Managing Organizations Word

Business Management
Study Manuals
Advanced Diploma in
Business Management
MANAGING IN
ORGANISATIONS
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Advanced Diploma in Business Management
MANAGING IN ORGANISATIONS
Contents
Unit
1
Title
The Development of Organisational Theory
Introduction to the Module
Introduction to Organisational Theory
Nature of Organisations
Classical Theory: The Search for Principles of Organisation
Human Relations School: Understanding the People Dimension
Contingency Theory
Systems Theory
Contemporary Theories: The Search for Organisational Drivers
The Context of Organisations: Analysing the Environment
Introduction
The Organisation in its Environment
The General External Environment
The Specific External Environment
The Internal Environment
Conducting an Environmental Analysis
Organisational Direction: The Planning Process
Introduction
Defining Overarching Intent: Mission, Goals and Policies
Strategic and Operational Planning
Objectives
Influences on Strategy and Planning
Organisational Structure and Design
Introduction
Infrastructure: The Distribution of Authority
Superstructure: The Organisation of Responsibilities
Factors Influencing Organisational Design
The Nature of Bureaucracy
Co-ordination In Decentralised Structures
Flexibility and Alternative Forms of Organisational Design
Authority and Decision-Making
Introduction
Authority
Delegation
Empowerment
Decision-Making in the Organisation
The Process of Decision-Making
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Unit
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Title
Developing Organisational Effectiveness
Introduction
Principles of Control
Control as an Organisational Process
Measuring Performance
Benchmarking
Techniques of Performance Management
Organisational Change and Development
Introduction
The Dynamics of Change
The Process of Change
Change Strategies
The Role of Managers
Culture and Change
Organisational Development
Responsibility and Stakeholders
Introduction
Stakeholder Interests
Legal Responsibilities
Responsibilities to Staff
Corporate Social Responsibility
Management Ethics
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1
Study Unit 1
The Development of Organisational Theory
Contents
Introduction to the Module
Introduction to Organisational Theory
A. Nature of Organisations
Towards a Definition of Organisation
Features Common to All Organisations
Classical Theory: The Search for Principles of Organisation
Henri Fayol
Lyndall Urwick
F W Taylor: Scientific Management
Relevance of Classical Organisation Theory
Human Relations School: Understanding the People Dimension
Elton Mayo and the Hawthorne Studies
Relevance of the Human Relations School
Contingency Theory
Joan Woodward
Burns and Stalker: the Influence of the Environment
Lawrence and Lorsch
Aston Group
Relevance of Contingency Theory
Systems Theory
The Systems Approach
The Organisation as a System
Sub-Systems of the Organisation
Boundary Management
Levels Within the Organisation
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B.
C.
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(Continued over)
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2 The Development of Organisational Theory
F. Contemporary Theories: The Search for Organisational Drivers
Excellence Theory
Theory Z
Organisational Culture
American and Japanese Corporate Culture Models
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The Development of Organisational Theory 3
INTRODUCTION TO THE MODULE
The subject of this module is the internal processes of organisations: how they are organised
and managed in order to achieve the purposes for which they exist. In this first Unit we shall
be concerned with a number of different approaches to the way in which organisation and
management may be analysed and understood. This is the realm of 'organisational theory'
and it forms an important backdrop to the whole course.
Before developing this in more detail, though, we should make an important point about the
approach adopted in this course as a whole and how you should work through it.
You should, through your previous studies, be reasonably familiar with much of the
functioning of organisations and management. To some extent this course will deepen and
widen that knowledge and understanding. However, much of this subject involves looking at
that same knowledge from different perspectives. We shall be concerned with exploring the
forces which shape organisations and the dynamics of their internal processes, rather than
with simple descriptions, and with analysing key concepts which underpin organisation and
management; and we shall be assessing the implications of these concepts.
Each Unit starts with an Introduction which sets out a clear analytical framework for the topic
under discussion. The examination of the topic which follows does not provide a complete
picture at this level; and so you do need to carry out additional reading. This is important to
enhance your understanding of the topic as well as providing you with the material to be able
to critically compare and contrast the different perspectives on the topic.
You do need to develop a broad understanding of the key principles, concepts and processes
identified in each topic area. There is a multitude of excellent books on management
theories and organisational principles. Many of these are listed in the reading section of the
syllabus but you should also carry out a Web search to identify those that are specifically
mentioned in this study manual. This is because of the up-to-date material that has been
included in this manual so that you can explore different writers' views, are able to interpret
these, and understand their applications in modern management and organisational
environments.
A vital component of your study is to constantly review and assess how the different concepts
apply to your own organisation. It is recommended that you make notes after working
through a topic area to help you to retain your learning. It would be helpful if you considered
the following questions when you are making your notes:

How do we apply these concepts, ideas and processes?
Why is our organisation and management the way it is?
What benefits and problems arise from this?
How would I apply these ideas and concepts in my organisation?
What benefits and problems would arise?
Finally, think about your own view of management and organisation. Consider what you feel
are the key forces which do, or should, shape organisations.
Working through the course in this way should enable you to develop an appreciation of the
dynamics of organisation and management in the increasingly turbulent environments of
modern organisations. It should also give you a greater insight into the problems they face at
all levels and the wide variety of organisational forms which have resulted.
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INTRODUCTION TO ORGANISATIONAL THEORY
Organisational theory involves identifying the different approaches to understanding
organisations, which cover a wide spectrum of views over many decades.
The history of organisations really starts with armies. These were the first large-scale co-
operative groups formed specifically for a purpose and they are characterised by a hierarchy
of authority within which decisions are made at the top and passed down in the shape of
orders which must be followed. A second early development was that of public
administration whereby organisations came into being to implement the decisions of
government: initially to collect taxes, but increasingly to order and regulate society through
laws and the application of various rules. Again, these organisations were characterised by a
hierarchy of authority and a requirement to comply with its exercise.
These models for the large-scale organisation of people for a purpose were, with a few
exceptions, followed by business organisations as they developed in the Middle Ages and,
through industrialisation, came to dominate work in society.
The study of organisations emerged from what we would call today sociology. This owed its
origins to philosophers turning their attention to the way in which whole societies function
and, in due course, to the study also of the social constructions which are created in them.
The first studies of organisation sought, in the fashion of the time, to identify the essential
processes at work in all organisations and to encapsulate these in principles which could be
beneficially applied to all organisations. This was the approach of 'scientific management'
and, since the organisations at the time all mirrored the military/public administration model, it
was not surprising that the principles identified were based around the concept of the
hierarchy of authority and obedience to decisions and rules.
In the 1930s a major shift in thinking took place with the realisation that, at the operational
level in organisations, people were actually bending the rules and decisions to meet their
own needs. Increasingly, sociologists and social psychologists turned their attention to the
way in which the people who make up the organisation behave. This was the approach of
the 'human relations' school. Their contribution has been to develop an understanding of
how management works on the social level, outside of the hierarchy of authority, and how,
therefore, organisations may respond to the needs of their staff.
After 1945 two further significant approaches developed, which looked at organisation and
management in the context of the environment of the organisation, both internal and
external. These were as follows.
Contingency theory, which states that there is no one 'best' form of organisation and
management, but that the most appropriate form will be dictated by a variety of factors
in the environment. This has given rise to a concern with those environmental factors
and how they influence the organisation (which will be the subject of the next Unit).
The key modern concept of stakeholder theory can be traced to this approach.
Systems theory, which provides a way of analysing how organisations, and any part
of them, function by reference to their inputs, outputs and the processes which take
place in between. This is an extremely useful analytical tool which we shall use in
detail at several points in the course to explore the ways in which organisation and
management processes operate.

More recently, in the increasingly competitive and changing environment within which all
organisations exist, most attention has been devoted to what makes organisations
successful. We characterise this here as the search for organisational drivers and
consider approaches which concentrate on 'excellence' and 'organisational culture'.
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A. NATURE OF ORGANISATIONS
It is common now to define business in terms of what it does and why it exists. At its most
general, we can say that business exists to meet the needs of a society; and thus there will
be many different types of business to meet the many different needs of societies.
There are three main types of entity found in the business sector: sole traders, partnerships
and companies. However, business does not satisfy all the needs of society and there are
also a range of 'non-business' entities which exist to meet needs not catered for by profit-
seeking businesses. Thus, we must consider public-sector bodies such as government
agencies, as well as not-for-profit bodies such as charities.
Towards a Definition of Organisation
All these different types of business are often referred to as organisations. You need to
have a clear and comprehensive definition which is wide enough to encompass and embrace
all those institutions which are commonly called organisations, but which excludes other
social institutions, such as the family.
Writers attempting to put forward a definition often concentrate on specific aspects: some
stress structure, others hierarchy or authority. We will attempt to draw together these various
strands into a sound definition:

Organisations are institutions which persist over time, possessing a recognisable
structure of work roles arranged in a hierarchy of power and authority.
Organisations pursue specific goals, which are concerned with converting resources
into utilities which meet human needs.
In order to optimise the factors of production, organisations must possess information
systems.
Features Common to All Organisations
With the range of organisational forms, we face some difficulty in saying just what is an
organisation. Perhaps a way to overcome this problem is to look at those features which are
common to all organisations.
(a) Providing Utilities
Organisations exist to meet the needs of people. These needs range from the
essentials of life, such as food, fuel, clothes and shelter, to desirable services, such as
entertainment or sport.
Organisations perform their tasks by taking what economists term the factors of
production and converting them into utilities. The factors of production are:

Land, which includes all those resources provided by nature, e.g., minerals,
trees, etc., as well as the land itself.
Labour, which includes human skills of body and brain.
Capital, which means machinery and those goods which contribute to future
production.
When economists refer to utilities, they mean goods and services which satisfy
people's wants. For the utilities to be effective, they must be available at the place and
time that consumers want them. This involves distribution.
Distribution includes the systems of transport (road, rail, air and sea) which move
goods to the places of consumption, and also the wholesale and retail organisations
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which buy goods from manufacturers and sell to consumers. All organisations have in
some way or another to be connected with the consumers of their goods and services.
We can sum up our first common feature of organisations thus:
All organisations meet some of the needs of members of modern societies.
They all take resources (physical and human) and convert them into utilities
(the goods and services produced). All organisations have to ensure that
these utilities reach consumers as and when required.
(b) Rules and Regulations
The second feature common to all organisations is that they all have rules and
regulations which govern the running of the enterprise. These may be formal and
written; or they may be informal, generally accepted ways of doing things.
Large organisations will have a written statement which outlines the structure and
purpose of the organisation. Small organisations, such as a family shop, have an
informal but generally agreed policy on how the enterprise should be run.
Organisations combine the activities of people and the control of resources in order to
produce goods and services, and these activities have to be directed and coordinated
to achieve the objectives of the organisation. Rules and regulations are essential to
bring about this coordination of effort. Individuals working in organisations need to
know just what their responsibilities and duties are. Just as every sport or game has its
rules, so does every organisation.
(c) Division of Labour
Our third key feature is that all organisations have a structure: a framework of
positions where each person has a set of duties and functions to perform. When
people take up these various positions and perform their allotted duties, sociologists
talk of individuals in their 'work roles'. Every person who works in an organisation has
a role to perform.
In large organisations, roles may be highly specialised: for example, some work roles
may involve aspects of production, others may relate to marketing, etc. In the small
organisation, work roles will be more general: the proprietor of a small shop will
perform a range of buying and selling activities.
Economists term this breaking-up of activities into selected work tasks the division of
labour. In contrast to the system of self-sufficiency where one person performs a
whole range of activities to meet his or her own needs, in organisations labour is
divided between workers. The division of labour can increase the efficiency of an
enterprise, by allowing workers to specialise in certain aspects of work and so become
more expert at what they are doing.
We can thus sum up the third common feature of organisations:
All organisations have a structure, a framework within which individuals can
perform defined work roles. Because there is this division of labour, there
is specialisation of work activities in organisations.
(d) Chain of Authority
The fourth key feature of organisations springs from the fact that they comprise
individuals performing a variety of work roles which combine to achieve the
objectives of the organisation. If organisations are to be effective in the pursuit of
their goals, the work activities have to be controlled and directed, and decisions which
affect the whole organisation have to be taken. This calls for a structure of authority.
A structure of higher and lower organisational roles is called a hierarchy.
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The hierarchy of roles in a modern organisation may be seen as a chain of authority.
At the top of the chain, senior management make the important decisions and are
ultimately responsible for the success or failure of the organisation. Orders and
instructions springing from key decisions made by them are passed down the chain of
authority. At every level, appropriate action is taken and further orders are passed on
down the chain until the lowest levels are reached, by which time all instructions should
have been carried out. The number of levels of authority will vary with the size of an
organisation; large organisations will have many levels of authority, whereas small
organisations will have relatively few links in the chain.
The crucial point is that all organisations have a recognised system of authority which
controls and delegates tasks and duties within the organisation.
(e) Information Systems
The fifth feature common to all organisations arises from the fact that they need
information. Information is needed:
To plan operations: management decisions cannot be made in a vacuum. Data
and information have to be studied so that various courses of possible action can
be appraised and rational decisions made.
To help plan the most efficient use of resources: there are many possible
different uses and combinations of land, labour and capital, and up-to-date
information can help select the best possible combination, so information helps
optimise the use of resources.
To control and evaluate the performance of the workforce: for example, to
check whether targets are being achieved in the various departments.
To compare the performance of an organisation with that of other
organisations in a similar field.

To attempt to run an organisation without up-to-date, accurate information is like trying
to drive a car with your eyes blindfolded, and is equally likely to end in disaster. All
organisations must have means of obtaining, recording and storing information so that
it is readily available.
Thus, all organisations must possess information systems, which make up-to-date
information available to members of the organisation who need it to assist the efficient
running of the enterprise.
B. CLASSICAL THEORY: THE SEARCH FOR PRINCIPLES
OF ORGANISATION
The classical school of organisation theorists comprises those with the view that there is a
single set of principles of organisation which, once discovered, would be the key to the best
way of structuring all types of organisation. Such principles would form a scientific basis to
management which all aspiring managers can learn and practice. This approach is
sometimes referred to as the pursuit of the 'Holy Grail' of organisational structure.
Some of the approaches discussed in this section may seem outdated, but their principles of
management and organisation were based on extensive research in the early 20th century.
Many of the concepts remain relevant in contemporary organisations, particularly those
associated with management style. However, throughout this course you will find up-to-date
material based on relevant research to enable you to compare and contrast earlier thinking
on the topic with a more modern approach.
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The main proponents of classical thinking principally Taylor, Fayol and Urwick derived
their theories from their own practical experience in industry (mainly in the engineering field)
and observations. They argued that organisations should be structured in a logical and
scientific manner. They maintained that there were a number of fundamental principles upon
which organisations are built:

There should be a blueprint of organisational structure which could be applied
universally.
The structure of an organisation should be hierarchical, with clear levels of authority.
Each level of authority should have its own functions to perform.
Everyone in the organisation should know their place and what is expected of them.
It was argued that the principles of organisation which derive from this would offer scientific
guidance to managers on how to run an organisation.
Henri Fayol
Fayol was an early 20th-century mining engineer who developed an interest in management
principles. He realised the importance of structure and argued that every organisation needs
to be planned, organised and controlled. Fayol's notion of the ideal structure for all
organisations rested on the following principles.
(a) Division of Labour
Work is divided:

Between the levels of authority in an organisation, with each level having its own
duties and responsibilities from top management down.
Between departments and other groups, with each having its function to perform.
Here Fayol built on the work of earlier authors. As early as 1776, Adam Smith
identified the benefits of specialisation, or division of labour, in the production process.
Fayol extended this to the study of management.
(b) Coordination
The various levels and departments must be coordinated so that all their efforts pull in
the same direction towards achieving the objectives of the organisation.
(c) Span of Control
Fayol stressed the importance of establishing the maximum number of subordinates
which a superior can control. This is called the span of control.
(d) Economies of Scale
Wherever possible similar activities should be grouped together to avoid overlap and to
obtain economies that accrue to larger Units: for example, bulk buying, spreading
overheads, making better use of resources.
(e)
(f)
(g)
Objectives
Every organisation must have clear objectives.
Authority
There must be a clear line of authority.
Responsibility
Where a person is given responsibility, he or she must also be given the authority
necessary to carry out the task. A superior can be held responsible for the actions of
his or her subordinates.
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(h)
(i)
(j)
Specialisation
As far as possible people should specialise in order to be proficient.
Definition of Tasks
Employees should know exactly what is expected of them.
Unity of Effort
Everyone in the organisation should be working towards achieving the goals of the
organisation.
(k) Unity of Command
Each member of the organisation should have one clear superior to whom he or she is
responsible. The span of control should not be too wide; ideally no person should
supervise more than five or six subordinates.
Lyndall Urwick
Urwick developed the ideas of Fayol and then put forward his own principles of management:
(a) Objectives
Achieving its objectives is the reason for the existence of any organisation.
Organisations that fail to achieve their objectives should cease to exist.
(b) Specialisation
In an effective organisation there is the principle of 'one group, one function', i.e. every
section or department should do its own job well and not interfere in other activities.
(c) Coordination
Management should so structure the organisation that all the parts fit neatly together
and work as a functional whole.
(d)
(e)
(f)
(g)
(h)
(i)
Authority
There should be clear lines of authority in the organisation.
Responsibility
Superiors are responsible for the actions of their subordinates.
Job Definition
All jobs should be described precisely and duties defined.
Correspondence
Authority and responsibility should go hand in hand.
Span of Control
A superior should be responsible for up to six subordinates.
Balance
The sections and departments of an organisation should be in balance; no one
department should dominate the organisation.
(j) Continuity
The organisation should be set up in such a way that it can continue to perform its
functions.
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F W Taylor: Scientific Management
Taylor acquired his practical experience in the American steel industry and went on to
become a management consultant. Taylor termed his key principle scientific management
and he modelled his approach to management on those of scientists seeking the laws of
nature.
Taylor's principles are summarised below:
Managers themselves should be guided by the scientific approach. In the division of
labour within an organisation, management should accept full responsibility for
planning, organising and supervising the work of subordinates. Workers should be
freed from these problems so as to concentrate on actually doing the job and
performing work tasks.
Managers have a duty to select and train staff in the most efficient way of performing
work tasks.
Managers should motivate workers with the prospect of earning good pay and the
chance of promotion for those who deserve it. Taylor stressed 'a fair day's pay for a fair
day's work'.
Managers should ensure harmony in the workplace by showing that the success of an
employee is tied closely to the success of the organisation.
Managers should see to it that a scientific approach is applied to each operation that an
employee performs, so as to avoid wastage of effort.
Managers should produce a blueprint of the best way to perform a given task by
studying successful employees and then applying this to all employees.
Managers should treat employees as individuals rather than as members of a wider
grouping like workgroups or trade unions.

Relevance of Classical Organisation Theory
It is very easy to construct a strong case against the ideas of the classical theorists, but the
concepts they put forward are remarkably persistent and may be seen in many different
types of organisation today. It is not sufficient, therefore, to dismiss them with a few well-
chosen arguments in favour of more modern approaches. We need to understand the value
in their ideas as the basis for their continued application.
(a) Principles of Organisation
The principles identified by Fayol and Urwick can be criticised on a number of points,
particularly in relation to their rigidity and their lack of appreciation of the external forces
influencing organisations. Their weaknesses are as follows:
The rigidity of the principles preclude the need for flexibility in designing
organisational and management structures to suit the circumstances within which
organisations find themselves.
There is an overemphasis on the division of labour and specialisation, the scalar
chain, spans of control and line authority, all of which have been affected by the
explosion of information and communications technology which tends to
empower both managers and workers at lower levels in the hierarchy.
Human beings are seen as puppets that must be made to fit into organisational
roles: they are there to do as they are told.
All important decision-making rests entirely with management, with very little
consultation with staff.

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There is an assumption that organisations are largely self-contained units where
management has complete control over events. Organisations and their
employees, in the real world, exist in an environment. They need to be
responsive to external forces over which they may have little or no control: for
example, customers or competitors, a national strike or sudden rises in the cost
of oil.
Fayol tended to be rather vague on the exact ways in which some of his
principles were to be put into action.
There is a strong element of common sense in the ideas put forward, and many
are easily recognisable by practising managers today.
The critics, like those they criticise, tend to overstate their case. For example, the
classical theorists did not completely ignore the social dimension, but many
managers using the theories overstressed the techniques at the expense of the
people.
The emphasis on the importance of objectives was a step forward. Likewise, the
focus was put on how the structure of an organisation affects its performance.
Although the main stress was on the organisation, theorists like Fayol did accept
that modern organisations operate in environments. There is also a strong theme
in these theories that emphasises the importance of management education.

Despite these criticisms, though, there remains much of value in these theories:

On balance, the strongest criticism of these approaches is their belief in the existence
of a single set of guiding principles of organisation. When these theories are used
more flexibly, they have much to contribute to our understanding of organisations and
their management.
(b) The Principles of Scientific Management
As with Fayol and Urwick, Taylor's work can be heavily criticised for its emphasis on
management control and lack of understanding of the complexities of the human
dimension to organisations and their management.
When management takes over all the planning and organising functions, the
workers' role is reduced to taking orders. Workers have very little control over
their work situation.
Money is seen as the major reward and motivator. Taylor says little about other
things which could contribute to job satisfaction. This form of management
encourages a 'carrot and stick' attitude by management to workers.
By treating the workers as individuals, Taylor underestimates the important
effects of group pressures on production and efficiency. Taylor also
underestimates the importance of trade unions in some organisations.
Taylor gives the impression that managers are only really interested in first-class
workers; there seems little place for older or handicapped people.
Taylor talks about a fair day's pay for a fair day's work, but who is to decide just
what is fair? Taylor leaves little room for negotiation between management and
workers on such issues. Unscrupulous managers could exploit workers when
measuring performances and payments.
Scientific management does not take account of the concept of group dynamics,
which was recognised by Elton Mayo in the 1930s Hawthorne Experiments at the
Western Electric Company (see later in this Unit).

