able to see now how your knowledge has been building up and how the connections between topics have been developing.

10.2 Business ethics and managerial integrity The first issue to be considered is the idea that business should be done in an ethical way and that those who manage organisations need to act with integrity. Ethics is a vast area of study in itself, but we are particularly interested in how this relates to business. Understanding this, though, must begin by considering the more general meaning of the term. Activity 10.1 What is your view about the role of ethics in business? 1. What do you understand by the word ethics? Add your own view to your glossary. 2. What do you think ethics has to do with businesses? Write down the ways in which you think that businesses need to be ethical. Are there any ways in which they do not need to be ethical? Ethics are a set of moral principles. Morals are accepted standards of behaviour, rules about whether an action is good or bad, right or wrong. Morals indicate the duties of citizens towards other people. 217


Look up morals and ethics in your dictionary and in Mullins’ book and add the definitions to your glossary. An ethical approach is one that follows rules of moral conduct. A general definition offered defines ethics as: The science of morals; the department of study concerned with the principles of human duty. (Oxford English Dictionary, 1989)

So business ethics is the application of this study to the duties of those acting within the organisation and the application of moral standards to management activities, policies and business behaviour. The point to remember about ethics, though, is that they reflect society. Therefore they can change from one era to another and from one society to another. Defining what these moral standards are is complex and depends on the context. Cultural and religious influences are strong and so what is seen to be ethical is not universally accepted. Can you think of behaviours that would be acceptable in some cultures but not in others, especially ones which relate to business? One example of such practices is gift giving. Gift exchange between those negotiating a business deal, or between business leaders and government representatives, can be seen by some cultures as accepted practice or part of the business culture. However, in other cultures this could be interpreted as bribery and so defined as corrupt and unethical behaviour. What other examples can you think of? The ethics of business is by no means a new subject; it is an integral part of the relationship between business and society. Business behaviour has been questioned and business leaders have continually been faced with ethical dilemmas. Ethical business is seen to be desirable but questionable, because it can mean going against what can, at least in the short term, lead to increased profits. Others argue, however, that the main cost can be incurred by those businesses that do not act ethically, because it is necessary to build up positive relations with business partners and to develop a good reputation for the promotion of the company. So what does ethical business involve?

Ethical approaches to business Ethical business (i.e. business conducted ethically) begins with a commitment to adhere to law and regulation. This is therefore clearly defined, but once we look beyond that, the definition of what is ethical becomes contested. Activity 10.2 Reading The first reading is from your secondary key text. Read the section on criteria for ethical decision making, considering carefully the four main approaches offered for making ethical decisions: • Daft (2008) Chapter 5 ‘Ethics and social responsibility’ pp.142–45. • Boddy (2008) Chapter 5, pp.149–51 also reviews the approaches. The four approaches are utilitarian, moral rights, justice and individualism. After evaluating each approach, complete these two exercises, which relate to them.

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1. Can bribes be justified? Are they then ‘ethical’? Think back to the example of gift giving and bribery, described above. Say a manager can use a bribe to secure a contract that will prevent a factory from closing, and so avoid significant job losses. • Would this be producing the most utility for the most people? • Do you think this would be an ethically justified behaviour? 2. Taking account of the justice approach: write down three examples where each principle of the justice approach is applied to the business context. One example of each is given here. Add your own to these. • Distributive – profit-sharing schemes can be organised on the basis of occupational status because this is seen to signify the worth of different employees to the company. • Procedural – the expectations the company has of an employee and the rules of the organisation can be formalised and presented either as part of the contract of employment or as a company handbook. • Compensatory – when a company fails in its promises to deliver goods or to provide a service to a certain standard, the customer may be compensated to demonstrate that they are valued and that this standard of behaviour is not usual. Take a few moments now to think of your own examples for each of these, perhaps with reference to businesses that you know or have read about. It can be seen from what you have now read that there is a diverse range of definitions for ethical behaviour. What is understood to be ethical or unethical behaviour depends on what approach is taken, with some of these conflicting. However, the approach of moral rights does suggest that certain fundamental or universal rights can be distinguished. Do you agree that universal rights can exist? What do you think these could be? Would they be accepted everywhere in the world, and so not be determined by culture? If universal rights – or at least widely accepted rights – can exist, then there is the possibility that agreement can be made on some aspects of what is ethical. In relation to business and management the duty will be to protect and promote these rights. Within certain cultures there will also be an understanding of what is considered ethical and as cultures, especially business cultures, are seen to be converging due to globalisation, it is also argued that this will bring more convergence in our understanding of ethical business behaviour. Jackson (2000)1 conducted a study called ‘Management ethics and corporate policy: A cross-cultural comparison’, which compared attitudes to ethical ‘grey areas’ in France, Germany, Britain, Spain and the USA.

1

Recommended reading

He found that national differences did exist between these cultures in some areas; however, more influential than this was the attitude of the manager’s peer group. This would support the possibility that convergence can actually occur in approaches to ethics and will possibly continue to do so as more businesses work across national cultural boundaries. How does the need for an ethical approach actually affect business management?