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Despite these criticisms, scientific management remains an important theory of
management. If Taylor's principles are used sensitively, many of the criticisms can be
met. In particular, Taylor's ideas on material rewards for performance and achieving
sales targets have been applied extensively in some businesses. The basic payment-
by-results ideas have been refined into performance bonuses and various mixes of
money, type of car, etc. and other tangible rewards. Some enlightened firms are giving
their managers or staff some choice over how the reward package is made up: for
example, more emphasis on money, or less commission and a larger company car.
C. HUMAN RELATIONS SCHOOL: UNDERSTANDING THE
PEOPLE DIMENSION
The main feature of the Classical School is its concentration on structure. It views the
organisation virtually as a machine, and indeed another term for this view of organisations is
'mechanistic'. (This is also referred to as the 'formal' organisation, a term closely associated
with the work of Charles Handy and his role culture typology of an organisation, of which you
will learn more later in your course.)
When we consider the implications of the classical theorists for management and
organisation in practice, we can say that the technical features are all there, but something is
missing. We need to consider the human dimension: the people who fill the posts in the
organisation and their behaviour. Whilst there is some consideration of a need to take
account of human factors, by and large the human dimension is not seen as important to the
form of organisation. Thus, classical theorists can propose ideal types of organisation and
management unencumbered by the problems that arise from actually having people involved
in them.
From the 1930s, greater attention began to be paid to the way in which the human dimension
affected the operation of organisations and what this meant for management. The basic idea
underlying this work is that to understand and improve an organisation you need to
understand the people who work for it and to take account of the way in which they interact
with it.
Unlike the classical theorists, the writers of the human relations school do not postulate any
organisational solutions as such. They are more concerned to shed light on the way
organisations work in practice and to identify possible organisational practices which may
bring the needs of the formal organisation in line with the reality of the way people behave.
The key work which defines the human relations approach in respect of organisation and
management comes from Elton Mayo's studies at the Hawthorne plant of Western Electric
Company between 1927 and 1932. Other important contributions have been from Maslow
and McGregor in respect of motivation and leadership.
Elton Mayo and the Hawthorne Studies
Without going into great detail about the studies, the background was that the researchers
were trying to find the optimum level of lighting in the plant in order to maximise productivity.
As such, it started out as a strictly scientific management approach. However, the surprising
finding was that productivity increased among the group of workers being studied both when
the level of illumination was increased and when it was decreased. Subsequent studies by
Mayo led to the conclusion that what was affecting performance was the special attention
being paid to the group of workers rather than any external physical factors. Their working
lives had suddenly become more interesting because of the experiments which were taking
place; they felt important and valued, and the result was increased enthusiasm for their jobs
and a higher output.
This phenomenon has become known as the 'Hawthorne effect'.
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Having established from this that performance was related to psychological and sociological
factors as well as purely physical ones and the organisational structure, Mayo went on to
investigate the other forces at play in the workplace. These are summarised below:
Workers are strongly motivated by social needs (for social interaction, self-esteem and
recognition, a sense of belonging and security) and seek satisfaction of those needs
over and above any others, including the need for money, once a certain level of
remuneration as been achieved;
Individual workers belonged to groups at the workplace which had their own codes of
behaviour, leaders and means of enforcement of the group norms (which included
notions of what appropriate output standards were), constituting a whole 'informal'
organisation within the formal one.

Relevance of the Human Relations School
These discoveries shifted the emphasis in organisation and management thinking. Mayo
demonstrated that human attitudes and behaviour seem to be what govern activity at the
workplace, and what was required was to examine the needs and interaction of individuals,
the ways in which groups operate and what this means for management.
The Hawthorne studies showed that the formal structure, organisation, values and goals of
an undertaking are by no means the only, or even the main, determinant of behaviour in the
workplace. There will always be an informal network of work groups and interactions which
constitute an alternative form of organisation for the workforce, and one which is invariably
far more important in their lives.
This 'informal organisation' determines, to a large extent, worker's attitudes to the formal
organisation and, therefore, how they view the formal structure of authority. It is work group
norms which tend to set standards of performance, such as timekeeping, output, quality,
attitudes towards customers and clients, dress codes, etc., and management will find it
difficult to impose standards which do not accord with them.
This concept has important consequences for organisation and management in that it must
aim to bring the formal and informal organisations into line: in particular, the values and goals
which apply. Strategies to achieve this include empowerment and participation, as well as a
raft of measures to maintain and develop motivation.
D. CONTINGENCY THEORY
The key feature of contingency theory is that there is no one best method that applies to all
organisations. There is a wide range of possible structures from which to choose. The
decision as to what structure would be appropriate will be influenced by such factors as the
external environment in which the organisation operates, the motivation of the workforce,
their skills, knowledge, and commitment as well as their experience in the specific working
environment. Technology, the product or service of the organisation are also influencing
factors.
Contingency theory is primarily based (though not exclusively so) on the findings of personal
observations within organisations. We shall now look at important researchers in this field.
Joan Woodward
The purpose of Joan Woodward's study was to assess the degree to which the classical
principles of organisation were being applied in British firms and to analyse the relationship
between organisational structure and success. The basic studies were carried out in the
1950s but they are still relevant today. Woodward looked at 100 firms each employing at
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least 100 people. The firms analysed were involved in a wide range of activities including
manufacturing, commerce, medical institutions, building, newspapers, etc.
A definitive pattern did not emerge that could relate either to business success or to the
variety of different organisational structures, in terms of their numbers of levels of authority,
span of control, clarity or otherwise of definitions of duties, the extent of communication
and/or specialisation. What was identified, however, was a correlation between the level of
control over the production process and working patterns, which was directly linked to the
objectives of the organisation.
Woodward identified three broad categories which seemed to favour particular forms of
organisations.
(a) Unit or Small Batch Production
This is where there was least automation of processes, the accent being on 'one off' or
short runs for which it is not appropriate to gear up machines to control production. A
hierarchy of increasing application of technology within the category covered the
production of items to customers' specifications and prototypes, the making of large
equipment in stages, and the production of small batches of items.
In this category, it was found that organisational structure was quite loose. There was
much delegation of authority within a standard pyramidal hierarchy characterised by
relatively small spans of control and quite permissive management attitudes.
(b) Large Batch and Mass Production
Here, the production process is much more automated, the firms being those
concerned with the production of standard items in large quantity, and assembly-line
working. However, the technology is not entirely dominant since variations and
uncertainties occur even in the mass production lines of car manufacturing.
These organisations were characterised by much tighter control procedures and rigid
large-scale hierarchies with the traditional pyramid shape being very elongated at the
base, reflecting the way in which large numbers of workers are required at the lowest
levels, but there are relatively few middle and senior managers. Span of control is very
large (which may account for the management problems experienced by many large
industrial concerns).
(c) Process Production
This is characteristic of the oil refineries and chemical manufacturers studied where the
production process was more or less certain and completed automated.
Such firms tended to be flexible again, but within a different organisation structure, with
diamond-shaped hierarchies which reflected the small number of operatives required to
service and maintain the process machinery, and the larger group of middle managers,
scientists, accountants, etc. In these concerns, problems tended to arise in this 'bulge'
in the middle where opportunities for advancement were limited. The production
process also limited individual initiative.
Woodward's key contribution to organisational theory was the discovery that, far from there
being a set of preferred organisational principles, the main determinant of structure is the
kind of activity and the technology with which organisations are concerned. As she stated:
'The criterion of the appropriateness of an organisational structure must be the
extent to which it furthers the objectives of the firm not, as management
teaching sometimes suggests, the degree to which it conforms to a prescribed
pattern. There can be no one best way of managing a business.'
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Burns and Stalker: the Influence of the Environment
Burns and Stalker studied management and economic performance in a series of electronics
firms where the key to success was the ability to respond quickly to technological innovation.
It was found that those organisations which embodied formal structures of hierarchies and
working relationships tended to be slower off the mark and less profitable than those firms
which were organised informally, had more lateral communication and allowed talented
individuals more personal initiative.
This led them to propose two 'ideal types' of management organisation which form the
extremes of a continuum along which most organisations can be placed.
(a) Mechanistic Systems
These forms of organisation exhibit a high degree of specialisation, a clear hierarchy
within which coordination, control and communication are constrained, and an
insistence on loyalty to the goals of the concern and the rules of the formal structure.
Such rigid systems are most appropriate to stable conditions.
(b) Organic Systems
These are more fluid forms of organisation appropriate to changing and uncertain
conditions, where new and unfamiliar problems continually arise which cannot be
broken down and distributed among the existing specialisms within the organisation.
Such systems are characterised by a flexible structure involving continual adjustment
and re-definition of individual tasks with a constructive rather than restrictive view of the
application of specialist knowledge. Interaction and communication occurs at any level
in the organisation and there are a range of different integrating mechanisms, such as
liaison teams, to ensure cohesion. Such a system was seen as generating a higher
degree of commitment to the organisation's goals.
Burns and Stalker argue that many of the features of the classical approach (formal line
structures of authority, clear division of labour and a tendency towards centralised decision-
making, with orders flowing down from the top) are appropriate when environments are fairly
stable with little change. However, when environments are changing rapidly a more flexible
(organic) structure is appropriate (flexible structures, delegated authority and decision-
making, and decentralisation).
Lawrence and Lorsch
These researchers were also concerned to discover which forms of organisational structure
coped best with various types of environment. They put forward two key concepts:
Differentiation: if environments are changing rapidly and becoming difficult to predict,
organisations will set up more departments and sections. These in turn will become
more specialised, with a greater division of labour. These parts of subsections of an
organisation develop different attitudes and ways of doing things. This situation
creates the need for:
Integration: ways in which the organisation as a whole draws together its parts or
subsystems in order to achieve its objectives.
Lawrence and Lorsch concluded that when environments are changing rapidly, both
differentiation and integration need to be at a high level. In contrast, when environments are
fairly stable, only integration needs to be high.
Aston Group
This group of researchers, based at the University of Aston, put forward yet another variation
of the contingency theory theme.
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They examined the way in which the classical concepts of structure were applied in different
types of organisation. Taking the concepts of specialisation or division of labour,
standardisation of methods, formal rules, tall structures with many layers of authority and
centralised decision-making, they argued that there were many possible permutations where
each of the these elements may be at high or low level. Thus, an organisation may be
centralised or decentralised, formal or informal, etc. They then considered the application of
these possible structural permutations in relation to various other features of the
organisation:

Is it large or small?
What kind of technology does it use?
Who owns it?
What markets does it serve?
They identified the size of the organisation as the most important factor influencing structure.
They concluded that as organisations grow larger they need to be more specialised (greater
division of labour), more formalised (more explicit and stricter rules), more standardised
(similar procedures and methods), but less centralised (greater delegation of decision-
making). This would assist firms to perform well as they grow larger.
Relevance of Contingency Theory
Contingency theory disputes the idea that, whilst organisation and management structures
are key determinants in the performance of an organisation, there is one best way to
organise an enterprise. Rather, deciding which organisational structure will produce the best
performance is situational, i.e. contingent upon certain circumstances. These
circumstances may be within the organisation or may be features of the environment.
If we draw the research together we find that if an organisation is to be successful in
achieving its goals, it must be so designed as to be able to meet demands arising from:

The type of technology in use.
The type of market for which the organisation caters.
The range of products.
The rate of change in design of products.
The size of the organisation.
The basic principles put forward by the classical theorists only make sense when considered
in relation to these types of factor. Therefore principles such as span of control or unity of
command have to be modified for the various types of organisation found in modern society.
It is dangerous to take the ideas of the classical approach as a fixed blueprint and apply
them to every organisation. The way you decide the best structure for an organisation is to
ask, 'Which design of organisation will be most successful in achieving its objectives?' The
key phrase of contingency theory is that there is no one correct way of designing an
organisation: it depends on the circumstances within which the organisation finds itself.
The contingency models of organisation concentrate attention on what is an appropriate
organisational form in the light of the situational pressures on the organisation. Even though
the various studies were conducted in industrial organisations, we can see same processes
at work in all types of organisation. For example, the impact of new office technologies is a
clear example of the type of influence identified by Woodward, and administrative support
structures of many public bodies have been moving steadily away from the highly rigid rule-
bound bureaucracies of the past, along the continuum proposed by Burns and Stalker,
towards a more organic structure, in response to the continual pressure of change to which
they have been subjected.
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Management Style
Management style is generally based on the structure, culture and strategies of an
organisation, but it is important to mention here what Professor Paul Hersey and Ken
Blanchard referred to as 'Situational Leadership' where a good manager/leader will not
practice the same style in every situation. This would not be appropriate, in view of the
plethora of situations that managers face on a day-to-day basis. A single style (say
autocratic) would certainly not be appropriate in a situation where involvement of employees
is vital to getting the job done. Often a manager/leader needs the active commitment of his
or her staff when change is introduced and has to be managed particularly in tight timescales
imposed by the turbulent external market environment.
E. SYSTEMS THEORY
The Systems Approach
As organisations are complex dynamic goal-oriented processes, the systems framework is
fundamental to the understanding of organisational theory. A systematic view on
organisations is transdisciplinary and integrative: it transcends the perspectives of individual
disciplines, integrating them on the basis of a common 'code' or more specifically on the
basis of the formal approach to an organisation. The approach is primarily founded on
interrelationships and is based on a humanistic extension of the natural sciences.
System dynamics was originated in the late 1950s by Forrester of the MIT Sloan School of
management and has since been exemplified by the work of Banathy. Capra, Senge,
Hammond and Swanson who all propound the idea that systems theories are a
transdisciplinary, interdisciplinary and multiperspectival domain, the areas of which have
brought together the principles and concepts from ontology, philosophy, sociology, political
science, computer science, biology and engineering. Also included are geography,
psychotherapy and economics. Therefore, systems theory provides an interdisciplinary
dialogue and link between all areas of the sciences.
This frame of reference is composed of regularly interacting or interrelating groups of
activities, and has evolved from 'an individually oriented industrial psychology to a systems
and developmentally oriented organisational psychology'. This is because it is based on the
premise that organisations are highly complex social systems, as already mentioned.
The same line of thought can be applied to organisations in that they take inputs of varying
kinds, and transform them through a series of processes into outputs. The organisation is
essentially the transformation process, but in viewing it we must be aware of the inputs and
outputs as well.
This basic concept can be illustrated diagrammatically as follows.
Figure 1.1: Basic elements of a system
Organisation or
transformation system
Inputs Outputs
Feedback
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The feedback loop is included to show that outputs commonly have an effect upon the
system, often by returning as an input.
Before considering organisations as systems, a number of points about the nature of
systems need to be explained.
(a) Sub-Systems
Within each system, there are likely to be a number of 'sub-systems', each a separate
entity but each forming an integral part of the whole. Notably, the outputs from one
sub-system are likely to form, at least in part, the inputs for another sub-system. The
whole can, then, be seen as a system of interdependent parts, constantly in action
and reaction both internally in relation to each other and externally in relation to the
environment of the system.
This can be crucial in organisations since any change within a particular sub-system
will inevitably have repercussions throughout the whole system. Management must,
therefore, understand and consider the inter-relationships and inter-dependence of the
various parts which make up the organisation.
(b) Boundaries and the Environment
A boundary is regarded as existing around each system or sub-system, defining it and
separating it from all others.
There are certain types of system which function entirely within their boundaries and
are totally unaffected by anything outside. These are known as 'closed' systems.
However, far more common are 'open' systems, where flows occur across the
boundary and factors outside the system affect it significantly.
Anything outside the boundary of a system with the potential to affect its operation
constitutes the 'environment'.
These are important concepts since managerial problems often arise at the boundaries
of a system or sub-system, and events in the environment are often outside of the
control of those responsible for the system itself. Indeed, environmental monitoring is a
key activity for management as it enables managers to be aware of change which may
affect the functioning of the organisation.
(c) Objectives and Goals
The last introductory concept to consider briefly here is that of what the system exists
to do. All systems must have a purpose, at the very least to survive, but in terms of the
types of organisation we are concerned with, some form of mission expressed as aims,
objectives or goals.
This applies to sub-systems as well as the whole system. Thus, Ford would have as its
objective the production of motor cars, but each of the myriad sub-systems which make
up the organisation would have its own goals: for example, to paint the body parts and,
a sub-system of that, to mix paints into the correct colours.
The outputs of the transformation process are designed to meet these objectives.
The Organisation as a System
Katz and Kahn describe the basic system model of an organisation as a structure of
functioning parts embedded in an environment from which it draws inputs and into which it
pours outputs (largely goods and services to meet customer needs, but also by-products,
which may be useful to other organisations or may be waste or pollution). Figure 1.2 is a
simplified illustration of this.
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Figure 1.2: An Organisational System in its Environment
Environment
INPUTS
Material
Envir
onme
nt
Human and
Financial
Resources
THROUGHPUT
Research &
Development
Production
Marketing
After-Sales Service
OUTPUTS
Products
Services
By-products
Emissions
Enviro
nment
Feedback
Katz and Kahn emphasised the role of feedback in the successful persistence of
organisations. If an organisation is to survive and thrive in its environment, it needs
information about its outputs: for example, how well its products are meeting customer
needs, or whether its by-products or emissions are causing environmental problems?
We can now develop the concept of the system to stress the interdependence of the various
parts in an organisation.
Consider a simple example of an organisation containing just four departments:
Department A
Department B
Department C
Department D
Production
Sales
Distribution
Finance
Each of these departments constitutes a sub-system of the organisation as a whole, and we
can show the interconnections between them as follows.
Figure 1.3: The interdependence of systems
Department A
Production system
Department B
Sales system
Department C
Distribution system
Department D
Finance system
For the organisation as a whole to function effectively each of the systems must themselves
function effectively, and they must all function effectively together. Department A must
produce goods efficiently, Department B must sell these goods, Department C must see to it
that the goods reach the customers and Department D must pay for the raw materials used
in production, and pay employees' wages, and must collect money as payment from the
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customers. Any malfunction in A means that production will be adversely affected and so
disturb the functioning of departments B, C and D. If Department B fails in its functions the
problems of unsold goods will feed back to production and will affect distribution and finance.
If Department C fails to deliver the goods on time this has implications for A, B and D. If
Department D fails to pay or collect money, all the other departments would be in serious
trouble.
In modern, complex organisations there are invariably far more than four systems, hence the
number of interconnections is considerably more than the six shown in Figure 1.1.
Note too that, in the example, we have identified departments with sub-systems. However,
the concept of a system does not necessarily equate with the way in which an organisation
groups its functions. Thus the finance sub-system will extend across the whole organisation,
including the financial activities of the other three departments, and the distribution sub-
system may even include other organisations.
The systems approach also concentrates attention on the dynamics of the organisation. It
allows us to consider not just how the organisation functions in formal or informal terms, but
what it reacts to and how change may affect it.
Obviously, if there is no change in the environment and inputs can remain constant, the
organisation will remain static and we can concentrate on the formal structures of the
transformation system. However, the human relations school taught us that the people who
work in the organisation are themselves a dynamic and there are very likely to be variations
in the attitudes, motivations, etc. of staff as an input. Crucially, though, the environment
within which most organisations operate is constantly changing, in both the nature of the
outputs required and the inputs available.
To view the organisation as a system, or as a complex of interrelated sub-systems, is to
study the extent to which it is able to achieve a balance in its internal and external
relationships, and how far it can develop and progress in relation to the changes in those
relationships.
A particular problem of complex systems is their reliance on the effective meshing together of
the parts or sub-systems. It is not sufficient for each part to perform at optimum (best
possible) level. Rather it is the fit of the parts that is crucial. We can illustrate this with an
example. If the sales department in a commercial firm pushes sales higher and higher, at
first sight this is an optimum performance; but if the production section cannot meet these
orders even when working at maximum capacity, then the firm will lose goodwill and offend
its customers. In the long run the firm may be worse off than if its sales subsection had been
less effective in generating orders. Viewed independently, both sales and production sub-
systems have been maximising their efforts, but viewed as a whole the system of the firm
was not at optimum performance because the fit between the sub-systems was unbalanced.
We term the effects which occur in unbalanced systems 'dysfunctions', meaning that they
do not assist the system as a whole to achieve its objectives.
It is relatively easy to spot dysfunctions arising from the poor performance of a sub-system,
but far more difficult to come to terms with the case where a sub-system gets out of step by
being too successful. Dysfunctions are revealed only when we view the organisation as a
whole system, and take account of the fit and the balance of the various sub-systems. If we
look at each sub-system as a separate entity we may assess them all as being highly
effective individually, yet fail to see that the total system is not performing at optimal level.
Inputs and outputs are invariably from or to the environment of the system and, as that
environment changes, so must the system. All organisations have experienced an enormous
amount of environmental change in the last 20 or 30 years in respect of both inputs
(principally in terms of technology) and outputs, with new products and standards being
demanded. In addition, the expectations of people, both as customers and staff, have
changed considerably. Consider what people now expect in terms of product specification
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for a new car or their treatment when reporting problems with that car, compared with 30
years ago, or what staff now expect their working environment to be like. As inputs and
outputs change, the organisation must be capable of changing to accommodate the new
requirements and maintaining equilibrium, that essential balance in a constantly shifting
environment.
Sub-Systems of the Organisation
We have noted that the organisation as a system has myriad inputs and outputs which are
constantly changing in response to environmental pressures. The impact of the environment
is crucial in shaping the organisational response.
The systems approach is a way to illustrate how inputs are organised to achieve the desired
outcomes in an effective manner. Proponents of the systems approach, notably Kast and
Rosenzweig, and Trist and Bamforth, have attempted to develop categories for the different
sub-systems which make up the organisational system as a whole, so that we can
concentrate more clearly on the organisational implications of each. Three main sub-
systems are identified:

the technical sub-system
the psycho-social sub-system
the structural sub-system.
the goals and values sub-system
the managerial sub-system.
In addition, Kast and Rosenzweig proposed two further elements:
It is apparent that classical management theory emphasised the structural sub-system and
the human relations school the psycho-social sub-system, while those concerned with
management science and operational research have largely been interested in the technical
sub-system. The systems approach allows us to unite those approaches and study their
interaction within the organisation as a whole.
(a) Technical Sub-System
Any organisation employs technology in its broadest sense to assist it in carrying out its
tasks. In industry this will include factory machines, robotics, etc. to make, say, cars.
In the service sector, the accent is more on office technology (computers, photocopiers,
telephones, etc.), as well as systems for filing and other forms of record-keeping:
indeed, all the paraphernalia of information and communications.
The technology used is an important determinant of the organisation. It prescribes to a
considerable extent the way the work is done, the organisation form and the
relationships between people. Thus, examining the technical sub-system, and the way
in which it changes, can explain a great deal about organisation and management.
(b) Psycho-Social Sub-System
The other key element that organisations employ is, of course, people. The goals,
values, aspirations and modes of behaviour of the members of the organisation will
also be important determinants of the way work is done and the relationships between
people in the organisation. This gives recognition to the nature of the informal
organisation and culture, and its impact on organisational form and management.
If we consider the interaction of sub-systems, we can see that the technical sub-system
itself makes demands on staff. An organisation based on the use of personal
computers needs different abilities and aptitudes, more personal motivation, control
and initiative, than one based on a manual clerical system.
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(c) Structural Sub-System
Organisations employ technologies and people in order to get the work done (or, if we
put it in systems terms, in order to process inputs into outputs). The structural sub-
system is concerned with the ways in which this is achieved the division of tasks,
their grouping into operation units, their coordination and control. This is very much the
approach of the classical management school, and indeed the formal expression of the
structural sub-system would be the organisation chart.
Once again, we can see that the structural form exerts its own demands on both the
technical and psycho-social sub-systems. For example, geographical divisions need
different sorts of staff and technical support than the specialised product groupings. It
is also true that structural form is constrained by the availability of appropriate
personnel and technology, so the interdependence can be seen.
(d) Goals and Values Sub-System
Whilst the psycho-social sub-system is concerned with the goals and values of the
members of the organisation, the goals and values sub-system emphasises the formal
goals and values of the organisation itself the purpose of the undertaking and the
supporting sub-goals and value systems required to give expression to that purpose
throughout the organisation. For productive industry, goals and values are generally
expressed in terms of, or at least underpinned by, quantifiable targets profits,
numbers of units produced over time, etc.
Goals and values do change considerably over time and can have a significant effect
on other sub-systems. Take, for example, the impact of equal opportunities legislation
and the promotion of non-discriminatory frameworks and value systems over the last
few decades. This has required changes in both the structural and psycho-social sub-
systems.
(e) Managerial Sub-System
This last category concentrates attention on the mechanisms of coordination and
control, beyond the formal lines of the structural sub-system. It includes the form of
management within the organisation and the techniques employed to ensure that the
work is carried out effectively and efficiently.
Again, the managerial imperatives can exert their own requirements on other aspects
of the organisation. The best example of this is the concern with 'quality' across
activities customer care, total quality management which demands that values,
structures and technology are employed in a particular way in order to give proper
expression to the particular managerial purpose
We can now redraw our simple system diagram to take account of the sub-systems we have
identified:
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Figure 1.4: The organisation as a system
Technical
sub-system
Psycho-social
sub-system
Inputs
Structural
sub-system
Goals and values
sub-system
Managerial
sub-system
Outputs
Feedback
Boundary Management
The boundaries of a system separate that system from its environment: they define what is
part of the system and what is not. All systems exist within an environment, but we can
distinguish two types of environment that which is external to the system (organisation) as
a whole and that which is internal to the system (organisation). In open systems, resources
and information flow across both external and internal boundaries. Boundary management is
concerned with the interface between the system as a whole, or any of its sub-systems, and
the external environment, and between the sub-systems and their internal environment.
The work of writers like Trist and Bamforth points to certain guiding principles for boundary
management:
A flexible approach is needed to managing boundaries. External boundary
management is contingent on the nature of the environment. Internal boundary
management must smooth the interfaces between sub-systems (departments or
divisions).
Boundary management should be based on clearly identified objectives for each and
every sub-system.
The problems between sub-system interfaces may well be social, and this will call for
insights from the human relations approach.
Boundary management must smooth the differential influence of technology across the
system as a whole. A sub-system such as production is shaped by one type of
technology, while another sub-section is shaped by another type of technology.
Managers must deploy skills to reconcile these differences.

Levels Within the Organisation
Just as it is useful to classify certain organisation-wide elements to help clarify the processes
at play in the system as a whole, it is also useful to look at the different levels of process
within the organisation. Organisations are not just one monolithic structure, but have
different levels of operation which each have their own purposes, require different inputs and
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outputs and, hence, a different transformation or organisational process. We can identify
three main levels.
(a) Technical or Operational Level
At this level, concern is with getting the actual task done. For example, in a finance
department, the task may be the payment of creditors. The emphasis will be on
determining the most efficient and effective method of achieving this: the cost of doing
it (do you wait until there are sufficient cheques needing to be produced in a batch or
do them on demand?), the measurement of results, etc. The timescale under
consideration is generally short.
(b) Tactical Level
The second level is concerned with the coordination and integration of the technical
level. Here, the emphasis is on mediation and compromise between the various
constituents of the organisation in order that the whole enterprise can work well
together. To pursue our previous example, left to its own devices, the technical level
concerned with the payment of creditors might institute a system incompatible with the
system for, say, the payment of wages and that for accounting for expenditure. Thus,
in the finance function generally, the organisational level will determine overall financial
systems and policies so that the different activities fit together in a coordinated fashion.
The organisational level is concerned with both the short-term timescale of the
technical process and the longer-term needs for ensuring continuity and consistency
across operations.
(c) Corporate or Strategic Level
At this organisation-wide level the concern is to deal with the development of the
organisation in relation to its environment, considering the internal and external
pressures and uncertainties and forming policy judgements about responses. It is
about determining the future direction of the operation, the overall methods of
achieving development and gaining commitment.
The timescale for this type of concern tends to be long-term, although the exigencies of
environmental pressures often dictate a much tighter timetable for action.
Table 1.1 brings these concepts together.
Table 1.1: The organisation as a system of levels
Level
Technical
Tactical
Corporate
Task
Specific operations
Coordination of specific
operations
Selection of operations in
light of changing
environment
Timescale
Short
Short
medium
Long
Approach
Costing and
measuring
Mediation and
compromise
Forecasting and
negotiating
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F. CONTEMPORARY THEORIES: THE SEARCH FOR
ORGANISATIONAL DRIVERS
The most recent approaches to the study of organisations and management have been
empirical in nature that is to say, based on observation, although using more scientifically
acceptable techniques than the classical theorists. They have sought to identify features of
organisation and management which lead to successful and unsuccessful organisations, or
which are associated with particular types of organisation.
We can characterise these approaches as seeking to derive philosophies around which to
build the organisation driving forces which dictate appropriate forms of organisation and
management.
The work of Peters and Waterman, published in 1982, caused a great deal of interest, as
they concentrated on establishing what attributes contributed to a company achieving
'excellence'. Their investigation looked at successful companies in the USA and found 43
companies with 'excellence criteria' which set them apart from their competitors. Clutterbuck
carried out further research to identify factors as 'differentiators' that encapsulated customer
satisfaction with successful companies in terms of profitability and position in their respective
markets.
These researches made a considerable contribution to organisational and management
practices but they were relatively short-lived and have been overtaken by later researchers
seeking to identify what practices are vital to organisational survival and growth. There is
little doubt that, at the time, Peters and Waterman provided a substantial contribution to the
study of what organisations should consider to maintain their customer/client levels and
profitability. Some of their weaknesses, however, were as follows:
Five years after the investigation, many of the high-performing companies they
identified had failed specifically in the area of managing change and subsequently did
not maintain their competitive edge.
They placed insufficient emphasis on the significance of the cultural context in which a
company operates, in terms of both the country's culture and the culture within the
organisation. A longitudinal study reported in 2005 found that as much as 97% of
managing change is unsuccessful because culture has not been considered
sufficiently.
Peters and Waterman found that a strong family belief in an enterprise over several
generations can enhance the performance of the company. However, Townsend
concluded that family tradition can be a destructive force, because of the insularity and
nepotism which very often retarded innovation and therefore inhibited growth.

Excellence Theory
As already mentioned Peters and Waterman's study sought to identify what companies
needed to do to achieve excellence in terms of profitability and of being the market leader in
their business sector. Since their research there has been a plethora of studies carried out
mostly because of the changing trends in working patterns and employee expectations.
(a) Employee Engagement
Excellence in all of its varying definitions will only be achieved if employees are
engaged in and with the organisation's business objectives. It is difficult to achieve this
employee engagement because it is mostly associated with the level of motivation of
the individual. A contemporary organisation in unlikely to achieve high standards of
performance if this engagement is not present. Purcell's work with Bath University,
published in 2003, is crucial to the understanding of how organisations have moved
away from 'command and control' management styles with exclusive concentration on
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the customer, to a shift towards employees' expectations of an organisation, meeting
which in turn provides high-level commitment and loyalty and therefore achieves
customer satisfaction. Purcell's finding that a happy employee will achieve high
performance standards has been substantiated by further research. Pfeffer, Huselid,
Guest and Ulrick's investigations are noteworthy because of their relevance and
importance to the principle of employee engagement and how this reflects in the
sustainability of an organisation.
(b) Bias for Action
Even though the companies studied by Peters and Waterman were analytical in their
approach to decision-making, they were not restricted by too much analysis (what they
call 'paralysis by analysis'). Rather than create cumbersome committees generating
reams of documentation, small task groups are established, not so much to talk about
an issue, but to do something, even experimentally often by the 'standing operation
procedure of do it, fix it, try it'.
Managers should be flexible and responsive to change. The excellent firm thrives on
change and actively seeks ways of changing so as to improve itself. This 'bias for
action', however, requires the organisation to be tolerant, both of risk-taking and of
mistakes being made. Managers must show enterprise and be prepared to experiment
and innovate; people must not be afraid to make a mistake. Constantly playing it safe
in a firm leads to inertia and this is the enemy of excellence. When problems arise
managers must get to the root of them and take action to sort them out problems
should not be glossed over.
(c) Autonomy and Entrepreneurship
Excellent companies foster many 'leaders' and many innovators throughout the
organisation. People should not be held on so tight a rein that creativity is stifled.
Practical risk-taking is to be encouraged and such organisations are supportive of
'good ideas'. In the words of one chief executive, 'make sure you generate a
reasonable number of mistakes'. Being given the chance to try, even if your efforts fail,
is highly motivating.
(d) Close to the Customer
Excellent companies learn from the people they serve, often differentiating their
products to suit client needs. This is the essence of the marketing approach as
opposed to a selling approach. Everyone, from the highest to the lowest employee,
needs to be committed to the concept of customer service. Many of the most
innovative companies were found to have got their best ideas from their customers.
Excellent companies listen intently, and regularly, to their customers.
(e) Productivity through People
The excellent companies treated even their rank-and-file employees as a source of
ideas, not just a pair of hands. This is rooted in the concept of respect for every
individual, no matter how lowly his or her status. Putting this concept into effect helps
to break down the 'them and us' attitudes so prevalent in western organisations and to
generate commitment to the company, both of which can provide a direct boost to
productivity.
This is an essential corollary to the principles of both entrepreneurship and closeness
to the customer. Thus, managers must treat their staff at all levels in the firm as
valuable assets who should be given responsibility and encouraged to take risks to
improve the working of the organisation. They should also listen and learn from their
subordinates as well as their clients/customers.
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(f) Hands-On, Value-Driven
It is organisational achievement and performance that count, and overriding concern
for these derives from an organisational value system which demonstrably supports
and promotes them. Everything else is secondary. Peters and Waterman cite the
anecdote of the Honda worker who straightened the wiper blades of all the cars as he
walked past on his way out of the factory each evening because he was so committed
to the company value of perfection that he could not bear to see a 'flaw' in a car.
(g) 'Stick to the Knitting'
This premise relates to the injunction that you should never get involved in a business
or undertaking that you do not know how to run. The excellent firm concentrates on
what it does best and does not branch out into areas it does not fully understand.
This principle is principally concerned with the issues of acquisitions and mergers in
industry, but has application elsewhere as organisations seek to expand their range of
work. Although Peters and Waterman note that there are exceptions to this rule, the
odds on excellent performance seem to strongly favour those companies that stay
reasonably close to the business they know. In effect, they are saying that if you do not
have the expertise to achieve high levels of performance, leave it alone.
(h) Simple Form, Lean Staff
Although most of the companies studied were very large, they were characterised by
relatively simple management structures and relationships, without too many layers
and levels of authority. For example, none of them used 'matrix' forms of multi-
disciplinary project teams. Top-level staffing tended to be small and multi-billion dollar
enterprises had central corporate staff of fewer than 100.
(i) Simultaneous Loose-Tight Properties
There is a place for both centralised and decentralised forms of organisation.
One the one hand, the 'what' (key objectives, values and standards) should be centrally
determined and monitored for the whole organisation and no deviation should be
allowed. The organisation must have vision: it must know where it is going and how it
is going to get there.
On the other hand, the details of 'how' can be delegated. As long as the key standards
are maintained, individual departments should have as much freedom as possible in
determining how to attain them.
Theory Z
Ouchi developed this approach in an attempt to apply the lessons of Japanese organisation
and management styles and practices to the Western (mainly American) cultural experience.
(a) Japanese approach
It is worth reviewing the key points of the Japanese approach as a starting point. Ouchi
identified these as:

secure lifetime employment
consensual, participative decision-making
collective responsibility for decisions, standards and performance
slow personal development, evaluation and promotion
implicit, informal control based on the overriding value system
non-linear and non-specialised career paths
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(b)
holistic concern for the well-being of the organisation and all its employees
(including their families) in the widest sense.
Application to Western Organisations
In applying these to the context of Western organisations, one must recognise the far
greater emphasis in our culture on individual expression and responsibility, lack of
company loyalty, and the expectation of short-term and more immediate personal
rewards for performance. However, it is considered that some mitigation of these
tendencies, in effect some subjugation of the individual to the greater good of the
company is necessary. The key principle of the approach is, therefore, that the
organisation should develop a philosophy and value system which fosters commitment
to organisational goals through the following practices:

long-term security of employment
consensual, participative decision-making
individual responsibility for decisions, standards and performance
slow personal development, evaluation and promotion
implicit, informal control within a framework of explicit formalised measures
generally linear and moderately specialised career paths
holistic concern for the well-being of the organisation and all its employees
(including their families) in the widest sense.
Note the subtle differences in the development of these principles for application to
western cultural values.
Organisational Culture
Culture is quite difficult to define. When we speak of culture we know what it is and
what/how it is manifested in an organisation but a clear, unambiguous definition eludes us!
This is because culture can mean different things to different people, depending on their life
experiences, their background, religion, beliefs and values. Handy described culture in
organisations as 'the way we do things around here'. These 'things' are the accepted norms
and values of an organisation, developed over time into expected behaviour patterns. They
generally emanate from the top management level of the organisation; but this is not always
the case, and analysing culture can be a complex task.
It is widely recognised that different organisations have distinctive cultures, built up through
tradition, history and structure. Culture gives the organisation a sense of identity. As part of
the induction (introduction) process to the company, a new employee will learn very quickly
what the culture is within the organisation because of the legends surrounding the owners or
founders of the organisation. For example, they might have been autocratic with scarce
interaction with their employees, worked long hours and be critical of formal education and/or
qualifications. Their mindset might be 'work hard, and do as you are told' rather than
welcoming employee participation
There are several influential writers on culture, including Handy's work which is still
recognised in contemporary organisations. Hofstede, Trompenaars, Hampden-Turner,
Schein, Schneider and Barsoux and Deal and Kennedy, are all worth reading.
(a) Cultural Analysis
We can develop an understanding of an organisation's culture by considering the
attributes listed below.
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The organisation's goals particularly its mission statement and the extent to
which they are clear, communicated to and embraced by all levels of the
organisation.
The dominant behaviour patterns applying to the interaction within the
organisation and between the organisation and its stakeholders (its existing and
potential customers, investors, owners, etc.), in respect to both what is expected
and whether actual behaviour lives up to these expectations.
The distribution of authority and decision-making through the organisation:
basically along a continuum from authority being concentrated at the top or
spread downwards to teams of empowered employees working close to
customers.
The structure of the organisation, which is closely related to the distribution of
authority and may be easier to identify through the use of organisation charts,
etc.
The nature of leadership, which refers to the way in which power and authority is
exercised, again along a continuum from authoritarian to democratic.
The values of the organisation in terms of its responsiveness to the needs and
aspirations of its own staff and to those of its stakeholders.
The entrepreneurial spirit of the organisation, as revealed by the degree of
enterprise, innovation, competitiveness, flexibility and drive for excellence of the
organisation.
Its readiness to embrace change arising from changes in its environment,
particularly whether this is proactive (anticipating and planning for change) or
reactive (coping with change as and when it arises).

Corporate culture is extremely difficult to change. It should be recognised that it takes
a long time for employees to get accustomed to such change, as it can lead to tensions
between the organisation and the individuals within it. Cummings and Worley state
that it is imperative for senior management to be in favour of the culture change, and
their behaviour needs to symbolise the kinds of values that are required for the change
to be effective.
(b) The Learning Organisation
The kind of culture which promotes a learning organisation is one whereby learning is
not perceived exclusively as formal training programmes or what is referred to (as a
generalisation) 'short, sharp bursts of training'. Senge argues that organisations should
constantly seek to improve processes, production outputs (irrespective of whether the
company produces a tangible product, for example a car, or provides a service, for
example banking), and employee skills and knowledge. These elements are crucial to
the organisation's survival and/or growth. Burgoyne and Boyatis have separately
researched the need for organisations to create the kind of environment in which all
employees, irrespective of their occupational position, feel able to put forward
suggestions for improving any area of the business (which does not necessarily have
to be the area in which the employee works).
Since the principle of the learning organisation was first put forward, important work
has been carried out with the emphasis on 'knowledge management' (KM). The
principle of knowledge management is to enable all employees to transfer their
knowledge, either through a formal educational programme and/or from knowledge
gained as a result of their experiences, either in their current or previous jobs.
A learning organisation will not be created unless there is active commitment from
senior management, which is cascaded in practical terms to the lower levels in the
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company. A policy or procedure stating that the organisation's strategy is to become a
learning organisation will be useless if senior management does not lead by example
and create an ethos, which is transformed into practice, of supporting and developing
employees at every level. The strategy to improve processes, systems, skills and
knowledge must be clearly communicated and practised.
(c) Culture of Excellence
The characteristics of this type of culture were emphasised by Peters and Waterman,
but it originated in a seminal work by Deming, who was at first scorned by American
organisations for his ideas on quality and what organisations should be doing to
develop/sustain their levels of output while still achieving. high levels of customer
satisfaction. Deming later went to Japan, and it was from his ideas that the Japanese
derived the concept of quality by 'right first time, and zero defects'. Deming's principles
have for the most part survived in Japan, and his ideas were transferred into practice in
the UK mostly because of Japanese involvement in the car industry. Many
organisations still aspire to realise his ideas by embracing the ethos of 'zero defects'.
Characteristics of a culture of excellence include the following.
The role of leadership is crucial. Management should have a clear vision and be
able to provide the environment which motivates their staff towards the
achievement of the vision.
There should be an emphasis on quality and value for both the company and the
customer. A pricing policy should reflect these and show awareness of the
customers' expectations and specific requirements. Creativity and innovation
should become the cultural norm, where employees are actively encouraged to
put forward their ideas for changing processes, procedures and practices. A
blame mindset has to be eradicated; instead employees should not be
apprehensive about making mistakes, within a culture where taking risks (within
set parameters) becomes acceptable and part of the organisation's business
strategic goals.
Management and organisational structures should be flexible, to cope with the
turbulent external environment. Problem-solving and decision-making are cross-
functional, with employee involvement. The hierarchy of the organisation should
be appropriate to its place in the market; the fashion for downsizing or delayering
should not automatically be followed, although in many instances this might be
appropriate. Following 'best fit' instead of 'best practice' should become one of
the values of the organisation. Benchmarking, which is a process of comparing
and contrasting characteristics of other organisations against those of one's own
organisation, does have value, provided that the best practices identified in those
organisations are not emulated automatically. The important factor from
benchmarking is learning what best practices there are and then selecting those
which would fit comfortably with the culture of the existing organisation. That is of
course on the assumption that the existing culture is one that currently does not
need to change!

(d) Controlling Quality
In the past many organisations had a specific function termed 'Quality Control' to
ensure that goods and services were of an appropriate quality and acceptable to the
customer/client. The tasks of quality control were:
Inspection: products were inspected, then either judged acceptable or returned
for modification or wastage.
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Statistical sampling: in mass-production industries where standardised goods are
produced, random sampling would be used. For example, selecting a number of
produced Units from of each batch.
The benefits of quality control were that sub-standard goods were identified before they
reached the customer. There were substantial costs involved in this process, however,
and today fewer organisations have a quality control function. Many organisations
have instead put in its place procedures and systems whereby individual employees
are responsible for ensuring their own quality control in the product or service that they
provide to the customer.
This change has seen a substantial rise in employee motivation, loyalty and job
satisfaction, which is evidenced by Purcell's work as well as that of Ulwick, Pfeffer and
Guest. The willingness of employees to accept the responsibility in this way has been
highlighted by Bennis, Holbeche and others. There have to be reasonable and
therefore acceptable reward systems, high levels of employee participation in decision-
making, and goal-setting objectives that are based on sound to business plans. These
employee practices form part of a 'bundle' of benefits that motivate and develop
employees, in the manner Purcell and others identified in high-performing
organisations that were recognised by other organisations as being 'world class'.
Lack of quality, in contrast, is generally associated with:

Uninterested, untrained employees with low morale which creates low motivation.
Dissatisfaction with management styles which emphasise control and command
instead of empowerment.
Unfair practices, inequality and maybe discrimination.
Ineffective leadership: lack of interest in employees, lack of direction, inadequate
planning, and managers promoted to the level where they are incompetent and
have received no development or training to support their position.
Working conditions, reward strategies, policies and procedures that are rigid and
have barely changed over decades.
Lack of trust in management decisions (and sometimes also lack of integrity at
senior management and/or board level).