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The manager’s role in an ethical business Managers are responsible for deciding what is ethical and applying this to business behaviour. One of the main reasons for the increased interest in business ethics relates to mistakes that past managers have made in this decision making process. High-profile scandals and the prosecution of business managers create further scepticism of the ethics of business and have increased pressure for businesses to adopt ethical policies overtly. British examples of such cases include the financier Nick Leeson who brought down the long-established Barings Bank by unethical share trading in Singapore, and the prosecution of a number of Guinness executives for their activities involving a company merger. An American case would be that of Enron in 2002. As with all scandals in large organisations, the effects of these can be far reaching. Can you think of examples from your country? These reinforce the negative image of business, and in a competitive environment more needs to be done to promote a positive one. To what extent do you think that senior managers in the banking sector should be held accountable for the current (2008–09) collapse of the financial sector across large parts of the globe? Take a moment to think about why the financial collapse of 2008–09 is an example of just how devastating the impact of a negative view of a company (in this case many companies) can be on competitive markets across the globe. Activity 10.3 This exercise requires you to consider some of the dilemmas that managers could face. Consider the following situations and decide whether you think the practice is ethical or unethical. In your country, which of these would be regarded as unethical behaviour? Also try to order them, starting with the most scandalous, towards the most acceptable. 1. A company advertises for a new technical adviser, and awards the post to an applicant who promises to bring confidential information from a competitor. 2. An employee uses the company photocopier to copy work for their child’s school project. 3. A manager is flown to a foreign destination for a meeting by a potential business partner wishing to discuss the possibility of work, and his family is also paid for and given the use of a holiday home. 4. A woman is appointed to a job when another male applicant was better qualified, to increase the number of women at that level in the company. 5. A mobile phone company targets children as their main customer base, designing a campaign to sponsor after-school events. 6. A film director offers a beautiful young actress a star part in his next film, so long as she spends the night with him. When you have taken time to consider each of these dilemmas and decided whether it is ethical, think about your reasons for your decision. What moral code are you being guided by? Because of the increasing pressure on managers to act ethically, there has been a boom in business ethics literature, several academic journals have been dedicated to the subject, special schools are devoted to its teachings, and official bodies have been set up to monitor morality (Solomon, 1992; Schlegelmilch, 1998). 220


These have all been designed to guide managers through the moral maze. An example of the models offered is that of Pearson (1995)2 in his book Integrity in organisations: an alternative business ethic. He states that, on one side, ignoring ethics is in the long term bad for business, but on the other hand it is natural that ‘businesses necessarily put business success before altruism’ (1995, p.39).

2

Recommended reading

Therefore a model of integrity is seen to be needed which involves enlightened self-interest as the factor that should be used to guide managers in their decisions. However, Pearson warns that the expression of enlightened self-interest must be genuine (‘credibility is crucial’) or benefits will not be realised, and ‘window dressing to build a false image’ has the potential to damage the firm (1995, p.131).

Making business morally upright: encouraging integrity among managers The model of integrity is mainly based on managers developing a highintegrity culture, and certain practical steps are put forward for achieving this. These include: • setting codes of standards • explicit communication of these both internally and externally • formally training employees to meet these codes • managers act as role models and adhere to the codes of standards • measuring and publishing performance results • regular top board meetings dedicated to the issue. Activity 10.4 1. Can you think of other things that could be done to promote this type of integrity culture? 2. Think back to your other work on organisational culture. What problems do you think managers might face if trying to implement this? 3. What would be important to facilitate the promotion of this culture, and how do you think the problems you have just noted could be overcome? Comment One way to promote a culture of integrity is to allow people to report (maybe anonymously) unethical behaviour. This issue needs to be managed sensitively, because reporting other workers can have serious implications for the employee (the ‘whistleblower’). (Note: a whistle-blower is someone who informs or publicises wrongdoing in an organisation – like a referee in a game, blowing a whistle to draw attention to a foul. Add this to your glossary.) Why might managers refuse to support the whistle-blower? Further problems are encountered when the management are not themselves committed to an ethical culture, because the whistle-blower then risks being in conflict with their employer. Cullen (1990) provides an example. Before the Piper Alpha disaster (an oil rig was destroyed in the North Sea), some of the people working there were concerned about the safety standards on the oil rig. Contractors who ‘blew the whistle’ were fired. Look out for news reports of whistle-blowing and how frequently the person who tries to act ethically is the one who suffers. Management commitment is therefore an important condition for a high-integrity culture.

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Codes of conduct One of the roles of managers mentioned by Pearson (1995) is to develop and to promote the use of codes of conduct. These can be set for individual departments, different types of employees and for the whole business. Activity 10.5 Look for some examples of codes of conduct (you can often find them on company websites). Are there common themes in your examples? Or are they very different? Two contrasting examples can be found on the following websites: www.bp.com and www.sp.edu.sg The first website is that of BP – the code found here is quite comprehensive. It covers: • health, safety, security and the environment • employees • business partners • governments and communities • company assets and financial integrity. The second website is that of Singapore Polytechnic. Here they give a code of practice that students should adhere to when giving feedback on the lecturers! Take some time to compare these two examples. So, views vary as to what codes of conduct should include and how directive the codes should be. The general idea behind them, though, is that employees and particularly managers can be guided in their decision making by an understanding of the company’s policy towards ethical issues. Armstrong (1995) puts forward a number of suggestions that would be relevant to a wide range of businesses.

Possible aspects to be included in codes of conduct • Fair dealing: not misleading customers, suppliers or employees • Keeping to the spirit, not just the letter, of the law • Honesty in presenting reports and advertising products • Prompt payment to small suppliers as well as large ones • Treating employees equitably, according to the principles of natural justice • Loyalty to the organisation as long as this is not inconsistent with an overriding ethical principle • Not taking undue advantage of insider knowledge to further one’s own interests • Not advancing oneself at the expense of the organisation (Armstrong, 1995, p.274). How manageable or attainable do you think each of these points is? To conclude this section, it has been seen that the issue of ethics has always been relevant to the management of businesses. However, in times of instability and as a result of high-profile scandals, the public’s negative and sceptical view of business is increased. At the same time the business context has become more complex and the competition greater, leading to a growth of interest in the area, and increased pressure for managers to act with integrity to facilitate ethical business behaviour. 222


10.3 Business and social responsibilities For this second issue of the chapter, we return to the question of what social responsibilities businesses have. We established at the beginning of this chapter that profit making and adhering to the law were the basic responsibilities of a business. Some authors argue that fulfilling these two basic duties are the only responsibilities a business has. As Adam Smith, the famous economist, argues: It is not from the benevolence of the butcher, the brewer and the baker that we expect our dinner, but from their regard for their own interest. We address ourselves, not to their humility but to their self-love. (Smith quoted in Minus, 1993, p.54)

This argument is further supported by an often-quoted statement by the economist, Milton Friedman. It is, however, important to point out that Friedman did not think businesses should act irresponsibly, just that the main responsibility of the business was to make a profit while acting within the law. He stated: There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits as long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud. (Friedman, 1962, p.33)

Therefore some consider duties to the law and profit to be the only responsibilities of business. Beyond these responsibilities, any others can be defined as social. In the previous section it was established that one expectation or desire is for the managers of business organisations to recognise a responsibility to act ethically. An understanding of business responsibilities can be developed further by considering the model put forward by Carroll (1993). This is a four-part model used to categorise responsibilities, and can be represented in a pyramid formation as shown in Figure 10.1.

desired

Discretionary responsibilities

expected

Ethical responsibilities

required

Legal responsibilities

required

Economic responsibilities

Figure 10.1 The four requirements of the socially responsible corporation Source: adapted from Carroll (1993, pp.32–34). 223


Here, to make profit is the first (economic) responsibility, followed by compliance with the law, both of which are required. The third responsibility – that of being ethical – is expected. The fourth refers to discretionary responsibilities – it is desirable that the organisation fulfils these. It is when a company fulfils responsibilities at all levels that it is defined as socially responsible. Therefore we can use this model to develop a definition of the socially responsible firm which describes: … those businesses that, in addition to legal and economic responsibilities, recognise an obligation to protect and promote the welfare of society.

Origins of social responsibility As stressed in Chapter 1, it is important to recognise the influences of new developments, and so we briefly consider how the idea of the social responsibilities of business have developed. The evolution of this idea can be seen as interlinked with the development of business itself. The origins of business have been based on changing relationships between economic classes. For example, the social problems that resulted from factory work led to philanthropy. Philanthropy refers to acts of benevolence and being charitable. Examples of early philanthropists include a number of people whose family businesses became famous, such as Jeremiah Coleman, George Cadbury, Joseph Rowntree and William Lever (Boddy, 2008, p.147). Entrepreneurs like these recognised a responsibility to the social welfare of their employees. This can be described as the act of paternalism – acting in a fatherly way, caring and taking responsibility for someone or a group. The following two examples demonstrate how seriously this responsibility was taken, and also how motivation can be culturally influenced. Joseph Rowntree and Lord Leverhulme From his birth in 1836 Joseph Rowntree, of the sweets company, was ‘steeped in the Quaker ethos’ and his employees enjoyed ‘generous salaries, pensions and medical benefits’ (Rigsby, 1998, p.102). As his business expanded, Rowntree created New Earlswick, a specially designed village, not just for his workers but for their families as well. This provided them with housing and also welfare amenities. This example mainly came about because of Rowntree’s personal moral code, and was made possible because he owned the business. As discussed in Chapter 6, ownership structures can have a significant influence on business behaviour. These structures changed when there was a separation of ownership and control, when professional managers began to run businesses (Burnham, 1942). This change can be illustrated well by the example of Port Sunlight, another company town like New Earlswick, started by Lord Leverhulme, whose company later merged with others to create Unilever. A significant change in attitude can be identified between that of Port Sunlight’s original owner and that of Sir Michael Angus, chief executive of Unilever in the late 1980s. Leverhulme viewed the company town as ‘a personal charge and responsibility’ whilst Angus saw it more as ‘a peripheral asset or even a liability’ (Cannon, 1994, p.2). It is necessary to recognise, at this point, the importance of cultural difference. The historical contexts of issues such as this are strongly dependent on culture, in this case the British culture. Social expectations of business are different in different parts of the world; it is important to recognise this and to relate this to your own context. 224


Present day philanthropists include Bill Gates, Warren Buffet and the late Anita Roddick. Look at the case study in Mullins (2010) on pp.299–303. Activity 10.6 1. Do you know of any other business people who had or have a reputation as being philanthropic, or being paternalistic to workers? Can you perhaps find an example from your own country? 2. What do you think have been some of the benefits to these companies by providing such facilities for the workforce? (It might help to think about approaches to human resources in gaining commitment and also practical concerns such as illness rates.) 3. How has the concept of ‘socially responsible business’ developed in modern times? What expectations do people in your country have that companies should behave responsibly? Spend a few minutes thinking about this before reading on.

Increasing pressures to be responsible More recently, companies have come under increasing pressure to be socially responsible, and this pressure is exerted by a number of forces. Public demand for socially responsible behaviour has increased since 1945 and especially since the 1960s and 1970s, which were characterised by social rights campaigns (Stark, 1993, p.39). Interest in the concept has flourished recently as the organisation of business becomes increasingly complex (discussed in Chapter 8). Globalisation and the growth in size and power of multinational corporations have added to the demand for corporations to act responsibly. Scepticism about the motives behind what multinationals say and do can lead to increased activity to pressure companies to be responsible. Grint (2005, p.299) points out that multinationals in the news have ‘far tighter legislative controls forced on them through the action of pressure groups’. This scrutiny is aided through the technology available to enable groups to share information about companies and to monitor their activities. Pressure groups can take several different forms, some of which are listed in Table 10.1. Ad hoc pressure groups

protesting about a one-off initiative or event

Consumer pressure groups

campaigning for issues such as consumer information, value and safety

Single-issue pressure groups

focused campaigns on a particular company or type of company, or on a particular practice