American and Japanese Corporate Culture Models
The direction of change in corporate cultures in recent years has tended to be from those
rooted in American organisational culture, towards a culture which owes much too Japanese
ideas. In addition, there has been a movement away from bureaucratic cultures towards
more flexible approaches. We can summarise the two corporate culture models as follows:
(a) American
The typical American organisational culture is characterised by decision-making
concentrated at the top, with instructions flowing down to subordinates (i.e. line
authority). We can see here the still considerable influence of Taylor and Fayol. In
accordance with this approach, few people are involved in planning and decision-
making.
This has the advantages stressed by the classical theorists: the objectives of the plans
and decisions are clear and unambiguous and decision-making is swift. However,
plans and decisions take some time to be implemented because they have some
distance to flow down the organisation. They need to be explained to the lower levels
and there may not be agreement or enthusiasm for these instructions among workers.
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Considerable bureaucracy tends to be present. Individuals have their areas of
discretion clearly delineated and are held personally responsible for results which stem
from their decisions.
Professionals operating within American organisations place their first loyalty to their
profession and see themselves as different from line managers, whom they regard as
'company men'. This is just one of several potentially conflicting areas in American
organisations; these become particularly apparent when the need for change arises in
the organisation.
The American corporate culture stresses the importance of short-term results. This
short-termism is an important influence on the organisations, producing a culture of the
hard sell and sometimes frantic activity. This cultural style is further reinforced by
rewarding individual results, a logical follow-on to holding individuals responsible for
their decisions and actions. Another feature of this culture is a sense of job insecurity
and rapid labour turnover; this in turn makes some firms reluctant to invest heavily in
long-term staff and management training.
The corporate culture of the USA favours strong, decisive leadership from the top.
Management is not afraid of confrontation and encourages competition.
Although many American firms do not fit the above model and many more are
attempting to change from it, the culture is sufficiently widespread to serve as the
model for organisational culture in the USA.
(b) Japanese
The typical Japanese organisational culture reveals many features in strong contrast to
the American model. Japanese decision-making tends to flow from the lower levels of
the organisation, with suggestions and ideas going up to top management and flowing
down again through consultations with people concerned. Bottom-up decision-making
encourages a culture of consensus, because people are likely to agree with decisions
where they have been involved with the decision-making process. However, there can
be drawbacks in that decision-making can be a long process and objectives may
become rather confused. Against this must be set the speedier, smoother
implementation of corporate plans and decisions.
The corporate culture in Japan tends to be more informal and less bureaucratic. All
staff, including professionals, are likely to owe their first loyalty to the firm. The
Japanese culture is far more collectivist; rather than rewarding individual results it is
the work group that is rewarded for good results. Japanese pride is in the group or the
organisation, not in the individual. This collective culture also applies to decision-
making, where many techniques are used to involve workers at all levels in the
planning and decision-making process.
The loyalty of Japanese employees to their organisations is reciprocated by the job
security offered to them. In many organisations there is lifetime employment, and as a
result firms are confident that their staff will remain with them. This, in turn, encourages
firms to undertake long-term, expensive training schemes, thus benefiting both staff
and organisation. The Japanese approach stresses the value of long-term results; in
consequence a calmer and more co-operative culture develops.
The value of consensus and agreement is reflected in the leadership style of Japanese
culture. The Japanese see the leader as primarily an enabler: the role of the leader is
to assist a group or section to achieve its objectives. The enabling role is carried on
through consultation, and subordinates are encouraged to help with suggestions.
Control is less authoritarian in Japanese organisations than in parallel American firms.
The Japanese culture encourages control by the group rather than by superiors;
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because results are measured in group terms it is in the interests of the group to see to
it that all group members are pulling their weight.
In summary, Japanese corporate culture has been more stable and democratic, has
greater consensus and takes a longer-term view than the American corporate culture.
Strategic Business Units and Internal Marketing
When large organisations produce a number of products or services they may split their
activities into a number of relatively autonomous divisions, known as strategic business units
(SBUs).
SBUs develop entrepreneurial culture within large organisations by being responsible for
developing, producing and marketing their own product or service. Each SBU can be
benchmarked for effectiveness and efficiency, so there are strong incentives to perform well.
SBUs may be profit centres, that is the units are responsible for both revenues and costs.
Another technique that develops entrepreneurial culture is internal marketing. This involves
divisions, departments or units marketing their products or services to other units within the
same organisation. The providing units satisfy the needs of the other units just as if they
were external customers. They meet the consuming units' needs for the right products at the
right price; of the right quality, in the right place at the right time. Supporters of internal
marketing argue that it increases effectiveness and efficiency by bringing the discipline and
culture of the market into the organisation itself.
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35
Study Unit 2
The Context of Organisations: Analysing the Environment
Contents
Introduction
A. The Organisation in its Environment
Classifying the Environment
Nature of Environments
The General External Environment
Political/Legal Environment
Economic Environment
Social Environment
Technological Environment
Current Trends: Globalisation and E-Commerce
The Specific External Environment
Customer Analysis
Supplier Analysis
Competition Analysis
The Internal Environment
Resources
Products
The Internal Organisation
Results
Conducting an Environmental Analysis
Forecasting
SWOT Analysis
Comparative Analysis
Stakeholder Analysis
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C.
D.
E.
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36 The Context of Organisations: Analysing the Environment
INTRODUCTION
No organisation exists in a vacuum. An organisation is affected by (and in many ways will
affect) the environment in which it operates. We saw in the last Unit how, when we consider
the organisation as a system, the inputs are derived from that environment and outputs flow
into it from the organisation.
In order to understand the nature of the organisation, therefore, we have to understand the
nature of the forces in that environment which shape it. This is, as we shall see in the next
Unit, an essential part of the planning process. All organisations need to identify the trends
and processes at work in the outside world which have a bearing on the way they operate.
They need to assess the implications of those trends and take appropriate action to
incorporate those implications in their future operations.
By the term environment we mean not just the physical surroundings of the organisation, but
also the economic, social, legal, political, and technological environment. Also, the
organisation must be aware of, and will react to, the market in which it operates and the
nature of the competitive forces it faces. The nature of the organisation itself is also
important: the resources it has, the organisational culture, the nature of the product or
service, the capabilities of management, are all amongst the factors that dictate the type of
organisation it is.
In this Unit we shall review the major environmental forces which influence organisation and
management. We shall also introduce some of the techniques used to analyse these forces
and prepare assessments of their impact.
A. THE ORGANISATION IN ITS ENVIRONMENT
At the outset, we need to establish a framework for understanding the nature of the
environment or, rather, environments within which organisations exist.
Classifying the Environment
A common way of showing the environment in which an organisation operates is by means of
a series of concentric circles, with the organisation in the centre and various 'levels' of
environment radiating out from it (see Figure 2.1).
At the centre we have the organisation and factors which we can describe as being
'internal'. These would include resources, employees, the nature of the product(s), the
structure and culture of the organisation, its technological base, etc. In essence, these
factors can be controlled and determined by the organisation.
Immediately surrounding the organisation is the 'specific external' environment i.e.
those factors which are external to the organisation but relate directly to it. The factors
might include the nature of the industry, competitors, customers and suppliers. It could
be said that these are factors in the immediate market within which the organisation
operates. As such, the organisation cannot directly control them, but may attempt to
'manage' them to its advantage. As a result, objectives relating to the management of
the specific market environment will often appear in the organisation's goals.
In the outer ring is the 'general external' environment which will affect all
organisations. Factors here include the political environment, the economy generally,
society at large, etc. These factors are largely out of the control or management of the
organisation. Rather, the organisation has to act in response to them. It is, therefore,
important to recognise exactly what these factors are, how they may change and how
they impact on the organisation.

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The Context of Organisations: Analysing the Environment 37
Figure 2.1: The environmental context of organisations
Technology Environmental
Employees
Social
Customers
Legal
Share
Holders
THE
ORGANISATION
Suppliers
Economic SPECIFIC ENVIRONMENT
Political
GENERAL ENVIRONMENT
Nature of Environments
It is clear that environmental factors internal, market and external may have a significant
impact on the organisation. Environmental analysis is concerned with identifying how the
various factors interact with an organisation. Johnson and Scholes suggest that there are
two key characteristics of the environment which need to be assessed.
(a) Its dynamics: in other words, how rapidly the environment is changing. Where
changes are predictable or relatively slow, the environment is said to be stable, whilst
uncertainty or rapid change would suggest that the environment is unstable or
dynamic.
Its complexity. Complexity arises from three factors:
The amount of knowledge necessary for the business to operate. For example,
all businesses would have to know about the regulatory environment relating to
the employment of people, whereas only a business in chemical manufacturing
would require specialist knowledge relating to the control, storage and safety
matters of the chemicals it manufactures.
The way in which environmental factors interrelate. For example, a holiday
company will be affected by the price of aviation fuel, which itself will be affected
by exchange rates, which are affected by interest rates. Computer modelling
techniques which try to predict changes in one or more of these factors have
greatly improved the ability to forecast such complex situations.
The variety of influences faced by an organisation. The greater the number of
influences, the more complex the environment.
(b)

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B. THE GENERAL EXTERNAL ENVIRONMENT
The usual way of analysing the general external environment is to consider the key factors
under four headings, characterised by the acronym PEST.

Political/legal environment
Economic environment
Social environment
Technological environment
(Note that you will sometimes see the political and legal environments separated out, with the
acronym changing to PESTL or SLEPT.)
We shall examine each of these four component environments below. However, you should
note that, although an environmental analysis tends to consider each separately, it is clear
they are all interrelated. We will take a simple but topical example. Technological advances
now make it possible to 'alter' the genetic make-up of some plants and animals, for example
to make them grow bigger, more resistant to certain diseases, etc. In many respects this
could be good news, particularly for the food industry. Farmers might be able to produce
more crops on their land, or crops specifically designed to meet consumer tastes or desires:
cholesterol-free eggs, for example, for those with heart disease. However, many people find
the concept of genetic engineering worrying or even distasteful and public outcry at the use
of such ingredients in food has led to the government passing food labelling regulations
requiring producers who use GM foodstuffs to label their products accordingly, so that
consumers can decide for themselves whether to purchase those products. Within this
example, you can see there are aspects of political, economic, social and technological
factors. In response to these factors, and in particular to the adverse press coverage of
public concern over GM foods, many organisations have publicly announced they will not be
selling foods containing genetically modified ingredients. This may well affect production
processes and purchasing options for those organisations in future.
Political/Legal Environment
The political environment within which an organisation exists has far-reaching
consequences. Governments, through their legislative powers, determine the legal and
regulatory framework applying to business and the public sector. They also give direction to
a country through the way in which they exert control over the economy. The political
environment most obviously operates at national level, but may also be significant at local
and international levels.
Organisations must operate within the regulatory environment applicable to the country of
origin. You should be familiar with the general framework of company and business law and
their impact on the conduct of business and aspects of the structure and organisation of both
private and public bodies. Businesses are subject to criminal law in much the same way as
individuals, and there are also a number of specific criminal laws which apply only to
businesses.
As well as this general legal environment, many industries are subject to special areas of law
which govern the way organisations operate, or develop, produce and market their products.
One example might be the regulatory framework governing the financial services industry
which imposes special rules about the way the industry operates. Another good example of
the way the legal environment operates is in the public sector where there may be statutory
restrictions on the powers of managers to adopt particular strategies.
Some areas of law have a greater impact on an organisation than on others. All businesses
are subject to health and safety legislation, for example, although it is clearly of greater
significance to a manufacturing organisation than, say, a financial services company.
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In many cases, control is exercised, at both local and national level, through the application
of regulations, such as planning permission for buildings or restrictions on advertising
campaigns. An example of the latter is the government's decision to ban tobacco company
sponsorship of most sporting events.
The application of regulations and the codification and establishment of laws are frequently
the result of political decisions, both nationally and internationally. The government's attitude
to, for example, offering incentives for investment or protecting the rights of employees can
have a significant effect on businesses. For example, the national minimum wage was
introduced as a result of a pledge in the Labour Party's manifesto to consider the plight of the
very low paid. For some industries, particularly in the areas of catering and care, this had a
significant effect on costs which led to changes to employment practices in some industries
and changes to personnel policies.
As noted above, political direction can be effected through general economic policy and
specific measures, such as the use of tax reliefs and grants to influence business locations or
start-ups.
At the international level, the EU is having an increasing effect upon organisations, both
through the legal system principally by the issue of Directives (such as those on packaging
and recycling) and economic policy and measures, especially in relation to trade.
Businesses can and do lobby government to put forward their own view on government
policy or proposed changes in legislation. Indeed, this is seen by many organisations as a
key means of creating a positive environment within which to operate. For the most part,
changes in legislation rarely take place without consultation or at least some warning, and
this provides an opportunity to influence the process. Many firms are members of interest
groups of various kinds trade or professional associations, and of representative bodies
such as Chambers of Commerce and the CBI through which their viewpoints may be put to
government. They may also join pressure groups to campaign on specific issues.
In the established democracies of the highly developed countries, the political environment is
relatively stable. Major shifts in government policy are generally rare and change tends to
occur incrementally. The legislative process tends to be lengthy and intentions are often
signalled well in advance, which allows organisations to plan ahead. This is even true when
there is a change in government, although many organisations will establish contingency
plans for coping with possible scenarios arising from changes in the environment.
The situation is more unstable at the international level, and particularly so in relation to the
many countries around the world which do not have a political consensus and are subject to
more radical shifts in the policies of different governments. The issue of political risk is
important for organisations operating in the international arena. This includes the instigation
of restrictions on trade both by a country protecting its own businesses and by the
imposition of sanctions limiting or preventing exports to unfavourable (in the eyes of the
government) regimes as well as appropriation of assets and even the risk of war.
Economic Environment
This clearly overlaps with the political environment in the area of government economic
policies, but here we are concerned with the interplay of market forces as well as the state of
the economy and the implications that has for both commercial and non-commercial
organisations.
The major impact of the economy may be felt in the availability and, hence, the price of
the factors of production. Land, labour and capital (in the form of new funds) will vary with
the state of the economy and this will be reflected in a wide variety of indices such as levels
of demand, interest and exchange rates, prices, wages, level of competition, etc. When an
economy is growing, funds tend to be widely available, interest rates will be low and demand
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high, although labour and natural resources may be scarce and hence more expensive. In
times of recession, the opposite tends to be the case.
Organisations need to understand both the trends in the economic indicators and what these
mean for the enterprise in which they are involved. As with the political environment, we can
say that the economic environment is relatively stable in that change is generally slow and,
with governments becoming more adept at controlling the fluctuations of the business cycle,
there are few major shifts in economic conditions. However, these conditions do change
continually at the margins: interest and exchange rates rise and fall, the availability of natural
resources fluctuates and can be restricted by a variety of forces, the availability of
appropriately skilled labour may vary, etc. The extent to which an organisation is exposed to
these changes will vary with the nature of its business. Note that growth and recession do
not necessarily mean good times and bad times for all organisations. Each presents their
own opportunities and threats.
Again, as with the political environment, the economic environment may be considered at
three levels.
The state of the local economy can have a significant effect on such aspects as local
infrastructure, the availability and cost of appropriately skilled labour, the cost of land,
etc.
National economic trends comprise a variety of factors, such as population growth,
rates of inflation, interest rates, unemployment rates, taxation, government subsidies,
public expenditure policies, etc. For the most part it is national trends which tend to
interest strategic planners most and are likely to have the greatest impact on
businesses.
At the international level, economic trends can be significant too. Comparative growth
rates, inflation, exchange rate changes, etc., can become a deciding factor when
exporting or importing or considering international business. As we move towards a
more global economy, international trends begin to impact directly on national trends.
For example, a contracting overseas economy can result in fewer goods being sold in
that country, resulting in a downturn in profits, layoffs and redundancies amongst
companies exporting to that country. Another example is when sterling is strong
overseas, which makes British goods appear relatively expensive to overseas
customers, so exports fall.

A major factor in the international environment is the establishment of the Euro and how this
is impacting on the economies of both those in the Euro zone and, importantly for the UK,
those outside it. This may have implications at the national level, particularly in respect of
inward investment.
Social Environment
Social change involves changes in the nature and norms of society. In particular,
organisations need to understand the trends in demographics and the cultural environment.
These areas are relatively stable on one level, in that it is rare for there to be seismic
changes across society as a whole. However, change at the local level can assume great
significance, and at times this can make the social environment very unstable.
(a) Demographic Change
Demography is the study of population dynamics, which has wide implications for both
the nature of the workforce and the markets for goods and services. Overall, the size
of populations does not change rapidly, but, there can be big fluctuations in its
composition over relatively short periods of time, particularly at a local level.
Key demographic factors which organisations need to monitor include:
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The rate of growth or decline in population, either nationally or locally (or both),
including the amount of immigration or emigration.
Changes in the density of people in particular regions, such as the movement
away from certain geographical areas.
Changes in the wealth of people, i.e. whether people have increasing or
decreasing levels of disposable income; this can vary regionally and even on a
quite local level.
Changes in the ethnic structure of an area, which can have a profound effect
upon both the workforce and the local markets.
Changes in household and family structures: for example, the increasing
numbers of single-parent families.
Changes in employment patterns: partly as a result of changes in the legal
environment, there is a growing trend for people to be employed on shorter-term,
more flexible contracts with more flexible working conditions, although it is still
true that the majority of the workforce in the UK works in permanent, full-time
employment. There has also been a growth in the number of women in paid
employment, and a significant growth in the number of women who return to work
after having children.
Changes in the age structure, locally or nationally. In the UK there is a trend for
an increasing proportion of the population to be over the state retirement age,
whilst in developing countries the trend is for an increasing proportion of young
people.

(b) Cultural Environment
The concept of culture can be difficult to define, but generally it incorporates aspects of
peoples' beliefs and values, behaviour and thought patterns. Sometimes there are
visible signs of culture, such as a style of dress, the adoption of rituals, ceremonies,
etc, the predominance of a particular religion, for example. Other aspects of culture
are less easy to recognise, such as the value structure of a society. Cultural influences
are not just at a national level but can also be reflected within regions, ethnic
background, class, age or sex.
With globalisation, there is a trend for certain aspects of (mainly Western) culture to
become established as an international norm. However, this masks huge variations in
national and regional values and beliefs.
In 1980, Professor Geert Hofstede attempted to identify key dimensions of common
culture in different countries. The result identified four main dimensions which
differentiate between different national cultures. You should note, however, that
Professor Hofstede's research did not include the Middle East, the Caribbean or Africa,
so is not representative of all countries. It did, however, include most of Europe, the
Far East, America, Australia, South America and the United Kingdom.
Power Distance
This measures preferred management styles in different cultures. A high power
distance refers to an autocratic style of management, when a manager decides
on a course of action and subordinates follow. France, Argentina, Brazil and
Spain were found to have a high power distance dimension, indicating that an
autocratic style was expected and preferred. On the other hand, the US, UK and
Australia have a low to medium power distance. This might explain why
concepts such as management by objectives were readily accepted by countries
such as the US (where it was developed) and the UK, but not by France.
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Uncertainty Avoidance
This dimension indicates the extent to which some cultures prefer clarity and
order whereas others are prepared to accept innovation. This dimension,
therefore, could indicate willingness to accept change.
Individualism/Collectivism
This indicates the extent to which importance is placed on the individual rather
than the collective good. A collectivist culture tends to stress the way people are
supported as a group. Teamworking is a work pattern favoured by the collectivist
approach. In the UK, which has a high individualism dimension (indicating an
emphasis on the individual, often characterised by elements such as bonuses for
individual performance), teamworking has been difficult to introduce.
Masculinity/Femininity
This dimension measures the degree of importance the culture places on
assertiveness, possessions, status and achievement, all described as masculine
traits. Countries with a high level of masculinity such as the UK, US, and
Australia contrast with countries such as Scandinavia and the Netherlands, which
value quality of life, sympathy and service.
Whilst Professor Hofstede's work is not universally accepted, it is possible that national
cultural differences could explain why certain techniques, styles or factors work in one
country and not in another.
Knowledge of a culture of a society is of value to organisations for several reasons.
For example, the acceptance of products or even working practices can be affected by
the way those products or working practices appear to 'fit' the culture of the society.
There is a famous story about how a refrigerator manufacturer failed to sell a single
refrigerator in Saudi Arabia after its advertising showed the refrigerator filled with a very
large ham and cans of beer (Saudi Arabia being a Muslim country which does not allow
the consumption of pork or alcohol).
The ethical environment is often linked to culture because it is based on values and
beliefs. The concept of ethical standards in business relates to what is considered the
right and wrong way of going about something. It is not necessarily compliance with
the legal environment (which may itself not be very 'fair'), nor is it necessarily
compliance with any contractual obligation. In broad terms, business ethics is
associated with honesty and fairness, which are themselves rather subjective
concepts. Culture comes into the equation because what might be considered
dishonest in one culture might be considered ethical in another.
We shall return to the issue of ethics in management practice in Unit 8.
Technological Environment
When we talk about the technological environment, we include three aspects: equipment, the
method of using that equipment, and the organisational requirements of using the equipment.
These days we tend to use the term 'technology' to imply some computer application, but in
its widest sense we should be considering all types of equipment, systems and procedures.
Changes in the technological environment can impact directly on an organisation's ability to
carry out its objectives. Improvements in machine capability, the systems employed or the
way the organisation uses that machinery can, for example, improve productivity or reduce
costs or improve the way in which a service is delivered.
(a) Technological Change
The technological environment is complex and dynamic. Organisations find it difficult
to plan effectively in such unstable conditions where new developments can
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revolutionise the way in which operations are carried out very quickly. Such changes
have included the following.

Changes in production or working methods: for example, robots, containerisation
for storage.
Effects of new technology on staffing: for example, less need for manual workers
and more demand for technical support and administrative staff.
Improvements in communications: for example, networking of PCs,
videoconferencing, and mobile phones all allow more people to work at home
and reduce the need for large central offices. And who could have predicted the
changes to our working and social lives that Internet technology has brought?
A plethora of new products, which in turn open up new markets: for example,
ever-faster home computers with CD-ROM drive.
Innovation in communications technology in particular has probably brought about
major opportunities in recent years. Access to the World Wide Web has enabled even
small rural businesses to operate globally which previously would have found it difficult
to sell their products nationally. Consider the case of organic farming. Previously,
organic farmers found it difficult to sell their produce because of the premium price they
charge. The market has traditionally been relatively small and localised. Helped in
part by the BSE crisis, ICT enabled small local producers to advertise their produce
internationally and many farmers are able to export much of their produce.
The ability to transfer data over vast distances with little effort and in a seamless
fashion has enabled many organisations to transfer their operations to areas where
skills are more readily available or costs are lower. Your local-rate telephone call to
book an engineer to service your washing machine is probably dealt with in a call
centre many hundreds of miles away where premises, rents and wages are lower. The
only clue is the slight regional accent of the telephone operator who takes your call! He
or she will, of course, have instant access to your details via a computer screen and
may even have a map of your area in order to locate your house. This trend has also
gone international. For example, in 2000 GE Capital Bank, a finance company
managing store cards for a number of high street retailers, announced that it was
moving its customer service call centre to the Far East. Store card holders would
continue to dial a UK local number and be automatically transferred to the call centre
where local staff would be able to answer queries from account holders, process
electronic payments, etc.
(b) Computerisation and IT
Computerisation, in particular, can have a variety of effects on business, not all of them
positive:
Automated processes for manufacturing mean there is less need for traditional
manufacturing skills and operations are carried out with less human intervention.
Manual or physical skills are superseded by skills in interpreting or manipulating
data.
Technology creates new products, as in digital televisions making analogue sets
obsolete. Not only television manufacturers have to adapt to this, but so do
service industries based upon the home entertainment market.
Technology can also change the way goods and services are provided and
delivered. The growth in e-commerce means that it is now possible to shop for
almost any item worldwide without having to leave your home. Not only does this
mean that manufacturers and retailers will be forced to become competitive
globally, rather than just nationally or regionally, but it also means that retail
outlets decline in significance as compared to websites. At the same time there

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are potential opportunities for smaller localised warehousing and delivery
operations.
The major supermarket chains offer an Internet-based shopping service for
everyday groceries; customers can access the company website and order their
groceries online, paying by debit or credit card. For a small delivery charge the
goods are delivered to your home address within about 24 hours (depending
upon the location of the nearest store or warehouse).
Database systems have made it easier to analyse marketing information for
some years now. Combined with greater access to information on buying habits
through store cards and loyalty cards, the way in which markets are identified and
reached has been greatly enhanced.
Tesco is one of the major supermarkets to have developed the potential of the
loyalty card. Ostensibly introduced to 'reward' customers for continuing to shop
at the supermarket, data collected about the buying habits of card holders when
they present their cards with their shopping at the checkout has enabled Tesco to
identify target markets for products and services with much greater precision.
For example, Tesco can now 'encourage' their customers to purchase particular
products by offering discounts for bulk purchases set slightly higher than the
customer's usual amount say offering 1 off the price of wine if the total
transaction amounts to 7.50 or more. Customers who would normally purchase
the product with an average transaction size of 6 may well purchase more in
order to benefit from the discount. Judging average transaction sizes is relatively
simple using data from the loyalty cards.
Technology has enabled greater access to information for decision-making
purposes, both from within the organisation and outside it. Management
information systems and decision support systems take data from that already
available within the company and re-present it in a format that managers can use
to aid decision-making. For example, information on the payment history of a
customer can help to make decisions about the creditworthiness of the customer.
The Internet enables managers to access huge amounts of information on just
about any subject and e-mail enables managers to share that information within
and outside the organisation. Whilst this might sound like good news, it has been
said that information overload is becoming a serious problem in some
organisations. There is a tendency to copy e-mails to anyone who might
remotely be interested (and to several who are not but are seen as being
politically sensitive and therefore worthy of a copy if only to prove that the sender
or forwarder is active) to the extent that some employees spend vast amounts of
time just sifting through useless information copied to them.
Technology has changed the very structure of many businesses by enabling
more flexible working patterns and allowing people to work from locations other
than the traditional office. With less direct supervision, managers have had to
change their management style and there is often more emphasis on monitoring,
particularly by sampling, where direct observation is not possible.

Current Trends: Globalisation and E-Commerce
Before we leave this examination of the general external environment, it is worth noting two
recent developments which are having a significant impact on many organisations.
Globalisation and the emergence of e-commerce tend to cut across the simple division of
external environmental factors in the four categories considered above and introduce further
complexity and dynamics to that environment.
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(a) Impact of Globalisation
Think carefully about the many products that you are aware of. See if you can write
down the names of at least five global brands.
Were you able to name five? How did you know they were global? You probably listed
Coca-Cola, Pepsi, and McDonalds. No matter where you go on holiday you are likely
to see some or all of these brands. Ford and Boeing would be other contenders. All
these companies operate on a global scale.
Did you list any British companies' brands? Rolls Royce is probably one and Virgin is
becoming another. Firms like Harry Ramsdens (the Yorkshire fish and chip shop) are
opening shops across the world in the hope of becoming global companies. All these
companies have expanded globally to exploit world markets.
The drive towards globalisation has been brought about by a number of factors:
primarily political, economic and technological. The advances in travel brought about
by cheap air fares, relatively cheap telephone systems, computerised, fax and video
communications have all enabled businesses to develop on a global scale. Declining
trade barriers, the collapse of the Iron Curtain, and growth in international finance
markets have helped to facilitate the expansion of multinational companies.
Globalisation impacts on businesses in a number of ways, each with their
organisational implications.

It opens up new markets, but differences in local needs often dictate that product
differences are required for different countries.
It gives scope for obtaining source materials from different countries with
technological or cost advantages.
It requires different management skills, particularly with regard to language skills
and the appreciation of cultural differences.
It provides opportunities for employee development through experiencing new
cultures and methods of managing.
It requires the adoption of technological solutions to communication problems.
(b) E-Commerce
The spread of the Internet throughout the world has created the conditions for
conducting business through computers in a truly global marketplace: buying and
selling, marketing and providing information. E-commerce must surely be the fastest
developing system of commerce that the world has ever seen. There is little point in
talking about how many websites there are, or how many people are connected to the
World Wide Web. Tomorrow the figures will be outdated.
In this course we are not concerned with the technicalities of the Internet. We do,
however, need to be aware of how it is affecting business in the early 21st century and
the implications for organisation and management.

E-commerce is no respecter of size. Businesses employing one person, right
up to multinationals, can take advantage of a site on the Web and begin trading.
E-commerce is no respecter of political and geographic boundaries. Once
the infrastructure of the Web is in place, access is available for the cost of a local
phone call in any country in the world. In addition, the legal framework applied to
commercial activities in one country cannot bind businesses operating from
another. Hence a number of Internet betting companies have set up in countries
with few or no restrictions or taxes on gambling, and have attracted customers
from countries who do have such taxes or restrictions.
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E-commerce is no respecter of truth. There is no mechanism or inherent
censorship which guarantees that the information on the Web is true or moral.
E-commerce is economic. Small businesses can use a web design service to
host their own web page for a cost of, typically, 25 a month, or sign up with an
online directory for as little as 10 a month. Businesses can also become more
competitive through the Web as a result of not having the cost of shops and front
offices. A report from the USA listed the following relative costs of a banking
transaction:
In a branch office
By telephone
ATM
By Internet
$1.07
$0.54
$0.27
$0.01
$10.00
$2.00
Similarly, the cost of selling a holiday was as follows:
In a travel agent's office
By Internet
E-commerce delivers results. A small bed and breakfast business in Cornwall
reported taking bookings from America, France and Germany through the
Internet, and it has become a major source of customers for airlines.
E-commerce is a security risk. By inviting other computer users into your
system you run the risk of them getting into (hacking) other parts of your system
not designed for their entry, and causing damage to your business and systems.
There are also risks from viruses, and concerns have been expressed about the
security of personal information transmitted and held.

C. THE SPECIFIC EXTERNAL ENVIRONMENT
One of the characteristics of the general external environment is that, by and large, the
organisation is not able to control it. It may attempt to influence the political and legal forces
to which it is subject, and there is a degree of choice about the way in which it reacts to
technological change. However, in essence, organisations have to be responsive to change
in the factors we have discussed so far.
The specific external environment encompasses those factors external to the organisation,
but with which the organisation directly interacts. These comprise the markets from which it
obtains its inputs of materials, labour and finance, and the markets into which the outputs of
goods or services flow. To some extent, the forces at play in these markets are drawn from
the general external environment: for example, economic and demographic factors.
However, there are a range of factors here which the organisation can directly influence
customers and consumers, competitors through its actions. Whilst they cannot be
controlled in the same sense that, for example, the organisation can determine its own
organisation and management structures, the way in which the enterprise organises its
interactions with these market forces may have a profound effect upon its effectiveness and
success.
Customer Analysis
The customer base of an organisation lies at the heart of the market. After all, there is no
point in producing goods or services that customers do not want and the way in which the
organisation relates to its customers meeting their various needs will determine its
success or failure in the market.
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Organisations need, therefore, to understand their customers. They need to be clear about
who they are, what they need in terms of the products offered and how these products are
supplied and supported.
Key elements of any customer analysis might include:

Demographic characteristics of customers: age, gender, class, wealth, ethnicity,
geographical spread, etc.
Relationship with products: types of product purchased (and why), average order size,
order frequency, etc. and other products (own or competitors') purchased.
Size of the customer base and whether it is growing, stable or in decline.
Relationship between customer and organisation: attitudes towards the business,
satisfaction levels, etc.
As before, it is not only the current situation which is important, but the trends that the
analysis shows. Thus, whilst satisfaction levels may be high, the trend may show decline
and that needs to be addressed.
Any analysis should consider both existing and potential customers. However, the cost of
such an analysis must be weighed against potential benefits and, as a result, many
organisations tend to concentrate on key customers. Whilst this approach is understandable,
no organisation should ignore the smaller customers. One potential way around the
cost/time problem is to group smaller customers together by some criterion such as
geographical location, customer type, typical order size, etc.
Customer analysis should not be understood to apply just to the end consumers of products
and services. For many organisations, customers include partners in the supply chain,
particularly retailers. The role of the large supermarket chains has caused some concern in
recent years. As the largest customers of food manufacturers in the UK, they exert
tremendous power in the food industry. To sell products through one of the major
supermarket chains requires a producer to comply with the supermarket's stringent
requirements in terms of quality of product, price, marketing techniques, customer service,
etc. Failure to meet those demands can result in the supermarket refusing to stock the item.
Supermarket chains are often blamed for troubles in the British farming industry. It is alleged
that they have forced down the prices they are willing to pay meat producers to the point that
farmers, particularly small producers, find it difficult to cover their production costs; yet there
are few other outlets for meat products as many high-street butchers have closed in the face
of competition from the supermarkets.
It is not just supermarkets which can exert this kind of power over producers. The relative
bargaining strength of a customer or group of customers will depend upon a number of
factors, such as the availability of alternative products, how much the customer pays and
how important the purchase is to the customer, as well as how important the customer is to
the supplier.
Supplier Analysis
Not only do organisations need to look forward in the supply chain to their customers, but
they also need to look backwards to their suppliers. Relationships with suppliers have
received great attention in recent years, particularly through such practices as quality
management and just-in-time production.
The bargaining power of suppliers can be a major force on the organisation. Their ability to
dictate the conditions of supply price, quality, availability, etc. will depend upon a number
of factors. Some of these are whether the supplier is in a position to charge monopoly
prices; whether there are any substitutes for the product; the importance of the supplier's
product to the customer; and the cost of switching to a new supplier.
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Competition Analysis
Competition is one of the most significant external forces that an organisation faces. It does
not matter whether an organisation is in the private, public or not-for-profit sector; all
organisations face competition. Even a sports or social club faces competition from other
social activities available in the immediate area.
Much research has been done on competition and the effect it has on organisations. One of
the most respected writers on the subject is Michael Porter who has researched competitive
forces for industries as a whole and within industries. He suggests that there are five basic
competitive forces which influence competition within any industry:

The threat of new entrants to the industry
The bargaining strength of customers
The bargaining strength of suppliers
The availability of substitute products
Rivalry amongst current competitors.
We have considered customers and suppliers above. Here we shall review the other three
elements.
(a) New Entrants to the Industry
To break into a market, a new entrant will have to make a certain amount of investment
and therefore will want to capture a certain proportion of market share to make the
returns worthwhile. To do so, the new entrant will have to overcome barriers to entry
(factors which discourage new entrants). Typical barriers to entry include:
The amount of capital necessary for a new entrant to invest. This will depend
upon the nature of the industry, but high capital requirements represent a strong
barrier to new entrants, particularly if the investment is relatively high-risk.
Traditionally, well-established markets tend to represent high start-up costs, as
any new entrant will be faced with the prospect of taking customers from the
established companies and will therefore have to spend heavily on marketing to
build up a brand image of their own, unless they can establish a niche market.
New entrants to a market are unlikely to be able to benefit immediately from
economies of scale that existing competitors will have established. As a result,
the costs incurred by a new entrant will be higher than those of existing
competitors. Similarly, existing producers will have built up technical know-how,
favourable supply terms, patent rights, etc., which the new entrant has to
compete against. On the positive side, however, sometimes a new entrant is in a
better position to benefit from technological advances more easily than an
established producer, who will have existing equipment, etc., in place.
Customer loyalty for existing products may have to be overcome if the market is
well established and unlikely to grow much more. This will be much easier for
new products or where there is a perceived difference in the product.
If customers are likely to incur costs for switching from one product to another,
this will act as a deterrent to purchase an alternative and create a barrier for the
new entrant. In this respect, the term 'costs' should include time, inconvenience
or opportunity costs and not just financial costs. For example, many people keep
the same insurance company for all their household and motor insurance
requirements, simply because they 'can't be bothered' to get alternative quotes
from other insurers at renewal time. It is too inconvenient to do so.

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Access to distribution channels can also act as a barrier to entry. For example,
most foodstuffs in the UK are sold through supermarkets, yet persuading a
supermarket to stock a new product can be difficult.
In order to guard against new entrants increasing competition, existing businesses are
likely to adopt both positive and negative strategies. Positive ones will be to build up
customer loyalty and drive down costs and prices, whilst negative action can be
through preventing supply and distribution chains being penetrated by competitors, as
well as negative advertising.
(b) Availability of Substitute Products
By using the term substitute we mean an alternative product or service as well as the
same product or service from another source. Thus, whilst a tennis club may be face
competition from, say, a leisure centre offering tennis facilities as well as a squash club
and sauna facilities, etc., it may also be threatened by alternative ways of spending
ones leisure time, such as short holidays, weekend breaks, etc.
This brings us back to the analysis of the customer base and how people wish to spend
their money. The whole range of alternatives which customers may consider need to
be assessed to understand the nature of the competition which an organisation faces.
(c) Rivalry amongst Competitors
Porter noted that the intensity of competitive rivalry within an industry will affect the
profitability of the industry as a whole. Competitive rivalry depends upon a number of
factors but is intensified when the market is stagnant or growth slow, so that companies
are competing for a limited market. Competition is also encouraged when customers
can easily switch from one supplier to another or where switching out of the industry is
difficult (because of high exit costs, for example) thus forcing companies to remain in a
particular (if not very profitable) industry.
D. THE INTERNAL ENVIRONMENT
A position audit, or situational audit as it is sometimes called, is the global term used to
describe an analysis of the internal environment of an organisation. It is not a single
exercise, but consists of a variety of techniques which are brought together to give a total
picture of the organisation and its capabilities. The nature of a position audit will depend
upon the organisation, but in broad terms will include a review of the following aspects of the
organisation:

Resources (tangible and intangible, including finance)
Operating systems
Products, brands and markets
The internal organisation structure and culture
Results
Returns to stakeholders (note stakeholders, not shareholders, as this applies to public-
sector organisations as well as the private sector)
We will look at some of the issues, and the techniques available, under each heading.
Resources
A resource audit considers the organisation's resources. By the term 'resources' we are not
just considering raw materials, but all other 'resources' that an organisation utilises.
Therefore, a complete resource audit encompasses:
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Human resources
Physical resources
Financial resources
Intangibles such as trademarks, corporate image, patents, etc.
Systems.
As well as identifying particular strengths within the organisation, a resource audit will also
identify weaknesses or limiting factors which might restrict the organisation's ability to
achieve its objectives or develop. Once identified, those areas can be addressed so that a
more effective use of resources can be made or planned for.
(a) Resource Efficiency and Effectiveness
Before looking at the specific aspects of a resource audit, it is appropriate to mention
briefly the concepts of efficiency and effectiveness, since it is against these indices that
resource utilisation is invariably compared.
Efficiency is the relationship between outputs (the goods and services produced)
and inputs (the resources used to produce those goods and services). An
organisation is said to be efficient if it produces the maximum output for a given
input, or has minimum input for a given level of output. From this definition, you
can no doubt see that we tend to consider efficiency in monetary terms; but you
should remember that not all 'outputs' or 'inputs' can be measured in this way.
For example, a charity established to promote awareness of a particular health
condition may find it difficult to put a monetary value on its 'outputs'.
Effectiveness is the measure of achievement and the extent to which objectives
have been attained. Again, we have the concept of measurement, but not all
objectives are easy to measure.

Finally, we should perhaps be considering 'economy'. If something is economical we
mean that it takes place at the lowest cost. If a department is over-staffed, it cannot be
said to be economic.
The three Es economy, efficiency and effectiveness are often used to assess the
performance of public-sector organisations which do not have profit as planning
objectives of the business.
(b) Human Resources
A human resource audit will consider:

The size of the workforce
What skills are available
Labour costs and its relationship to returns/profits
Labour turnover rates
Industrial relations
Organisational structure how hierarchical?
The size of the management team
Management styles and structure
Training and staff/management development.
Such an audit might reveal under-utilisation of labour, a lack of certain skills or
appropriate training, a high labour turnover rate or lack of career structure.
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(c) Physical Resources
A typical audit of physical resources would include these questions:

Where do materials come from and at what cost?
Who are the main suppliers?
What is the relationship between material costs and total cost of sales?
What are wastage levels?
Are there any alternative suppliers or materials?
What are the organisation's fixed assets? What is their value and how old are
they?
To what extent are assets used?
To what extent is the technology employed out of date or advanced?
Such an audit might identify that assets are under-utilised, for example, or that plant
and machinery are occupied to maximum capacity with the result that further
production is not possible without additional capital investment.
(d) Financial Resources
A financial resource audit might include:

How much working capital is used?
What are the debt and gearing ratios?
What is the credit policy of the organisation?
What credit is taken from suppliers?
How are foreign exchange transactions dealt with?
What rate of interest is achieved on spare cash?
What is the level of bad debts?
Lack of money is probably the most likely limiting factor to be identified by a financial
resources audit, but it may also be possible that interest rates or foreign exchange
rates are uncompetitive, or that the credit policy of the organisation restricts working
capital.
(e) Intangibles
Intangible resources include goodwill, brand image, corporate image, trademarks and
patents. An audit of intangible resources might include:

An identification of the value placed on intangible items, such as goodwill
Are company trademarks protected?
How does corporate culture affect the way people behave at work in the
organisation?
Such an audit might reveal that the corporate culture conflicts with its objectives or that
the company's reputation is either not being exploited or is restricting development.
(f) Systems
In an organisational sense, the term 'system' is used to mean 'how things are done'.
An organisation's resources must be organised into systems in order to be utilised. A
systems audit considers how well or how badly resources are used, rather than the
limitations on the resources themselves. A systems audit therefore considers such
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factors as the interaction between resources: for example, the use of labour to produce
goods, monitoring and control systems.
We can categorise the systems employed by an organisation in many ways. We talk
about 'production systems' to mean the equipment, and methods used within the
production process; 'control systems' to talk about the methods and procedures used
to control activities within an organisation; and 'quality systems' to mean the methods,
equipment and procedures employed to ensure quality within the organisation. There
are many more.
Systems influence an organisation's strategic choice both by offering opportunities for
exploiting capabilities, and as a limiting factor. For example, an organisation which
employs equipment for mass production is unlikely to select a strategy, however
attractive, which requires individual, custom-built production techniques, because the
cost of either changing the equipment already in place, or of simply not using it, is likely
to be too high. Instead, strategies involving using spare production capacity (if
available) are likely to be selected.
(g) Competences
The concept of a 'competence' as a resource has become popular recently, and should
be familiar to you as another way of describing a skill. A competence is something you
can do.
For an organisation, a core competence is something it can do well. Core
competencies stem from a combination of experience (in producing and selling
the product or service), the talents of the individuals within the organisation and
how well those two factors are put together.
A distinctive competence of an organisation is what it does well, or better than
its competitors. It is a distinctive competence which gives an organisation its
competitive edge. Distinctive competences do not necessarily have to be directly
linked to the main product or service, but are something that competitors cannot,
or would find it difficult, to replicate.