Environmental pressure groups campaigning for the protection of the natural environment Anti-capitalist groups

campaigning against the way business is organised

Table 10.1 Pressure groups It is from groups such as these that pressure is placed on businesses to act responsibly, because these groups can also lobby government, shareholder and consumer opinion. The growth in the number of these groups, and the technologies such as the internet used to promote their activities (including the media), have helped to fuel the growing public scepticism arising from the ever-increasing power of big business. High-profile disasters such as the chemical leak from the Union Carbide plant in Bhopal, India, and scandals linking businesses with conflict and human rights abuses, such as encountered by Shell in Nigeria, also 225


contribute to this growing call for businesses to act responsibly. One of the results has again been a growth of interest in this area in the business and management literature. Activity 10.7 Think about the types of pressure groups mentioned above. Do you know any examples of these, either worldwide or locally based? Your task in this exercise is to consider the work of two different pressure groups. Look for websites of business-oriented pressure groups. Here are three examples: • The Clean Clothes Campaign is a group concerned with the employment rights of textile workers (www.cleancloths.org). • Corporate Watch is a pressure group that monitors and collects information on the activities of corporations, using it to campaign for more responsible practices (www. corpwatch.org). • Globalize Resistance is a pressure group which ‘brings together groups and individuals opposed to the growth of corporate power’ (www.resist.org.uk). You may already know of others or they can be easily found; otherwise look at any of the examples above. 1. Search the information on these groups, which can be easily done on their websites, to find out what they view as the social responsibilities of business. 2. What does each group say it is campaigning for and why? 3. What ways do you think that managers can take into account pressures to be responsible, and what are the benefits of doing so? 4. Why do companies hate getting a reputation for being socially irresponsible? Think for a minute. Feedback One of the main reasons why many companies wish at least to be seen to be responsible is because damage to reputation can be costly. Companies who are seen to have behaved irresponsibly come under pressure from: • highly motivated people who run the types of groups mentioned above • the media, government, religious bodies and consumers • their own employees and shareholders; even bankers and consultants do not wish to be associated with an irresponsible company. In contrast, building up a positive reputation is a marketing benefit worth investing in. How do you think this model of the socially responsible firm affects business behaviour? How can managers follow a strategy that is both beneficial to the success of the company, but which is also socially responsible? Jot down a few points and then read on.

Responsible management strategies There is a wealth of suggestions provided by the literature in this area, an example of which is that of organisational social responsiveness (Bartol and Martin, 1991). These authors describe a system for applying the principles of the social responsibility model. The steps they prescribe provide a further demonstration that this has become an integral management activity compared to the past individual activities of benevolent owners.

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Chapter 10: The social responsibilities of business organisations Organisational social responsiveness refers to the development of organisational decision processes whereby managers anticipate, respond to and manage areas of social responsibility. (Bartol and Martin, 1991, p.126)

The social responsiveness strategy involving these processes can be divided into two stages. Stage 1 Managers are advised to monitor social expectations through: • social forecasts • opinion surveys • social scanning. The purpose of this first stage is to identify trends and public concerns. Stage 2 After the monitoring and anticipation stage above, internal social response mechanisms are prescribed, involving ‘issues management’. This describes how the information is treated (1991, p.127) and may be done by: • a special task force • a permanent committee • a permanent department of public affairs. The last of these options is recommended. This model of social responsiveness also facilitates social audits being conducted. These involve monitoring the success of social performance to see any improvements or problems, similar to the way in which economic achievements are measured. Another aid to managers developing socially responsible strategies is the stakeholder concept. This was introduced in Chapter 2 (look back at this now). The model is based on the idea that every business has a number of stakeholders who influence, or are influenced by, what the business decides to do. Remind yourself of the diagram in Chapter 2 of the stakeholder model. Remember that the diagram is an example, and the exact numbers and types of stakeholders are different for each business situation. (See also Daft, 2008, p.152, for the Monsanto stakeholders.) The stakeholder model of the firm can assist managers in making informed decisions about a responsible business strategy. The model can help them to recognise the different groups to which the business has a responsibility. Being aware of these stakeholders, and the variety of responsibilities a business has, helps ensure that managers are more conscious of the consequences of their decisions and resulting business activities. It is also useful to classify the stakeholders according to their power and interest. Level of interest Power

Low

High

Low

A Minimal effort

B Keep informed

High

C Keep satisfied

D Key players

Figure 10.2 Stakeholder mapping – power/interest matrix Source: Adapted from Mendelow (1991).

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This mapping identifies stakeholder expectations and power and helps in establishing political priorities. See Boddy (2008) pp.104–06 for more information, or alternatively Johnson & Scholes (2005) pp.215–20. Activity 10.8 Look again at the type of stakeholders included. Now imagine that you have the following roles in turn: • the managing director of a paint manufacturer • the branch manager of an off-licence (selling alcoholic drinks) • the CEO of a multinational finance company. 1. For each of these roles write down all the different types of stakeholders that you think could be affected by, or could affect, your business. 2. Which are the most important stakeholders for each? 3. Take a few moments to think, and then write down what responsibilities you think you as a manager have and your company has, to each stakeholder group for each business. The responsibilities that a company has will be determined by the factors that make up each business context, as explored in Chapters 6 and 7. However, some general observations can be made using the stakeholder model about some of the major groups involved. Shareholders Responsibilities to this group include providing the best return on investment, providing clear and honest information and acting as a good representative of the shareholders’ investment. Studies have shown that ethical issues are a key factor used for judging investment possibilities (Schlegelmilch, 1998, p.4). The recent development of the ‘ftse4good’ initiative is a further indication of shareholders’ desire to be associated with responsible companies. This offers: … a series of benchmark and tradable indices facilitating investment in companies with good records of corporate social responsibility. (www.ftse4good.com 2002)

Corporate managers These are particularly important stakeholders for the control they have. Because this group has to act responsibly towards its own stake, their employment and benefits, the issue of integrity is particularly important. However, managers benefit from belonging to a responsible business because it reflects on their own reputation, and they also have to account to other managers as well as shareholders. Other employees The socially responsible firm treats its workers in a way that goes beyond its legal obligations. How do you think that this type of employment policy could be linked to models of human resource management previously discussed? Pause for a few moments.

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To gain commitment, employees need to be dealt with justly, within clearly defined codes of conduct, and rewarded fairly for their contribution. The expectations that both parties have can be seen as part of the psychological contract examined in Chapter 2. This can include expectations of respect, loyalty and trust. The concept of the learning organisation can be related to responsibilities towards employees, as this model suggests a responsibility to continually developing the business and the employees. Customers Responsibilities to this group are particularly important, since a central aim of business is to profit from satisfying consumer needs. Clear and honest product information, safe quality standards and honest pricing will be important considerations. It is also becoming increasingly important for companies to guarantee that products have been manufactured responsibly. This has resulted from campaigns particularly attempting to highlight, for example, the use of child labour and poor working conditions in overseas outsourcing companies. Nike and Gap are two particular brands which have been the subject of such campaigns. The community Responsibilities here can be on different levels. At a local level, responsibilities could be to play an integral part of local life, supporting local causes and providing a source of good employment. At a more general level, responsibilities to the wider community would include playing a positive role to protect and promote the welfare of society. When related to the wider community this can be seen as being a kind of ‘good citizen’, an issue to which we will return in the final section of this chapter. The environment It is important to note that we are referring here to the natural, physical environment. The responsibilities of a business are to protect it and not to harm it in any way. Minimal regulation can govern this to some extent, but socially responsible companies are seen to go beyond this. Environmental concerns have been a particular issue in recent years, as our knowledge of the implications of pollution has developed. This is especially relevant to some industries. In your opinion, what types of companies most need to consider the responsibilities they have towards the physical environment? Robbins (2001) described the ‘greening’ of the corporation, and looks at how a positive policy towards environmental concerns has been particularly important for Shell and ARCO Chemical. Also, Grint points out (2005, p.299) that it is not only large corporations that need to be actively responsible, since much pollution is created by locally owned companies described as ‘the real villains’, rather than the MNCs who are usually more closely monitored. Activity 10.9 The stakeholder model is useful for creating socially responsible strategies. This is because it highlights the groups and types of responsibilities faced by the business. Now look back to the responsibilities that you thought your business had when you took on the roles suggested in Activity 10.8. 1. Reflecting on what you have read, can you identify other responsibilities that each business has, to add to your list? 229


2. How useful do you think the social responsiveness model would be to assist you further in developing a responsible business strategy? Finally, there are strategies that involve a socially responsible business mission. They link to the aid provided by the stakeholder model, and particularly to the physical environment considered above. A socially responsible business mission means that the whole of the business is actually based on acting responsibly, and this is used to gain competitive advantage. Can you think of any examples of businesses that base themselves on being ethical and acting responsibly? Robbins (2001) provides a study of how corporations have responded to the growth in environmental challenges. These strategies for responsible business include the development of: • social-environmental cultures • green management styles. The example of the environment also shows how business responsibilities change over time. In early industrial nations, chimneys billowing smoke and factory fumes were a sign of progress, to be welcomed. Also in different parts of the world, communities have different types of relationship with the environment. In Germany for example, green issues are hotly debated and a common political topic, compared to some of the newly industrialising countries, who are concentrating on developing industry. What about in your country? Do ‘green issues’ get on the front pages of newspapers or on your television news very often? Think for a few minutes, then read on. The rise of ‘fair-trade’ goods is another indication of how the model of the socially responsible business is affecting the way business is done, and provides another socially responsible management strategy. In 1995 retail sales for Fair Trade goods reached a quarter of a billion US dollars, and 1998 saw the first-ever conference of the Ethical Trading Initiative (Deacon, 1999, p.64). Fair Trade goods originate from local farmers and craftspeople, who are paid under controlled systems to prevent exploitation, and some profits are usually put towards community initiatives. Do you buy Fair Trade goods? Are they available in shops? If not, does this, in your opinion, reflect a lack of social concern by stakeholders, or some other reason? One company well known in the UK for illustrating the strategy of focusing on social responsibility is the Body Shop. The company has used this to market its products and to create competitive advantage. Take a look at the Body Shop website which tells you something of the company’s values: www.thebodyshop.co.uk/_en/_gb/values_campaigns/index.aspx To conclude this section, it can be seen that the social expectations placed on business have developed and changed over time. Nowadays it is seen as desirable for businesses to go beyond the expectation of the law and to do more than make a profit. This has potential value for all stakeholders, and some businesses make it an integral part of their strategy and 230


mission. However, the monitoring of whether companies do meet their responsibilities is difficult. Some companies monitor themselves and pressure groups also contribute to this, ensuring that the issue of business social responsibilities will remain on the management agenda. Activity 10.10 Reading Read the following section from your main key text: • Mullins (2010) Chapter 18 ‘Corporate responsibility and ethics’, pp.712–28, from ‘Corporate social responsibilities’ to the end of the chapter. As you read, note Figure 18.2. This is particularly interesting because it provides a summary of the main issues of ethics at work. Consider the different roles of a manager and think how the ideas you read about would affect you in each of these roles. An alternative source for a review of the subjects of both ethics and social responsibility can be found in Boddy (2008) Chapter 5.