Identifying core and distinctive competencies can be useful when combined with an
analysis of competitor activity, and can enable an organisation to identify strengths on
which it can build for the future. It can therefore be a useful tool in strategic planning.
Products
The outputs of an organisation are its products goods and/or services which are
distributed and/or delivered to customers. The nature of these products and their place in the
market are obviously central to the organisation, and part of an environmental analysis will be
to assess these issues.
Typical issues to be investigated include:

The stage of the product's life cycle that it has reached
The market share it holds
The likely total size of the existing market and the potential for entry into new markets
The marketing effort to support the product.
The Internal Organisation
An internal analysis has to consider structure, lines of authority and power, the systems
employed, and the culture of the organisation. They have important consequences for the
aspects of the subject of the next Unit planning the way ahead for organisations and are,
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to a great extent, determined by the organisation's response to the external environments in
which it operates and the nature of its business.
We shall examine these elements of internal organisation in detail later in the course, but
note here the need to assess the existing organisation as part of a comprehensive analysis
of the internal environment. Apart from the factors noted above, there is also one further key
aspect which should not be neglected: the capacity of the organisation to change.
Organisational change is a major issue, particularly in the current turbulent commercial
climate, and ability to adjust the internal organisation can be a significant strength. The
impact of organisational culture is of particular significance in this respect. (The processes
and requirements of managing change will be looked at in depth in Unit 7.)
Results
Analysis of results may be seen as the feedback mechanism within the systems approach. It
feeds information into the position audit on existing performance from a very wide variety of
control measures and assessments.
These will include financial information in the form of ratios and other indices on such issues
as profitability, investment and efficiency. There are also a host of other measures of
performance and performance indicators which can be used to provide information on the
effectiveness of current operations against both quantitative and qualitative objectives. We
shall examine these in more detail later in the course, in Unit 6. We also look at the setting of
objectives and the implications of this for control and feedback purposes in Unit 3, the next
Unit. Note, here, that the requirement to assess results means that the organisation must
build the appropriate procedures and processes from which to obtain this information, at an
appropriate cost.
E. CONDUCTING AN ENVIRONMENTAL ANALYSIS
Conducting an environmental analysis is a two-stage process:

Gathering data on the environment
Interpreting that data in a meaningful way to provide insights on the likely implications
for the organisation.
Environmental data, or strategic intelligence as it is sometimes called, is quite widely
available:
Internally, from customer and competitor information gathered through the sales
processes, market research and management information systems which collect data
from a company's sales, accounting and other systems.
External sources of data include the media, government publications (particularly
economic and financial data), investment reports, trade journals and the Internet. In
addition, many organisations commission independent research into specific areas of
concern: for example, in relation to the political situation in a particular country with
which is has, or is considering developing, trading links.

The analysis and interpretation of data will focus on three particular techniques: forecasting,
SWOT analysis and comparative analysis.
Forecasting
Data collected about the environment essentially paints a picture about the past or, at best,
the present. However, organisations need information about the future so that they can plan
their operations to meet the conditions which will apply then, rather than as they apply now.
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The major purpose of forecasting is to reduce uncertainty, and management must use the
best available information and techniques, supplemented by judgment, in order to achieve
the best possible forecast. However, forecasting the effect of an environmental factor or
factors can be difficult, because of the relative complexity and dynamics of the environment.
In a stable environment, what has occurred in the past might be a reliable indication of the
future; but in a dynamic environment change makes the past a poor predictor of the future.
Different techniques therefore are appropriate for different situations.
Forecasting techniques can be complex or simple. For many purposes, a simple technique
is superior to a complex one, and a KISS approach 'keep it simple, silly' should always be
tested before a complex modelling approach is tried. The key is to obtain data that is
accurate enough for the purpose. You should never pay for more detailed data than is
needed, nor waste time refining a forecast from, say, 50% to 40% presumed accuracy.
(a) Developing Models
In any situation, there are a number of variables which interact to create the conditions
of the situation. Some of these variables are 'dependent' variables: that is, they alter
as a result of changes in the other 'independent' variables. The basis for most
modelling techniques, including those used for forecasting, is an assumption that there
is one dependent variable in a situation and the behaviour of this variable can be
predicted by given information about the independent variables. Independent variables
are themselves usually dependent to some degree on other variables, and so to
simplify the process a basic assumption is made. This is that the independent
variables will continue to operate in unison, and that they can be represented by a
single variable that is known as a proxy. Time is commonly taken as the proxy
variable.
An excellent example of this is the model of the product life-cycle. Sales are assumed
to be dependent upon time, the independent variable, given that other independent
variables do not change.
In any given situation in the real world, there are likely to be a large number of
variables, many of which will be independent and largely outside the control of the
forecaster. It is in the identification and weighting of these, and the specification of their
relationship with dependent variables, that the skills of the forecaster come into play.
The aim is to forecast, given a particular set of circumstances, how the dependent
variables will behave.
Models are used extensively in forecasting. They can vary from incredibly complex
ones which attempt to predict the future state of the UK economy to the relatively
simple constructions of assessing the impact of changing demographics on the market
for a particular product. They also underpin much of the programmed decision-making
in use in most organisations: for example, the application of rules about entitlements to
benefits or the assessment of car insurance premiums. They are even used informally
as part of thought processes when weighing up future possibilities and determining a
particular course of action.
In principle, the more carefully a model is constructed the more accurate it should
become; but in reality there is no forecasting model that can predict accurately.
Despite the assumption that all other variables outside of the model remain the same,
there is always the possibility that some of these could change. Consequently, the
results need interpretation themselves and in this we come down to human judgement,
based on knowledge and experience of the past and good understanding of the
processes at play in the situation.
(b) Forecasting Models
The common problem with objective techniques lies in their reactive nature. Noticing
that house starts are increasing, a manufacturer of carpets may gear up for increased
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production, which will not come on stream until some time after demand from new
house buyers is current. It will, however, continue after the house building programme
slows down. In other words reactive forecasting must suffer from lag.
To overcome this problem it is necessary to try to anticipate the market, using by two
types of technique.
Time series techniques, such as extrapolation, exponential smoothing, trend
analysis and Z charts, are arithmetically straightforward and simple to apply in
many instances. The only technical problem is to select the technique that best
suits the data. A manager should never underestimate the value of simple
techniques; they often give results that are sufficiently reliable for the purpose.
Causal techniques do not use time as the independent variable. Instead they
search for a discernible relationship between the forecasted dependent variable
and a measurable independent variable. Statistical techniques such as
regression and correlation may often used for this. Once the relationship is
known it is straightforward to deduce the one from the other.
Unfortunately it is rarely easy to ascertain relationships in such a clear-cut way
and if you have to make assumptions (guesses) about one variable perhaps
even both then the complexity of the whole process overwhelms the value of
the result. It might be better to guess the result without going through the
process at all!
Leading indicators are required for causal techniques to work effectively.
Leading indicators are identified causes from which known effects will follow.
Cause and effect can sometimes be measured very precisely. Ice-cream
salesmen in the UK know, for instance, that when the temperature goes above
60F there will be a marked switch from ice cream to ice lolly. This is important
when loading vans each morning when it is reasonably possible to forecast the
weather for that afternoon; but how do you place a wholesale order on a Friday
morning for delivery on Monday when UK weather is so notoriously
unpredictable?
The application of leading indicators can be taken a stage further by testing the
environment for certain changes and conditions.

Cross-impact analysis uses the identification of a set of key trends and asks the
question, 'If event A occurs what will be the impact on the other trends?'
Demand/hazard forecasting is based on the identification of possible major
events that would greatly affect the organisation. Each event is rated for its
convergence with several major trends taking place in society, and for its appeal
to significant sections of the public. The higher the event's convergence and
appeal, the higher the probability of its occurring. The higher-rated events
become the subject of detailed management concern.

Note that these processes can be used to analyse the implications of any change in the
external environments where the factors are largely independent of the organisation
and the dependent variables are those of the internal environment: for example, in
forecasting the potential impact of the changing age profile of a local population on
recruitment and retention practices.
They can also be applied to analysis of the interplay of factors within the internal
environment. Such analysis often forms the basis of managing change: assessing, for
example, the implications of planned structural change on decision-making.
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(c) Scenario Building
By drawing on objective techniques which analyse and interpret the environment, and
supplementing them with a little imagination as to the choice and weighting of the
variables, a researcher can create a series of alternative futures. Each should be
internally consistent and have a certain probability of occurring. Their major purpose is
to stimulate management thinking, and to create opportunities for managers to think
forward.
The process is particularly suited to dynamic situations where there is a high degree of
uncertainty. It is based on creating a model (often, but not always computer-based) of
the industry (or company) and incorporating within it the uncertainties affecting the
industry. The model makes assumptions about how those uncertainties will affect the
industry, predicts how the industry might react to the uncertainties; and thereby predicts
the likely impact of the uncertainties. In practice, making such models is a highly
complex process. For a model to be realistic the uncertainties in the environment must
be variable and a genuine attempt made to assess all those factors which might affect
the organisation, and to replicate the interrelation of those uncertainties.
Scenario building is one way of developing and testing strategic plans, as the likely
impact of a strategy can be tested on the model and then adjusted to give the most
favourable outcome. Michael Porter suggests that scenario analysis is most
appropriate when used for a single industry.
(d) Subjective Techniques
Subjective forecasting techniques recognise the limitations of objective forecasting and
attempt to develop effective interpretations of analysed data by the best possible
people.
There are a number of variations in the way in which this may be done and in the
names applied to them, including the Delphi model, jury method and standing advisory
committees. However, they all involve the use of specialists who are believed to have
expert knowledge of the industry or the environment. These may be drawn from
academic institutions, government departments, trade and consumer associations,
elected politicians, etc., usually ensuring a mix of specialisms in line with the
requirements of the process. To these experts may be added a mixture of internal
management and external agencies and customers whose opinions appear to be of
value. The chair should preferably be independent.
The aim is to have the committee of experts agree upon a composite forecast that
covers whatever period(s) the organisation is concerned with, usually mid- and long-
term. This forecast then becomes a major advisory tool to aid management decision-
taking.
To achieve the best results each expert should be briefed beforehand and should
produce a personal forecast that he or she will present and argue the case for. If there
is general agreement a composite forecast will be determined, but if not some method
of aggregation may be needed to produce a unified forecast. A minority view, if held
strongly, is often of considerable value: perhaps more so than the aggregate.
The problems of these forms of subjective analysis arise from:

The base of the forecasting, which is opinion and not fact.
Actual and opportunity costs of time and of people who may charge highly for
their services.
The top-down nature of the forecast.
On the other hand, a number of advantages accrue:
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The range of probabilities assessed is likely to produce a balanced forecast.
There is less danger of being totally wrong (or totally right, it might be said).
Organisation managers feed directly into the forecasting process.
It can be relatively quick to compile, with no ongoing commitment.
At the very least it will concentrate top management thinking into the areas of
planning and forecasting.
SWOT Analysis
A SWOT analysis is a simple technique which looks at an organisation's strengths and
weaknesses, and the opportunities and threats which face it. It is usually drawn up in
diagrammatic form as follows.
Figure 2.3: Form of a SWOT analysis
Strengths
Threats
(a) Strengths and Weaknesses
The strengths and weaknesses part of the appraisal derives essentially from the
internal and specific external environments of the organisation. It attempts to identify
those areas of the organisation having strengths that could be exploited under
particular circumstances by suitable strategies, and which areas have weaknesses
which should be minimised.
It therefore looks at the findings of the position audit, and considers information on
such factors as:

Products
Marketing
Distribution
Raw materials/stocks, etc.
Finance
Plant and equipment/facilities
Employees
Employee relations
Management
Customer base and loyalty
Suppliers
Weaknesses
Opportunities
Thus an organisation's strengths or weaknesses may include the skills and expertise of
its management and staff, some organisational factors (such as responsiveness to
change), access to resources (such as availability of cheap capital) and market
position. Their relevance and importance may depend upon the particular
circumstances and objectives of the analysis. So, for example, strengths and
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weaknesses may be considered relative to the organisation's competitors, or to
meeting industry standards, or to compliance with government regulations.
Where any factor suggests a significant strength or weakness, further investigation
may be warranted and strategies devised to develop or minimise the situation.
(b) Opportunities and Threats
The opportunities and threats part of the appraisal is more outward-looking and seeks
to identify the implications of change in the organisation's general and specific external
environments. Opportunities can be identified and exploited by the organisation's
strengths. Typically, to review opportunities, the organisation must identify what
opportunities arise from environmental change, what their potential is and whether or
not the organisation has strengths to maximise the potential of the opportunity.
Threats from the environment, in the form of economic conditions, government action,
technological advances, and competitor activity are also anticipated and strategies
developed to minimise the impact. For example, changes in the economic environment
(increases in interest rates and a general downturn in the economy) force banks to
make increased provisions for bad debts, threatening profitability and capital adequacy.
Comparative Analysis
The value of environmental data can be significantly improved by assessing positions relative
to other, comparative bases. For example, the knowledge that the organisation has
increased profitability by 5% may be considered a good result in itself, but may look less
successful when compared to the performance of a major competitor which has increased
profitability by 10%.
One implication of this approach is that data needs to be collected for comparative purposes
against selected bases. The main such bases of comparison are:

Historical: primarily in relation to results, but also to assist in identifying trends in the
external environment.
Competitors: again in relation to results (as noted above), but also in relation to a
range of other factors such as customer and supplier characteristics and many aspects
of the internal environment, not least organisation and management structures.
Industry norms: this is similar to comparison with competitors, but looks to assess
performance, resources and organisational practices in relation to the general
standards applying throughout an industry or sector. This is of considerable
importance in the public sector where there is less direct competition.
Best practice: again in relation to a similar range of factors as would be considered in
comparisons with competitors, but this time concentrating on what may be seen as the
most successful organisations or practices.

It is also possible to use comparative analysis to assess the efficiency and effectiveness of
the internal environments within an organisation: for example, in relation to management
practices or the use of resources in different departments.
Comparative analysis is most often used to compare results and performance, and we shall
return to this later in Unit 6. However, as we have seen above, it can be used to develop
greater understanding of any areas of the specific external environment and the internal
environment.
In addition, it is a technique widely used by organisations exploring the possibilities of
entering new markets, particularly in other countries. Here, comparisons will not only be
drawn with other organisations, but also applied to the consideration of the external
environment to elucidate key factors about the political/legal, social/cultural, economic and
technological conditions applying.
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A further approach to analysing the environment can be to consider the environmental forces
in terms of the relationship between the organisation and its stakeholders. The concept of
stakeholder analysis has developed relatively recently, but is proving an important means of
establishing the balance among the competing interests involved.
The term 'stakeholder' can be used to describe any individual or group which has an interest
(not necessarily financial) in the future of the organisation. Stakeholders can therefore
include employees (including directors, executive and/or non-executive), shareholders,
customers, suppliers, providers of finance, local authorities, the government, the community
at large, professional bodies, etc.
Each of the stakeholders will have different expectations of an organisation. Employees, for
example, will want good conditions of work, opportunities for training and development, a
decent wage, etc. Customers want quality products at a reasonable price, a good after-sales
service, to be treated honestly and fairly, etc.
Assessment of the interests of stakeholders and how the organisation is satisfying them can
be an important part of environmental analysis. The stakeholder approach recognises that
businesses can make strategic gains from recognising stakeholder interests and responding
to them through the strategic management process. It is not difficult to see some of the
advantages of doing so. A workforce which has some, if not all, of its expectations
recognised and met is likely to be more stable, change less frequently and be more likely to
accommodate change when required.
Taken to its logical conclusion, accepting the legitimacy of stakeholder interests implies a
wider social responsibility on organisations, particularly when the interests of the community
at large are taken into consideration. Even so, it is usually possible to see a benefit to the
organisation generally from taking on a wider role in the community. Many organisations,
large and small, are today involved in social projects. Such projects, for example
secondments to local charities, provide useful expertise to local or national bodies whilst
providing good work experience and development for the organisation's managers.
Difficulties can arise when the interests of different stakeholder groups conflict. The
organisation must strike some kind of balance between the different interests. It is important
here to remember that recognising an interest is not the same as being accountable to the
stakeholder. The primary responsibility of a commercial organisation is towards its
owners/shareholders.
The stakeholder approach is particularly relevant to non-profitmaking organisations or public
or charitable bodies, where social interests may outweigh financial ones.
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61
Study Unit 3
Organisational Direction: The Planning Process
Contents
Introduction
A. Defining Overarching Intent: Mission, Goals and Policies
The Concept of Mission
Mission Statements
Producing the Corporate Mission
Goals
Policies
Strategic and Operational Planning
The Planning Process
Benefits of Planning
Different Views of the Strategic Planning Process
Objectives
Characteristics of Objectives: SMART
Quantitative and Qualitative Objectives
Hierarchy of Objectives
Setting Objectives
Conflicting Objectives
Influences on Strategy and Planning
Analysing the Environment
Using Environmental Analysis
The 7S Framework
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B.
C.
D.
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62 Organisational Direction: The Planning Process
INTRODUCTION
The organisational direction of an enterprise is what it sets out to achieve in terms of its
vision, mission, strategies and objectives. The direction is transferred to the business plan
which (depending on the organisation) will have clearly defined goals by which this direction
can be achieved, in the short, medium and long terms. Therefore the focus of this Unit is the
process of how an organisation plans to achieve the desired outcomes.
Organisations evolve and operate to provide the means to fulfil the interests of their owners.
The owners of a commercial organisation are clear. An individual owner is called as a sole
trader; two or more people who share the ownership are a partnership. A limited company is
owned by its shareholders irrespective of the number of individuals who buy the shares;
there can be as few as two shareholders. The difference between a partnership with just two
people and a limited company with the same number is that the latter has to be registered
with the Registrar of Companies. The partnership does not have to register in the same way.
In the most simplistic sense public-sector organisations are owned by the public but are
managed by local or central government in terms of the money invested and the
accountability of those who run the enterprise.
Private-sector organisations are generally intent upon meeting the commercial interests of
the shareholders, in terms of the return on their investment and the level of dividends they
receive as a 'reward' for investing their money in the company. Public-sector organisations
seek to meet the objectives of the public as expressed through their elected representatives,
though these objectives may be more conflicting and complex than the straightforward desire
of shareholders for financial returns.
The owners have ultimate authority over the direction of the organisation. They will continue
to support it as long as it fulfils their interests, or the majority of their interests. If an
organisation is failing to maintain the level of income that the investors feel is appropriate,
they can change the Board of Directors and/or other management and/or withdraw their
financial investments. The appropriateness of these various courses of action will depend on
the structure, culture and strategy of the particular organisation.
In the public sector managers may be subject to directions from or removal by elected
politicians, and the politicians themselves may be removed by the voters.
All organisations, irrespective of their size or their range of products or services, operate in
an external environment which is constantly changing. The organisation has to be aware of
all the varying factors within the external environment, and respond to any change in those
factors whether it affects: production/service output, cost of materials, finance or human
resources. The external environmental conditions represent both threats to and opportunities
for the organisation, and it needs to respond to these as well in making decisions about its
direction.
These three forces owners: stakeholders and the external environment combined and
separately make an impact on the operation of the business. Sometimes these forces may
be in conflict and it may be necessary to enlist the assistance of other external 'bodies' to
negotiate a collaborative solution.
The purpose for which an organisation exists will determine how it operates. Most
organisations define their purposes in the following terms:

Mission: a broad statement of what the organisation is attempting to achieve, and its
aspirations for the future.
Goals: more specific long-term aims which derive from the mission.
Objectives: specifications of short- to medium-term operational outcomes which will
lead on to the achievement of the goals. Objectives will be broken down into more
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Organisational Direction: The Planning Process 63
specific targets to form the basis of operational plans for the organisation, against
which performance may be measured. Achievement of these basic targets should
lead, ultimately, to achievement of the organisation's goals.
The specification of goals is the level at which the owners need to be satisfied that their
interests will be met. These goals must be acceptable to the owners or they will enforce
changes to the organisation to alter them. It is very likely, though, that the owners will be
prepared to accept some compromise in the extent to which these goals represent their own
interests, in order to accommodate certain stakeholder interests. It is also likely that the
owners will have to accept some further dilution of their interests to the extent that it may not
be possible to satisfy them in full in the conditions prevailing in the organisation's
environment. Therefore, the goals will be shaped by the interactions and interrelationships of
these three factors.
Goals are broken down into objectives through strategy. The processes of strategic analysis
and planning take the goals as the starting point and then translate these into preferred
actions for achieving them. The external and internal environments and stakeholder interests
are all included in such an analysis, since the business plan is more likely to be achieved
when all the factors have been taken into account.
This Unit considers the purpose and influences on each aspect of the planning process, from
the mission to organisational plans. Additionally, there are explanations of alternative views
on the way in which the same issues may be addressed. We then look in rather more detail
at the setting of objectives and the interplay between the strategy stage of the process and
factors in the internal and external environment.
A. DEFINING OVERARCHING INTENT: MISSION, GOALS
AND POLICIES
All the stakeholders in an organisation need an understanding of what that organisation
intends to achieve. For the most part, many stakeholders do not need or want to know the
detail of objectives and plans the specification of how it intends to achieve its goals but
rather want an overall vision of what they are a part of.
The Concept of Mission
Mission has been said to answer the question: 'What business are we in? Mintzberg
describes it as 'the organisation's basic function in society, in terms of the product and
services it produces for its clients'. However, this is rather too narrow a definition.
The mission of an organisation incorporates not just an identification of the products and
services the organisation offers, but also sets the philosophy and culture behind the basic
organisational functions. It is concerned with its overall purpose, its scope and its
boundaries, and attempts to describe the nature of the organisation and the reason why it
exists. It is also long-term, in that it is not concerned with a set of relatively short-term
achievable targets, but rather a definition of the parameters of the organisation's activities.
It is also the starting point for all the activities of the organisation. A clear mission will

define the philosophy and purpose of the organisation.
signpost the direction which the selection of strategic plans and control systems will
take in the future.
As such, it has an important role to play in the planning process. Within the terms of the
mission, managers can identify, evaluate and select appropriate corporate objectives and
strategies which will give enable the organisation to achieve its intentions. It is, therefore, the
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essential starting point for corporate planning, and thus for all planning within an
organisation.
The mission can make a very real difference to the way in which an organisation operates
and develops. For example, it can have a direct influence on culture by stressing the
importance of customers or product quality as the driving force behind the business.
Mission Statements
As we noted above, stakeholders need to be aware of the organisation's mission in order that
they can assess the commitment they may make and their level of involvement. Clearly this
is easier in a small organisation, but in a large one the vision and organisational goals need
to be formalised and communicated to all stakeholders. This is through the organisation's
mission statement.
Many businesses take mission very seriously and studies have shown that over 80% of
companies have a formal mission statement and believe that it contributes to the
organisation's effectiveness. Once established, many organisations publish their mission
statement in order to communicate the essence of the organisation.
The mission statement encapsulates the vision of what the organisation is, or intends to
become. It does not need to be long (famously, Fuji Films used to have just two words: 'kill
Kodak'), nor is there any standard format. The important point is that it should be:

(a)
Easy to understand and remember
It should make the organisation seem different from the rest
It should be flexible enough to accommodate change, although mission statements
rarely change frequently.
Content and Meaning
Johnson and Scholes consider that the mission statement should be visionary: that is,
it should be regarded as a general, long-term statement about the organisation, which
may be subject to changes in detailed objectives over time without losing its overall
direction. Thus Avis states its overall objective as 'To become the fastest-growing
company with the highest profit margins in the business of renting and leasing vehicles
without drivers.' The details of how it plans to do this do not appear in the mission
statement.
Johnson and Scholes go on to identify the following three key elements which should
be addressed in a comprehensive mission statement.
It should clarify the main purpose of the organisation, answering the question
'Why does the organisation exist?' This may be to make profits for shareholders,
or perhaps the furtherance of a philanthropic aim. Thus the Banque de Montreal
states its primary objective, and the reason for its existence, as 'To maximise
long-term return on investment for shareholders'.
It should describe the organisation's main activities and the position it wishes to
attain in its industry. This clarifies the nature of the business the organisation is in
and the way in which it intends to compete. Tesco include in their mission
statement; 'To be the UK's number one food retailer'. Tesco also specify the
boundaries of operating, which refer to ethical standards.
Missions should state the key values of the organisation: particularly regarding
attitudes towards and commitment to stakeholder groups; customers, employees,
suppliers and the environment. Tesco state their corporate objectives, which
include:
(i) Offering customers the best value for money at the most competitive prices.