10.4 Corporations as good citizens In this final section of the chapter we will consider one of the latest developments in the area of business social responsibilities. It represents a rapidly expanding area of interest, and is particularly relevant to the relationship between big business, mainly MNCs, and wider society. This centres on the concept of corporate citizenship. Before going on, think for a few minutes: what do you think is meant by the term ‘corporate citizenship’? Have you heard of this term before, and if so where? What do you think might be involved in being a ‘good’ corporate citizen? Come back at the end of this section and see if you have found answers to these questions. Corporate citizenship is another new concept that can have many meanings, particularly because it is such a new area, still in the development stage. This is acknowledged in the first issues of the Journal of Corporate Citizenship which was launched in 2001, stating that: Corporate citizenship is a broad term which has many starting points, means different things to different people, and is used in a wide variety of contexts in different countries. (McIntosh, 2001, p.3)

The arrival of this journal and other such journals, and a plethora of new books and reports, as well as the setting up of corporate citizenship research schools and resource centres, all testify to the importance placed on this concept. One journal that might be a useful source of case studies is Ethical corporation magazine, which you can find at www.ethicalcorp.com. Each year the magazine lists the companies which, in their view, are the 100 best corporate citizens. We will look at an example of one of the listed companies later. An understanding of the concept can begin by considering the meaning of ‘citizenship’. This again is a term with many meanings; however, it generally relates to enjoying the rights and obligations of being a citizen, a person who belongs to a certain place or society. Add it to your glossary. Linking this to the corporation, then, involves viewing these businesses as 231


belonging to society as entities that also have rights and obligations. The term is usually used in connection with multinational companies, which see themselves as global corporate citizens. The concept can be linked to the stakeholder approach, but it focuses particularly on the relationship with the community as a stakeholder. This is not limited to the local or national community, but relates to the global level.

Global vision Multinational companies, which describe themselves as good corporate citizens, usually present themselves as important at the global level. Presenting a ‘global vision’ may help the company to establish its name in world markets and keep it competitive. Sklair (2001)3 sets out three different types of global vision: • consumer-orientated global visions for humanity • industry-orientated global visions • organisation-orientated global visions. The concept of globalisation, as discussed in Chapter 8 of this guide, is relevant here, because the growth in multinational activity increases competition and the pressure on companies to be seen as progressive. Global vision therefore involves being a world-class business and also on the other side of citizenship, which involves recognising responsibilities to the whole world. This could therefore suggest a social role for corporations at a time when some believe the power of the State is in decline (such as Ohmae, 1990). One of the benefits this could bring to corporations is that they could be seen as more responsible, such as by promoting voluntary codes and, in doing this, avoiding more formal regulation. We will now look at the Nike company which is on Ethical corporation magazine’s list of 100 best corporate citizens for 2008. Nike On their website (www.nikeresponsibility.com) the company promotes its socially responsible initiative: Nike state: We see corporate responsibility as a catalyst for growth and innovation, an integral part of how we can use the power of our brand, the energy and passion of our people, and the scale of our business to create meaningful change.

The aspects of their initiative are:

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

to improve conditions in their contract factories – Nike regard this as the greatest responsibility of a global company – working towards positive change for workers in the supply chain

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a design for a better world – combining premium design and performance innovation with environmental sustainability

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to become climate neutral by 2011 – targeting brand facilities and business travel

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to unleash potential through sport – to build a healthy community – to create social change.

3

Recommended reading


Activity 10.11 Reading What can you find in company literature and on websites? First choose at least two corporations as your own case studies. Read through the company information for each case. 1. Do you think that this company has a global vision? What makes you think so? 2. Does the company describe itself as a good corporate citizen? If so, what does it see this as involving? 3. Compare your cases and the two examples provided above. What are the main similarities and differences? 4. If you were a manager in one of these corporations, do you think that working for a corporate citizen with global vision would affect your job? If so, how? Keep your notes handy: we will consider this final question in the next section and refer back to your answer.

Business and management activities of good corporate citizens What do you think is actually involved in being a good corporate citizen? Spend a few minutes writing down what you think; then read on. This is where we can encounter problems! On the one hand, there does seem to be convergence in the terminology used and the areas seen as important. On the other hand, the actual activities that companies link to being a good corporate citizen vary dramatically from ‘almost nil’ to ‘quite a lot’. As a result, we cannot make generalisations about the implications for the work of managers. Nevertheless, we can use the tools of analysis introduced in this course to help us along the way. Can you see how? Think about what you have learnt from this course. Then spend ten minutes and note down a structure for an answer to the question, ‘What does being a good corporate citizen mean for a manager?’ It is likely that, for all socially responsible businesses, a culture that facilitates integrity is important, as is a strategy, including goals, to direct decision makers to act responsibly to stakeholders no matter where they are in the world. Certain structures may help good citizenship (decentralised, location-oriented divisions may help). Also a manager’s span of control is a factor to think about (see Mullins, 2010, pp.562–63). You should be able to think of more headings to consider. Next, think what activities a ‘good citizen’ company could undertake in your country. Jot down a few ideas before reading on. Some common examples of what could be involved in promoting a business as a good corporate citizen include the following activities: • sponsorship of events, such as festivals, exhibitions, sports • support for community groups and activities, for example through grants and donations

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• following codes of ethical conduct • raising and donating money to good causes • providing expert skills and assistance to development projects. Within each one of these categories the range of activities is diverse, from building a school in a developing country to providing refreshments at a local concert. An illustration of how the link between citizenship and responsible behaviour can be stretched is offered by General Motors. Their philanthropy section has a current news section, which includes details of money being donated and raised, and so on. However, in March 2001 this also included a report about one of their female engineers being in the top ten contestants of a US beauty pageant. It is also important to recognise the scope for being unethical within each of these different types of activities. An example is provided by Sklair (2001). Coca Cola Corporation took an initiative to fund local schools so long as 70 000 of its products were sold. A strategy was even suggested for the schools to meet the target, including children being allowed to buy from vending machines throughout the school day (2001, p.169). This and similar examples of sponsorship tied to sales make it hard to distinguish good citizenship from clever marketing. Efforts are being made to clarify the situation, notably under the Global Compact Initiative of the UN, which corporations are encouraged to endorse. This is described as: … a value-based platform designed to promote institutional learning. It utilises the power of transparency and dialogue to identify and disseminate good practices based on universal principles. (www.unglobalcompact.org)