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(ii)
(iii)
(iv)
(v)
Providing shareholders with progressive returns on their investment.
Developing the talents of people through sound management and training
practices while rewarding them fairly, with equal opportunities for all.
Working closely with suppliers to build long-term business relationships
based on strict quality and price criteria.
Supporting the well-being of the community and the protection of the
environment. This last point is emphasised in Marks & Spencer's mission,
which specifically addresses the stakeholders as follows:

To offer our customers a selective range of high-quality, well-designed
and attractive merchandise at reasonable prices.
To encourage our suppliers to use the most modern and efficient
techniques of production and quality control dictated by the latest
discoveries in science and technology.
With the co-operation of our suppliers, to ensure the highest
standards of quality control.
To plan the expansion of our stores for the better display of a
widening range of goods (and) for the convenience of our customers.
To simplify operating procedures so that our business is carried on in
the most efficient manner.
To foster good human relations with customers, suppliers and staff.

You can see that basic corporate values have been identified and expressed, and
that policy formulation is considerably simplified.
Following from this, Johnson and Scholes also point out that the organisation should
have the intention and capability to live up to its mission statement. Having
established, and declared publicly, its strategic intent, the organisation must be able to
follow it through with the necessary course of action. Often, general policies and the
standards of behaviour it intends to follow are included in aspects of the statement.
One example of this approach is the British Telecom mission which sets standards of
quality care for customers as the basis of its business practice:
'Customers
BT is committed to providing its customers with:

Excellent telecommunication services and products;
Value for money; and
Choice and flexibility.
Our main services are backed by guarantee, and we give our
customers compensation if we fail to meet our published standards.
We measure our customers' satisfaction with the quality of these
services and publish results.
We will compete vigorously but fairly in the marketplace; we will not
seek to use our market position in a way that unfairly disadvantages
our competitors.
We will respect our customers' confidentiality, and be helpful and
honest in all our dealings with them.

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We will respect the circumstances of customers with special needs
and difficulties, including when we supply goods or services on credit
and when we collect payment.
We will be truthful and accurate in all our communications with
customers.'

BT has published standards for handling complaints, speedy response and
professional and courteous customer treatment. The company has also set out
missions for employees, shareholders, suppliers, the community and the environment.
(b) Value
A mission statement provides a useful guide for planning purposes, because it states
the direction in which the organisation is going. Ideally, all plans are prepared at board
level, which has the authority to do so. It is fundamental that all levels of management
are ' bought' into the plans, and usually they are involved in the formulation of the
business planning process. Both specific and broad objectives are set within the
values, norms, and beliefs of the organisation, with ethical standards clearly defined
within which these objectives have to be achieved. Mission statements are often used
in corporate publicity to communicate the principles and ethos of the organisation.
Conversely, mission statements have been criticised for being too general and
containing statements which are difficult if not impossible to quantify or prove. Terms
such as 'best', 'favourite' or 'quality' can be difficult to define. Mission statements are
sometimes viewed as a public relations ploy with no real commitment and of minimum
value in the planning process.
If a mission statement is imposed without consultation with management or is not
effectively communicated, there is a risk that employees will not be engaged in it. To
avoid misunderstanding or any ambiguity, some organisations have the mission
statement printed on small cards for employees to carry with them. Marks and
Spencer is one such organisation.
Producing the Corporate Mission
Mission statements take considerable time and effort to prepare, particularly because they
are likely to remain in place for the long term.
A preferred method to write a meaningful mission statement is set out below.

Set up a project team.
Carry out an attitude survey throughout the organisation, to check the validity and
usefulness of the current mission statement. Ask for suggestions for improvement
and/or any amendments that the staff feel are more in line with their level of operations,
growth and development. Is the mission statement outdated and no longer reflecting
current thinking about processes and policies?
Elicit information from current customers and their perceptions of the organisation. Ask
for suggestions for improvement/amendments/updating.
A revised mission statement can then be drafted, and sent for consultation to
representatives of the workforce and a selection of customers. Further comments
should be elicited.
This process of involvement must be communicated throughout the company in an
appropriate way. Newsletters, workshops or meetings are commonly used. This is an
important, because a sense of ownership of the mission statement throughout the
company is vital in realising its purpose.

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Finally it is important to monitor and review the process to ensure that the mission
remains relevant and supported, and takes into account stakeholder views.
Once the mission statement has been established, it is possible to develop action plans and
set objectives. Action plans should aim to build on the consensus and commitment
developed within the senior management team and to spread it throughout the organisation.
In effect, this is where the mission process meets with the strategic planning process, and
objectives are set by asking what has to be done to realise the mission.
Goals
Whereas a mission statement gives some general guidance to the planning process, this
general guidance has to be translated into something a little more concrete. Here, the
terminology used by various writers can get confusing. The dictionary tells us that goals,
aims and objectives all mean much the same, but management writers often use each word
to describe a different level of target-setting. Unfortunately they are not always consistent in
the way they do this, and you need always to define your meaning when using these terms.
Mintzberg (in Power In and Around Organisations) has made an attempt at classifying these
meanings in a way which can help. Goals, he states, can be operational or non-operational:
Operational goals are goals expressed in a quantified form and, thus, can be
measured: for example, 'to increase market share by 5%'. For the purposes of this
course, we are going to use the term 'objective' to describe this.
Non-operational goals are qualitative in nature and are not expressed so specifically
for example, 'to improve market share'. We will use the term 'goal' to describe this
general statement of intent.

Goals are frequently used to give substance to the mission statement and may be included
as part of it or alongside it. If we take the example of the Association of Business Executives,
its mission is encompassed in its general aim of 'the promotion and advancement of efficient
administration and management in industry, commerce and the public service by the
continued development of the study and practice of administration and management', and its
primary objective that 'students successfully completing its examinations will be more
effective managers'. This is given more substance by a series of goals which accompany
these statements.
'To be the first choice for business management education worldwide.
To focus the range and quality of our courses and qualifications.
To provide our members with a positive learning experience for business.
To deliver respected and recognised UK qualifications.
To open up a world of opportunity for now and the future.
To provide effective responsive management for the millennium and beyond.
To meet the needs of tomorrow.'
You can see how these goals start to focus the mission statement into more specific areas of
intent, although they are not yet sufficiently specific to enable us to measure how successful
the ABE is at achieving its mission.
Policies
All organisations have policies: some are formally laid down and others are less formal, but
they represent the way in which things are done in the business. They are overarching
specifications which concern how managers should behave in certain circumstances and the
ways in which rules and procedures are to be applied. They relate strongly to the culture of
the organisation.
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We noted that policies often flow from the mission and goals of the organisation, and as such
will constrain strategic choice: for example, to use only organically grown food products, or
not to trade with companies who are known to pollute the environment. Policies may also be
determined as part of the strategic planning process where overarching concerns about the
conduct of business may be identified, often in reaction to pressures from stakeholders or for
competitive advantage.
Policies act as guidelines within which other decisions are taken and procedures are
developed, with the aim of:
Ensuring consistency of decision-making. For example, a retail chain may have a
policy of always prosecuting shoplifters, or a company may adopt a travel policy which
states that staff always travel standard class on journeys of less than two hours.
Ensuring compliance with legislation. For example, companies have equal
opportunities policies, and specific policies like the wearing of hard hats or specialist
training to ensure that health and safety requirements are met.

B. STRATEGIC AND OPERATIONAL PLANNING
Planning is the process by which we decide what we are going to do and how we are going
to do it. A plan fills the gap between the current state of affairs ('where we are now') and the
desired future state of affairs ('where we want to be'). First the company must decide where
it wants to go, and by when, and then how to bridge the gap between the current situation
and that which it wants to achieve. This principle, associated with Lewin, has become known
as 'gap' analysis: the purpose of planning is to work out how to bridge the gap to ensure
objectives are met.
The Planning Process
The classic model of the planning process is a cascade, such as that described by Wheelen
and Hunger. Decisions at the top of the hierarchy, about mission and goals, are initially
translated into strategies and objectives by top management and then are cascaded by the
downward communication channels to staff at the lower levels of the organisational structure.
At this level the objectives become more specific to the department and are then transferred
into meaningful objectives for every individual in that department through tactical plans,
operational plans and individual actions. This is known as 'top-down' objective setting. The
model is essentially linear, although reference is made to the importance of feedback for
evaluation and control purposes.
The process of planning is illustrated in Figure 3.1 below.
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Figure 3.1: The Planning Process
Mission
Goals
Strategy
Objectives
Tactical plans
Operational plans
Performance
Feedback
Let us now consider each element of the planning process in turn.
(a) Mission
A mission may be narrow or broad in scope. For example, a bank which had a narrow
mission could express it as providing savings and loan facilities to the citizens of a
particular location, whereas a bank with a broad mission could express it as providing a
wide range of financial services worldwide. If the mission is too narrow, then it may
limit the scope of the organisation's activities, restricting future opportunities for growth;
but if it is too broad, it may become meaningless because it fails to identify what the
organisation actually does.
An effective mission statement should:

(b)
describe the unique purpose of the organisation;
identify the scope of its operations;
provide a unifying theme to its activities.
Goals
The organisation's mission sets the parameters within which goals, strategies and
objectives are determined. Wheelen and Hunger distinguish goals from objectives by
defining goals as open-ended statements, typically not quantified or given time limits,
whereas objectives set out exactly what the organisation wants to achieve within a
particular timescale. However, as we have seen, other writers use the terms differently.
We shall continue to use the term goal to refer to a consciously agreed statement of
something the organisation desires to achieve in the long term.
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(c) Strategy
Chandler has defined strategy as:
'the determination of basic long-term goals and objectives of an enterprise,
and the adoption of courses of action and the allocation of resources
necessary for carrying out these goals.'
The word 'strategy' is derived from the ancient Greek term strategos, a general, which
in turn is a compound of two words: stratos meaning 'army' and agein meaning 'to
lead'. The term emerged at a time when the complexity of military decision-making
was increasing as warfare evolved and issues relating to the planning and co-
ordination of different activities were becoming important considerations for successful
military commanders. Planning and co-ordination are still seen as key aspects of
strategy today.
Hax has identified six different dimensions of strategy:
A coherent, unifying and integrative pattern of decisions for the
organisation as a whole
The strategy gives rise to the plans that ensure that the basic goals of the
organisation are fulfilled. Many large organisations have conscious explicit
strategies, which are set out formally. In smaller organisations, the strategy may
not always be articulated or analysed, but there may be still be a common
understanding of it among top management, expressed as, for example, 'the
development and acquisition of new product lines'. However, an organisation may
also have an implicit strategy, which is not set out anywhere, but can be identified
from the actions which are actually taken: for example, which projects are
approved, where funding is directed, etc. This may be very different to the
explicit strategy and indicate that the real goals of the organisation are not the
same as those which are articulated. Can you identify in an organisation which is
known to you whether there seems to be an implicit strategy which is different to
the explicit strategy?
A means of establishing an organisation's purpose in terms of its long term
goals
This approach regards strategy as shaping both the goals and objectives of the
organisation and defining the major actions needed in order to achieve them. It
therefore forms the key link between goals and objectives and the actions
necessary to ensure that they are achieved. Resource allocation is regarded as
the organisation's most critical step and therefore the timescale for strategic
implementation is determined by the timescale during which all the resources of
the organisation, such as capital and labour the factors of production can be
varied. This means that the timescale for strategic planning in most
organisations is frequently five years or longer.
A definition of an organisation's competitive domain
One of the central concerns of strategy is defining what business an organisation
is in or intends to be in (strategic planning) and taking the necessary action to
move it from one state of affairs to the other (strategic implementation). Strategy
must therefore address issues both of growth, such as an extension to existing
capacity and diversification into new product areas, and of divestment, such as
closing production facilities.
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A means of maximising competitive advantage and minimising competitive
disadvantage
This approach regards the key purpose of strategy as seeking to achieve long-
term advantage over an organisation's main competitors. This advantage is
achieved by having:
(i) a thorough understanding of the external environment in which the
organisation operates, enabling identification of the opportunities and
threats presented by changing conditions;
a thorough understanding of its internal strengths and weaknesses, so that
strengths can be built upon and weaknesses minimised.
(ii)
A logical system for differentiating managerial tasks at corporate, business
and functional` levels
The different levels within an organisation have different responsibilities in terms
of their contribution to planning and implementing strategy. The corporate level is
responsible for defining the overall mission, goals and overall objectives and
takes the highest-level decisions, for example on external acquisitions. The
business level is responsible for objectives planning within departments or
divisions and may take decisions on, for example, developing a new product
within an existing range. The functional level is responsible for operational
planning and implementation, such as setting and meeting production targets.
A definition of the contribution the organisation intends to make to its
stakeholders
As we have already seen, 'stakeholders' refers to everyone who is directly or
indirectly affected by the activities of the organisation, ranging from employees,
shareholders and suppliers to customers, local communities and government. In
recent years, the concept of stakeholders has gained importance as an element
of strategic concern due to the increasing emphasis on organisations taking
account of their social responsibilities.
The process of strategy formulation will determine the direction of the organisation:
what it intends to do, and how, to meet its goals. However, the existence of other
dimensions to strategy beyond that of the agreed goals indicates a need to
acknowledge the influence of the environment on the organisation. Strategic planning
must, therefore, be alert to external conditions and what the future may hold. It also
takes place within constraints set by the internal context of the organisation, such as
resources and established policies, management organisation and operational
procedures and practices. We shall consider the way in which these impact on, as well
as being shaped by, strategy later in the Unit
(d) Objectives
The organisation's objectives are an expression of the agreed strategy in terms of
exactly what is to be accomplished and by when. The achievement of objectives
should result in the organisation meeting its goals and thereby fulfilling its mission.
Objectives may be either quantitative, where the outcomes are expressed in terms of
numbers, or qualitative, where the outcomes cannot be measured directly and their
achievement is identified through performance indicators or comparative analysis. We
will consider the formulation of objectives in more detail in the next section.
Below the level of objectives for the organisation as a whole are objectives for different
departments and divisions, different operating units and different teams of staff. For the
organisation to operate effectively, the objectives at all these levels must be
synchronised. For example, the objective for the organisation may be to 'to achieve
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year-on-year growth in profit after tax for the next five years'. For the marketing
division, this may be translated as 'to achieve a 5% increase in sales in one year', and
for the marketing section in a particular locality this may be 'to obtain six new
customers for our products within the first three months of the year'.
(e) Tactical Plans
Deriving from the objectives set by top management for the organisation as a whole
are the tactical strategies and objectives for the different parts of the organisation, such
as the various departments or divisions. It is the responsibility of managers at business
level, such as department heads, to draw up tactical plans which set out the major
steps necessary to achieve the tactical objectives. These plans are developed by
business-level managers, usually in consultation with their junior and senior managers.
In doing this, managers will need to consider similar concerns as those at the corporate
level in terms of the external and internal environments, albeit at an operational level.
However, tactical planning differs from strategic planning in terms of scope and
timescale:
Tactical plans are more specific than the strategy and are likely to focus on
measurable outcomes, such as increasing profitability by a particular amount
each year.
Tactical planning has a shorter timescale typically one to five years and
therefore less flexibility in the deployment of resources, because factors of
production are less variable in the short term. For example, the timescale to
build a production facility from acquisition of the site through to commissioning
may be seven to ten years, whereas the timescale to add a new production line
at an existing facility may be only one or two years.

The implementation of tactical plans supports the achievement of strategic plans, and
in turn, the implementation of strategic plans fulfils the mission of the organisation.
(f) Operational Plans
Operational objectives are derived from the tactical objectives of the different parts of
the organisation. Managers at functional level, with responsibility for particular units or
sections of the organisation, draw up operational plans which set out the actions
necessary to achieve operational objectives.
Operational plans are frequently single-use plans. This means that they are aimed at
achieving a specific objective which, once reached, is not likely to recur in the future. A
single-use plan is supported by a budget, which represents the expression of the plan
in monetary terms. The budget lists all the items of expenditure which the plan will
incur and the estimated dates on which expenditure will fall. It therefore provides a
detailed financial statement of the expected effects of the plan and acts as a
mechanism for monitoring and evaluating progress. The budget may be monitored
monthly or even weekly, depending on the type of operation.
Operational planning differs from tactical and strategic planning in terms of scope and
timescale:

Operational plans are highly specific and set very clear, quantifiable outcomes.
Operational planning has a timescale of one year or less and therefore flexibility
in the deployment of resources is correspondingly reduced.
The implementation of operational plans supports the achievement of tactical plans,
which in turn supports the achievement of strategic plans.
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(g) Performance
Deriving from the operational objectives set by functional management are the
objectives for different teams of staff and individuals in the organisation. It is the
responsibility of first-line managers to prepare plans which set out the actions
necessary to achieve team and individual objectives, working in close consultation with
staff to obtain their motivation and commitment. Such plans are likely to include
developing the competencies of staff to provide them with the skills required for
successful achievement of their objectives. The agreed objectives and plans are then
fed back to their line manager for agreement.
Each individual or team works to achieve their objectives through implementation of the
plans. The performance of individuals and teams is monitored regularly by the
manager through normal supervision arrangements, supplemented if necessary by
additional measures, such as progress meetings, to ensure that key objectives are
being met. Evaluation may be by both quantitative and qualitative measures: for
example, in a call centre, staff performance may be evaluated by the number of
telephone calls answered after the first ring and also by the level of customer
satisfaction, indicated by the number of complaints received. A variety of techniques of
performance management are increasingly being used by successful organisations to
bring about sustained improvements in the performance of individuals and teams, and
hence of the organisation as a whole.
(h) Feedback
We have already noted that the classic model of the planning process is linear. It
exemplifies a 'top-down' approach, where the decisions of top management cascade
down the hierarchy of the organisation for implementation by managers and staff at the
lower levels. In this model, the role of feedback is principally for evaluation and control
purposes. Information in the form of performance data and activity reports is fed up to
managers at each level, to enable actual performance to be compared with planned
performance, so that where necessary corrective action can be taken and problems
resolved.
However, some organisations adopt a different approach, known as 'bottom-up'
objective-setting, where greater autonomy is allowed to lower levels of management;
but if conflict and a lack of co-ordination is to be avoided, the objectives agreed at the
lower levels must be fed back up to top management, where decisions about the
direction of the organisation are made. The difference between 'top-down' and 'bottom-
up' objective-setting can therefore be seen as a difference in the importance placed
within the planning process on the linear cascade of decisions down through the
organisation and feedback in the opposite direction. A balance between the flow of
decisions and information in both directions is essential if the organisation is to operate
effectively.
Benefits of Planning
By means of planning, top management can direct and co-ordinate the efforts of the
workforce towards the achievement of the organisation's goals. In a small
organisation, it may be possible for the owner to direct and co-ordinate the efforts of
each individual by direct personal contact, without the need for formal arrangements,
but in an organisation of any size, more formal processes are necessary.
The process of planning can increase the commitment of employees to achieving the
objectives. If a 'bottom-up' process for setting objectives and preparing the plans to
achieve them is adopted, employees feel more involved in the process and therefore
are likely to be more committed to achieving them.

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A formal plan clarifies expectations of staff at all levels about that the organisation is
expecting of them.
Setting targets for achievement and providing means of recognition when they are
reached increases employees' motivation. Research has shown that if challenging (but
not impossible) goals are set, the performance of employees increases.
Undertaking the planning process highlights areas of weakness that the organisation
needs to address. For example, staff skills may need to be enhanced through
additional training, or a shortage of key staff in a particular function may need to be
remedied by changes in the organisation's approach to recruitment and retention.
Setting clear objectives at every level of the organisation facilitates management
control, because benchmarks are then available against which progress can be
measured.

Different Views of the Strategic Planning Process
(a) Limitations of Rational Approach
The rational approach to planning which has been described in this section has been
criticised by different management theorists on the grounds that when applied in
practice to organisations, it can stifle creative thinking, and that it is not an accurate
description of the way in which strategy is actually formulated and implemented.
On the basis of their research into formal strategic planning processes in financial and
commercial organisations in the UK, Lenz and Lyles concluded that the process had
become 'inflexible, formalised and excessively quantitative'. They ascribed this
problem to four main factors:
the growing professionalism of the planner's job, with a consequent reduction in
the involvement of line managers in the planning process and hence in their
commitment to its outcomes.
an over-emphasis on quantification, resulting in important qualitative information,
such as emerging societal values or new directions in technology, getting lost in
the process, thereby biasing the scope and character of the information used to
plan.
requirements of administrative efficiency, such as the introduction of standardised
data inputs and planning documents, making the planning process more routine
and less open to a wide range of information or fresh insight into emerging
strategic issues.
misapplication of analytical techniques constraining management thinking, so
that emerging strategic issues which may later prove decisive are not identified
because they do not fall within the scope of the model or complex problems
become over-simplified.