Such initiatives are still in their infancy, and so it remains difficult to regulate and monitor the claims corporations make. However, the potential for positive community benefits should not be underestimated. The contribution made to social causes by these organisations is demonstrated by the example of Hewlett Packard, who in 1994 alone made charitable donations of $467 million (Sklair, 1998, p.209). As the power bases of corporations increase and bring growing public pressure, the potential contribution that these corporations could make also increases. This, and the need to act ethically, can be seen to be continuing challenges to managers as the business environment becomes ever more complex and dynamic. Therefore the social responsibilities of business will continue to be an important issue for business and management, and one that contributes to the ever-developing depth and scope of this subject. Activity 10.12 Reading To conclude this chapter, the final reading is the remainder of the chapter in Daft. This focuses on business social responsibility. Now read: Daft (2008) Chapter 5 ‘Ethics and social responsibility’. As you read this, think back to the ideas presented in this chapter and in the reading from Mullins. When reading the section on managing company ethics and social responsibilities, think of yourself as a manager and the challenges you could be faced with. How do you think this reading fits into the ideas we have discussed above? 234


Chapter review Key points • The relationship between business and society is important for understanding business within its wider environment. • The issue of ethics has always been relevant to business and management, but recent growth in the area suggests a need for a culture of integrity. • The social responsibilities of business organisations are contested and dependent on each context; however, they involve the recognition of obligations beyond the need to make profit and act within the law. • The concept of corporate citizenship develops further the relationship between business and society, as it involves recognising responsibilities to the world and can suggest a social role of corporations.

A reminder of your learning outcomes Having completed this chapter, and the Essential readings and activities, you should be able to: • explain how businesses change over time and in relation to wider changes in society as well as to the cultural context • apply the concept of ethics to the business situation and evaluate the relevance of agreed moral codes for informing management decision making • describe the pressure on managers to design socially responsible strategies, and the relationship this growing pressure has to change linked to globalisation • evaluate different approaches that managers can take to promoting ethical behaviour and to fulfilling their social responsibilities • identify the potential benefits of acting ethically, responsibly and as good corporate citizens, and also assess the costs this can have and the possible impact on the work of managers.

Sample examination questions When considering these, remember the guidance given in the Introduction about exam preparation. Each question can be answered fully in approximately 45 minutes, under examination conditions. 1. Discuss the view that profits, not social responsibility, must be the first concern of managers. Support your answer with reference to theory and practice. 2. a. Briefly explain what you understand by the term ‘ethics’. b. Compare and contrast the utilitarian approach to the moral rights approach in ethical decision making. Support your description and analysis with practical examples. c. Briefly discuss which, in your view, is the best approach for managers to follow. Give clear reasons to justify your view. 3. a. Discuss the usefulness of the stakeholder model in determining the social responsibilities of a business. b. Discuss why the concept of corporate citizenship is increasingly important, particularly to MNCs, and how the concept can be linked to the analysis in part(a). 235


4. a. Discuss in what ways government can influence the level of social responsibility and ethical behaviour in organisations. b. As well as external pressure, steps can be taken internally to make a business morally responsible. Discuss what measures managers can take to achieve a culture of high integrity within the organisation. Support your answers with practical examples.

Advice on answering a question To help you further with your exam preparation we offer below some suggestions for one of the answers. However, it is very important to remember that there is no model or correct answer to any of the questions. It is more important to demonstrate what you have learnt by developing your own response to the question, supported by evidence from the relevant parts of the chapter. 3.

(a) Discuss the usefulness of the stakeholder model in determining the social responsibilities of a business. (b) Discuss why the concept of corporate citizenship is increasingly important, particularly to MNCs, and how the concept can be linked to the analysis in part (a).

An answer to this question would need to begin by defining the key term ‘business social responsibility’, and perhaps commenting on the growth in this area due to wider changes such as the increased number and power of multinational corporations. It would be important to point out that social responsibilities are dependent on each business context and so different for each, but that certain types of responsibilities are common. The stakeholder model of the business organisation can be introduced and explained, and its usefulness for understanding to whom businesses are responsible can be evaluated. A number of key stakeholder groups could then be considered in turn, and the possible responsibilities of the business to each could be explained. Examples could include employees, shareholders, the government and consumers. Carroll’s four requirements of the socially responsible corporation and the stakeholder power/interest matrix can also be usefully introduced into the discussion. When considering the community as a stakeholder, the concept of corporate citizenship could be introduced and linked to understanding the responsibilities business has to wider society. For the global corporate citizens these responsibilities are seen to extend to the whole world. The answer could be developed further by offering a case study to illustrate the points you have made, and to provide examples of the stakeholders to whom a particular business could be responsible, and the nature of those responsibilities.

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Appendix 1: Sample examination paper

Appendix 1: Sample examination paper Important note: This Sample examination paper reflects the examination and assessment arrangements for this course in the academic year 2008–2009. The format and structure of the examination may have changed since the publication of this subject guide. You can find the most recent examination papers on the VLE where all changes to the format of the examination are posted. Time allowed: three hours Candidates should answer FOUR of the following TEN questions. All questions carry equal marks. 1. a. Discuss why it is increasingly important for managers to adopt an international approach to business. (10 marks) b. Discuss FIVE ways in which national culture can affect the activities of the firm. Reinforce your answer with reference to theory and practice. (15 marks) 2. a. Identify the different stages in group development and maturity. (10 marks) b. Discuss the factors that influence the cohesiveness of work groups. (15 marks) Support your answers with reference to theory and practice. 3. ‘Employees’ motivation to achieve high performance depends on more than a high salary and good work conditions.’ Discuss. Reinforce your answer with reference to theory and practice. 4. The manager’s job requires a combination of technical competence, social and human skills, and conceptual ability. a. Explain what these three attributes are, illustrating your answer with examples. (8 marks) b. Discuss how and why these attributes may change as the manager moves up the organisational hierarchy. (9 marks) c. Discuss what problems the manager might experience when making the transition from one level to the next. (8 marks) 5. a. Discuss the different responses organisations may have to the various pressures on them to act in a socially responsible manner. (12 marks) b. Describe ways in which managers may develop a social responsiveness strategy. (13 marks) Support your answer with practical examples. 6. a. Explain what you understand by the term ‘organisational culture’. (3 marks) b. Discuss what factors might influence the development of the culture in an organisation. (10 marks) c. Discuss ways in which culture relates to the other elements of the internal environment of an organisation. (12 marks) Support your answer with reference to theory and practice. 237


7. a. Discuss the influence of information technology on the organisation in terms of its management and structure. (10 marks) b. Discuss how information technology and knowledge management have impacted on the various responsibilities of the marketing function. (15 marks) Illustrate your answers with reference to practical examples. 8. a. Briefly explain what is meant by: i. corporate level strategy ii. business level strategy iii. functional level strategy.

(8 marks)

b. Compare and contrast the generic strategies of differentiation and cost leadership. (8 marks) c. Discuss how functional strategies in marketing and human resource management would differ if a business changed from a differentiation to a cost leadership strategy. Illustrate your answer with practical examples where appropriate. (9 marks) 9. ‘Classical management never dies because it achieves results.’ Discuss. Support your answer with reference to theory and practice. 10. a. Briefly explain how a decision tree might aid a manager. (4 marks) b. Describe the basic process of constructing a decision tree, clearly defining the individual components and stating any assumptions. (10 marks) c. Alpha Hotels plc has to choose between two sites for a new hotel, one in the north of a country, the other in the south. From experience, Alpha estimates that, if it builds in the north, its profit will be £4 million, £0.9 million, or −£0.5 million with probabilities 0.24, 0.42 and 0.34 respectively. If it decides to build in the south, its profits will be £5.5 million or −£2.8 million with respective probabilities of 0.46 and 0.54. Draw a decision tree to represent this dilemma, clearly showing the probabilities and pay offs. Construct the equations for the expected profit in each case.* (11 marks) END OF PAPER *(Note: In the examination you would not be expected to do the final calculation, but it does not stop you completing it here!)

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Appendix 2: Sources and references

Appendix 2: Sources and references Adair, J. Action-centred leadership. (Farnborough: Gower, 1979) [ISBN 0566021439]. Agmon, T. and R. Drobnick Small firms in global competition. (New York: Oxford University Press, 1994) [ISBN 9780195078251]. Alvesson, M. and D. Karreman ‘Odd couple: making sense of the curious concept of knowledge management’, Journal of Management Studies 38(7) 2001, pp.995–1018. Armstrong, M. Management processes and functions. (London: Institute of Personnel and Development, 1995) [ISBN 0852924380]. Arrow, K.J. ‘The economics of agency’ in Pratt, J. and R. Zeckhauser (eds) Principals and agents: the structure of business. (Boston: Harvard Business Press, 1985). [ISBN 087542569]. ASEAN The ASEAN Declaration (1967) www.aseansec.org (accessed 2009). Atkinson, J. ‘Manpower strategies for flexible organisation’, Personnel Management (16) 1984, pp.28–31. Barlett, A. and S. Ghoshal ‘Matrix management: not a structure, a frame of mind’, Harvard Business Review (July–August) 1990, pp.138–45. Beugre, C.D. and O.F. Offodile ‘Managing for organisational effectiveness in sub-Saharan Africa: a culture-fit model’, International Journal of Human Resource Management 12(4) 2001, pp.535–50. Bartol, K.M. and D.C. Martin Management. (New York: McGraw-Hill, 1998) third edition [ISBN 0071152067]. Boddy, D. Management: an introduction. (Harlow: FT Prentice Hall, 2008) fourth edition [ISBN 9780273711063]. The Body Shop ‘Who we are’, www.thebodyshop.co.uk/_en/_gb/values_ campaigns/index.aspx) (accessed 2009). The BP website for example code of conduct www.bp.com/ sectiongenericarticle.do?categoryId=9003494&contentId=7006600 (accessed 2009). Bruyn, S. The social economy. (New York: Wiley–Interscience Publications, 1977) [ISBN 0471019852]. Burnham, J. The Managerial Revolution. (London: MacMillan, 1942). Cadbury, A. ‘Ethical managers make their own rules’, Harvard Business Review (5) 1987, pp.69–73. Cannon, T. Corporate social responsibility: a textbook on business ethics, governance, environment, roles and responsibilities. (London: Pitman, 1994) [ISBN 0273602705]. Carroll, A. and A. Buchholtz Business and Society: Ethics and stakeholder management. (Ohio: South-Western Publishing, 2002) [ISBN 9780324114959]. Castells, M. The Rise of the Network Society. (Oxford: Blackwell, 2000) [ISBN 0631221409]. Cohen, M., J. March and J. Olsen ‘The garbage can model of organisational choice’, Administrative Science Quarterly 1972, pp.1–25. Cole, G.A. Management theory and practice. (London: DP Publications, 2003) sixth edition [ISBN 9781844800889]. Cullen The Hon. Lord The public enquiry into the Piper Alpha Oil Disaster. (London: HMSO, 1990) [ISBN 9780101131025]. Daft, R.L. Management. (Mason, Ohio: Thomson Learning, 2003) sixth edition [ISBN 0030351383]. Daft, R.L. New era of management. (Mason, Ohio: South Western: Cengage, 2008) second edition [ISBN 9780324537778]. 239

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Principles of Management

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