Mintzberg and Waters point out that in practice, organisations do not always formulate
strategy in the conscious, deliberate logical manner which the process model
suggests. Often, strategy development is a trial and error process, involving continual
small steps. In this scenario, strategy is regarded as emergent because it emerges as
a pattern which can be observed in organisational activities, rather than as the result of
a deliberate act. Their criticism of the rational approach is that it is based on
assumptions about the environment and about the process by which strategy is
formulated that do not hold in practice:
it is assumed that the environment is sufficiently predictable for the strategies
formulated to remain viable once they are implemented, but in reality the
environment may be far more unstable or complex than the theory assumes.
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it is assumed that strategy is formulated by top management, for implementation
at the lower levels, but in reality formulation and implementation may be
undertaken by the same managers, resulting in organisational learning as an idea
is tried out tentatively, modified, tried again, and so on, until a viable strategy
emerges.
This analysis is reflected in Thompson and Strickland's use of the term 'crafting a
strategy' in order to achieve performance objectives. They say: 'Crafting a strategy is
rarely so dominated by objective analysis as to eliminate any room for the subjective
imprint of managers.'
(b) Logical Incrementalism
Here, instead of applying highly formalised methods to long-term planning, managers
use instead a mixture of formal analysis, behavioural techniques and power politics to
move forward in incremental steps towards their ultimate objectives, constantly
checking and refining their actions in the light of incoming information. Thus, starting
out with a plan which is not fully detailed, management tries out its application and
waits for responses and criticism from others in order to modify and refine it.
(c) Visionary Perspective
More emphasis is now being placed on the idea that management is an art as well as a
science. In other words there is room in decision-making for those who, rather than
using rational methods, or even intuition based on past experience, rely instead on
flashes of inspiration. The thinking behind this view is that rational behaviour can stifle
creativity and that in solving problems there is room for both types of behaviour.
It may be that the rational approach is more suited to such areas as budgetary control
and other quantitative types of strategic decision-making, but in areas of a qualitative
nature, such as advertising, there is scope for those who are able to imagine new ways
and new opportunities which cannot be found by considering past experiences.
Those who are able to visualise future change have much to offer to an organisation's
strategic management. Such a method provides a general direction for the
organisation to take, rather than a totally planned approach, so it can be readily
adapted to cope with changes in the environment. It is even possible for the 'vision' to
be changed, since it is the brainchild of one person and does not need to be
reconsidered through a complex layer of committees.
(d) Natural Selection
This approach considers that strategy evolves from a number of actions by different
decision-makers. The main difference between this and other approaches described
above is that it is the result of actions rather than of a collective intention to pursue a
particular goal. As various strategies are put into action, for example with different
departments within a business adopting different ways of behaving, there is a type of
natural selection occurring where some actions are shown and accepted as being more
appropriate than others in achieving the goals.
C. OBJECTIVES
Using our definition above, objectives are quantified statements of what the organisation
intends to achieve. They should focus the mission of the organisation onto specific targets
which direct the activities of the organisation, and can also be used for measuring
performance. (The use of the word 'should' is deliberate because this may not always be
achieved in practice; we will look at this further later on.)
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Characteristics of Objectives: SMART
Objectives should set out exactly what is being aimed for and, wherever possible, they
should be quantified. Their desirable characteristics are often represented through the
acronym 'SMART'.
S Specific
The objective states quite clearly what is to be achieved.
An objective has to be unambiguous; otherwise it will cause confusion and be open to
misinterpretation.
In contemporary organisations two other Ss are desirable: objectives should be
significant and stretching. To motivate individuals, an objective must be significant in
terms of the employee's contribution to the achievement of organisational
effectiveness. The stretching factor is to ensure that some areas of the tasks will need
additional effort, since an objective should not be so easy so as to demotivate an
individual
M Measurable
Objectives are either quantifiable or qualitative. The outcomes must be defined so that
those who are fulfilling the tasks know exactly what is required of them and the
person(s) measuring their efficiency and effectiveness will know what the measurement
outcomes are in practical terms.
Meaningful and motivational should also be included as desirable Ms, because of
their relevance to the self-worth of the individual and his or her role in the
department/unit/division, and also to the achievement of corporate objectives.
A Achievable
Objectives should always be achievable, with training and support given by the
immediate manager where required. In setting individual objectives as part of the
organisational performance management and feedback process, objectives should be
jointly set by the member of staff and his or her manager. So acceptable objectives
are more likely to be achieved, as the individual will have been part of the decision-
making process regarding the outcomes of their job role. All objectives must be
action-orientated: that is, there must be outcomes measurable either quantitatively or
qualitatively.
R Realistic
The targets/aims/objectives must be realistic, which is aligned to them being
achievable. They must be relevant to the job role, reasonable, reviewable and
rewarding. Rewarding in this sense here does not necessarily refer to monetary
rewards but intrinsic in that the individual's job satisfaction and worth (self-esteem), is
also recognised. Kanter believes that there are 50 ways to reward individuals, one of
which is money and the other 49 recognition for a job well done and personal
commendations and public acknowledgement of the individual's achievements.
T Timed
A definite date must be decided upon by which the objectives have to be achieved,
which means they have to be time-based. It is appropriate too that they are timely in
so far as the time set for achievement of the objective must be in line with other
objectives of the team (or the entire workforce). Objectives should be tangible, in that
they can be assessed and are meaningful to the organisation and to the individual.
Trackable objectives are vital: monitoring and review must take place on a regular
basis and, where necessary, remedial action taken. It might well be that either the
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internal or external environment has made an impact on the objectives, in which case
they should either be rewritten or amended to meet the new circumstances.
Quantitative and Qualitative Objectives
Before we leave this discussion of the characteristics of objectives, we should note the
distinction between quantitative and qualitative objectives. This has important consequences
for the way in which achievement may be measured, as well as providing a means of
expression for the goals of many service organisations which find it difficult to identify
quantifiable objectives.
(a) Quantitative Objectives
Quantitative objectives are those in which outcomes are expressed in terms of
numbers, relating to money, percentages, periods of time, output figures, etc.
Examples are:
'To achieve 5% year-on-year growth in profit after tax for the next five
years.'
'To effectively reduce operating costs by a total of 20% over the next five
years and, in the same time period, to achieve growth in profit after tax by
8% each year.'
'To achieve 15% return on investment in the next tax year.'
Sometimes the actual target figures will be given in the statement:
'To achieve 5,000,000 increase in profit in 2002, which represents a
growth of 15% on 2000 profit levels.'
(b) Qualitative Objectives
Qualitative objectives can relate to service levels to be achieved, image, position,
ethics, or learning and development. The following is an excerpt from a statement of
objectives published in the annual report of a police force in northern England:
'Within five years, or as soon as is practicable, to have a police force which:

Is more open, relaxed and honest with ourselves and the public;
Is more aware of our environment, sensitive to change and positioning
ourselves to respond to change;
Is more closely in touch with our customers, puts them first and delivers
what they want quickly, effectively and courteously;
Is the envy of all other forces.'
It may be that these should be considered as goals rather than objectives, but for
certain types of organisation, or particular parts of organisations, which are not
concerned with the production of quantifiable outputs, there is little alternative to
qualitative objectives. In recent years, two approaches have been developed to try and
overcome this problem.
The identification of quantifiable outputs which, whilst not representing precisely
the goals of the organisation, may be said to indicative of them. These are
known as 'performance indicators'. These do provide measurable targets, but
there are problems in respect of the extent to which these truly reflect the overall
mission of such bodies.
The use of comparative analysis to establish performance targets for one
organisation by reference to performance levels in another similar organisation,
or in relation to performance across the industry or sector as a whole. This is

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now common practice in parts of the public sector, such as social services, where
the environment is highly unpredictable.
We shall examine this issue in more detail in Unit 6, in respect of performance
management.
Hierarchy of Objectives
Objectives can be, and usually are, set at all levels of the organisation:
(a) Corporate objectives are those which are associated with the overall direction of the
organisation. Thus they develop the organisation's mission in relation to the key areas
of the business, such as

(b)
Profitability
Market share
Cash flow
Growth
Customer satisfaction
Industrial relations
Added value
The product and/or service.
Unit or divisional objectives translate the overall objectives of the organisation into
objectives for specific units or divisions of the organisation, according to that division or
unit's areas of responsibility or function. They are then broken down into
Departmental objectives, which in turn can then be further refined into
Individual or team objectives.
(c)
(d)
Thus there is a hierarchy of objectives through which quite general statements at the
organisation-wide level are gradually broken down and made more specific through
application to smaller and smaller parts of the organisation. The achievement of objectives
at the lowest level will ensure that the objectives at the next level above are met, and thus
those at the level above that are met, and eventually the corporate objectives will be fulfilled.
Note that not all objectives will be broken down throughout the whole organisation. Some
will relate specifically to the activities involved at a particular level: for example, those relating
to the management of staff and operations. However, these can be seen as interrelated
since the primary objective of management must be to ensure that staff and operations at the
next level down achieve their objectives. Thus a key role of each manager in the hierarchy of
an organisation is to take the objectives from the level above and translate them into terms
which are relevant and understood by his/her team.
The principle underlying the hierarchy is that of primary and secondary objectives.
Secondary objectives are those whose achievement leads directly to the achievement of a
primary objective. These secondary objectives can relate to shorter time spans or stages in
the achievement of a primary objective, or may relate to a particular aspect of the overall
primary objective. For example, the primary objective might be to increase the sales volume
of a particular product. Secondary objectives might be to increase sales volume by a
particular percentage this year, with a further objective to increase volume by a further
percentage the following year. Alternatively, the primary objective of increasing sales volume
might be expressed in secondary objectives relating to increasing sales volume in specific
geographical areas. In turn, secondary objectives themselves may be broken down into
further sub-objectives providing more specific expressions which can then be related to
particular units of the organisation.
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Setting Objectives
The task of setting objectives can be undertaken in either of two ways.
(a) Top-Down Objective-Setting
This is where top management sets the objectives for the whole organisation and
passes them down to lower levels of management to see that they are adopted and
achieved. The rationale for this is that senior management establishes the strategy
and is, therefore, best placed to plan and set the objectives which will help to achieve
the organisation's goals: it is they who have the overall view. In practice, it would not
be senior management which sets the objectives for the whole organisation, but rather
each level of management would set objectives for the level below them.
It is claimed that this approach ensures greater co-ordination of objectives and
structural fit within the hierarchy. However, it tends to be inflexible and authoritarian,
with objectives having to be 'marketed' to staff who are then required to adopt the
organisation's goals and ethos, subordinating their own objectives for the greater good
of the organisation.
Taylor's concept of Scientific Management is a classic example of top-down objective-
setting.
(b) Bottom-Up Objective-Setting
This allows greater autonomy to the lower levels of the hierarchy. Staff are consulted
and agree with management the objectives which they themselves see as necessary to
achieve the overall goals. This approach is claimed to be more flexible and allows for
flows of information and ideas to be drawn up from all levels of the organisation. It also
encourages involvement in the establishment of organisational direction and can
increase commitment and motivation to the achievement of the agreed targets.
Advocates of more participative management styles support this approach: for
example, McGregor, Ouchi and excellence theorists like Peters. However, there may
be a lack of co-ordination and the goals of one department or team may come into
conflict with those of another.
Conflicting Objectives
In theory, objectives should not conflict, but of course in practice they often do. Some
objectives may be more important than others or may be achieved only at the expense of
others. This is common where resources are restricted and some form of trade-off or
compromise is required to achieve some or all of an objective. Objectives can be set for the
short term or long term; and even if the overall aim is still consistent, there may well be
conflict between long-term and short-term objectives.
There are four main ways of dealing with such conflicts:
'Satisficing' is the term used to describe where an organisation compromises to some
extent on the degree to which an objective is met. For example, rather than aiming for
maximum achievement in one area, the organisation accepts a lesser performance to
the extent that it enables another objective or objectives to be met or achieved.
Priority setting is where objectives are ranked in order of priority and efforts
concentrated on achieving each objective in order of priority.
Sequential attention, like priority setting, involves dealing with individual objectives
before moving on to another. Unlike priority setting, however, sequential attention does
not attempt to rank objectives, but gives attention to each as if in sequence.

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Bargaining is probably the most common form of dealing with conflicts. Individual
managers will negotiate or co-operate with other managers to achieve their own
objectives.
D. INFLUENCES ON STRATEGY AND PLANNING
The strategy and plans of an organisation are determined with the intention of achieving the
organisation's goals. However, there are a number of different factors both within and
external to the organisation which interact with the strategy and goals and may either work
together with them towards the achievement of the goals or, if they are not appropriately
aligned, work against them. These factors need to be considered as part of the planning
process in terms of both how they may influence the determination of strategy and how
strategy may influence them.
We consider three approaches to exploring these factors:

Stakeholder analysis
Environmental analysis
The '7 Ss' framework, proposed by Waterman, Peters and Phillips, as a means of
analysing the factors internal to the organisation.
All organisations have to achieve long-term objectives, but before they can hope to do this
they need to be as clear as possible about what these objectives are. One of the immediate
complications that arise is that the expectations of different groups associated with the
organisation do not always agree. For example, shareholders of a commercial organisation
may be looking for quick returns on the money they have invested, directors may be trying to
achieve market growth by reinvesting profits, and the workforce could be looking for long-
term employment prospects; and at times these different expectations may be incompatible.
In addition, objectives often change over time, with outside influences having an important
bearing for instance changes in interest rates. Part of the management of strategy involves
trying to reconcile these different expectations in order to set agreed objectives for the
organisation.
Analysing the Environment
We have already noted that successful strategic planning requires thorough analysis of the
environment of an organisation. An example of the importance of environmental analysis is
provided by the traditional Swiss watch manufacturer ETA, which by the later 1970s was
facing significant losses in its market share at the lower and middle levels to manufacturers
of electronic watches abroad. At this time, Swiss watch production was still characterised by
individual craftsmen producing the many different parts of a watch for central assembly.
Although quality standards were embedded in the organisation, the structure was not suited
to adopting the new electronics technology. Through careful analysis of the external
environment, ETA spotted a gap in the market for well-designed, but inexpensive, watches
which young people would buy as fashion accessories. To keep costs down, it was essential
that the new watches should be simple to produce, with few components, in centralised
production facilities that incorporated the latest technology. As a result, the Swatch was
developed, which in a short time had turned around the fortunes of the company.
We saw in Unit 2 how, for the purposes of analysis, the environment of an organisation
comprises the external environment and the internal environment.
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(a) The General External Environment
This part of the total environment of an organisation consists of variables which are
outside the organisation itself and not within its control. These variables form part of
the context within which the organisation operates and may be analysed by use of a
PEST analysis (standing for political, economic, social and technological forces). In the
case of ETA, key forces in the general external environment were economic and social
changes which resulted in increased spending power among young people and the
major change from analogue to electronic technology. Information about trends in the
external environment can be obtained from a range of sources, including reports in the
general and specialist media, published market research and reports and surveys
commissioned specially from research organisations.
(b) The Specific External Environment
This comprises those aspects of the environment which are specific to the
organisation, i.e. those factors which directly affect or are affected by the organisation's
operations, such as shareholders, employees, suppliers, competitors and customers.
In the case of ETA, the actions of competitors were a key consideration, as the firm
continued to retain its traditional business at the top end of the market, and decided to
move into the lower end of the market with Swatch, leaving the most of middle market
to its competitors. Information about trends in the specific external environment can be
obtained from sources such as the media, specialist trade publications and trade
associations, companies' annual reports to shareholders, and, of course, personal
contacts.
(c) The Internal Environment
This consists of the factors within the organisation itself that are not within the short-
term control of top management, but can be changed in the longer term. These are the
organisation's structure, culture and resources, which form the context within which
work is carried out. The organisation's structure is the way in which is it organised in
terms of authority, communication and workflow, as shown in an organisation chart.
The culture is the values, beliefs and norms shared by members of the organisation.
Resources are all the assets of the organisation, such as labour, machinery and
buildings. In the case of ETA, it was necessary to make significant changes in all these
factors, by introducing a new organisation structure based on large centralised
manufacturing facilities, changing the culture of the organisation from one which valued
traditional, highly labour-intensive skills to acceptance of modern manufacturing
methods and building new centralised production facilities. However the success of
Swatch also depended on retaining important elements of the traditional environment
and building on them, such as the emphasis on quality and innovation which had
always characterised Swiss watchmaking.
The environmental factors which are most important to an organisation's future are referred
to as strategic factors. For ETA, the strategic factors in the external environment for the
decision to develop Swatch comprised market trends, changing technology and the actions
of competitors; and in the internal environment the organisational structure, the culture and
the competencies of employees were all significant.
Using Environmental Analysis
Having acquired a thorough understanding of the environment, top management must then
use that knowledge to inform development of the organisation's strategy. This involves
assessing the strategic factors carefully to identify how competitive advantage can be
maximised and competitive disadvantage minimised. There are a number of approaches to
this, three of which are considered here. In the first two we have a further look at topics
introduced in Unit 2.
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(a) SWOT analysis
Wheelen and Hunger describe top management as scanning the external environment
for opportunities and threats and the internal environment for strengths and
weaknesses. Such an assessment can be summarised in the form of a SWOT
analysis (standing for strengths, weaknesses, opportunities and threats). A typical
SWOT analysis for a consumer goods firm is shown in the diagram below.
Figure 3.2: SWOT Analysis
Strengths
High level of staff competence
Experienced management
Positive public image
Good customer service
Strong research function
Well-developed financial control
systems
Opportunities
Rising consumer prosperity
Expanding markets worldwide
Diversify into other products
Threats
Low-cost competitors
Demographic changes
Changing consumer tastes
New legislative requirements
A strength is defined as an internal characteristic with the potential to improve the
organisation's competitive position, such as a high level of competency among
staff.
A weakness is an internal characteristic which may disadvantage an organisation
in relation to competitors, such as ageing equipment or manufacturing facilities.
An opportunity is an external factor which offers the possibility of securing
competitive advantage, such as changing consumer tastes.
A threat is an external factor which may undermine competitive advantage, such
as the entry of new firms to the industry.
Weaknesses
High wage levels
Old buildings and equipment
Poor record in implementing
change
Strong trade unions
Slow decision-making

Having conducted such an analysis, further research then needs to be undertaken into
the opportunities and threats identified. After the external and internal environments
have been audited, the results of continuing with the existing strategy can be forecast.
Then strategic decisions can be taken about continuance and change, depending on
the convergence of forecast and required outcomes. As with all management decision-
making, the key stages are identification of alternatives, evaluation and selection. In
evaluating an opportunity, careful consideration needs to be given to its relationship
with the organisation's strengths and weaknesses. Opportunities should be sought
which are most congruent with the organisation's identified strengths and where any
weaknesses in strategic factors can be subject to corrective action. Decisions also
need to be made on the aspects of the business which appear most vulnerable to
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external threats, indicating it may be necessary to withdrawal from a particular product
or market, or divestment a particular business unit.
(b) Scenario Planning
The tools of scanning and trend analysis are useful in environments which are
relatively stable, and forecasts of the future can be based on what has happened in the
past. However, an organisation may be faced with sudden discontinuities, such as the
introduction of a new technology which renders its products obsolete like typewriter
manufacturers when word processors were developed or major uncertainties, such
as the oil price rises of the 1970s, which were not foreseen in advance. In these
circumstances, planning needs to take into account a range of different scenarios,
forcing managers to 'think the unthinkable'.
The basic approach of scenario planning is to identify existing trends and key
uncertainties and then combine them in a number of scenarios that are internally
consistent and within the realm of the possible. The purpose of the scenarios is not to
cover all future eventualities, but to identify the boundaries of future outcomes. There
are four steps in scenario planning:

Determine the parameters of the analysis, such as the time frame, the scope and
the stakeholders whose actions need to be considered.
Identify existing trends and conditions that will significantly affect the
organisation's future within the time frame.
Identify key uncertainties, such as the possibility of a fundamental technological
breakthrough or the effect of a change in government policy.
Combine the trends and uncertainties into internally consistent, wide-ranging
scenarios. To develop the scenarios, it is useful to put all the positive elements
into one scenario and all the negative elements into another and then to consider
whether they are internally consistent. These extreme scenarios offer starting
points from which to develop different but consistent scenarios.
(c) Competitive Analysis
Porter states that there are five forces that determine competition in an industry: the
threat of new entrants, the bargaining power of suppliers, the bargaining power of
buyers, the threat of substitute products or services and rivalry among existing
competitors. Let us consider each of these in turn.
The threat of new entrants
New entrants to an industry bring additional capacity and the desire to gain
market share. The seriousness of the threat of entry depends on the extent to
which there are barriers present within the market which deter potential new
competitors, and on the reaction from existing competitors which the new entrant
can expect.
The bargaining power of suppliers
Powerful suppliers can exert bargaining power over participants in an industry by
raising prices or reducing the quality of purchases. A supplier is powerful if:
(i)
(ii)
(iii)
the industry is dominated by a few companies;
either its product is differentiated or there would be significant costs
involved in changing to another supplier;
it does not compete with other products;
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(iv)
(v)

it poses the threat of integrating forward into the organisation's own
business;
the organisation is not an important customer of the supplier.
The bargaining power of buyers
A buyer group is powerful if:
(i)
(ii)
(iii)
it purchases in large volumes;
the products it buys from the organisation are standard or undifferentiated;
the products it buys form a component of its own product and represent a
significant fraction of the cost, so that buyers are more likely to shop for a
favourable price;
it earns low profits, creating an incentive to reduce purchasing costs;
the organisation's product is unimportant to the quality of the buyer's own
product (where it is, the buyer is much less likely to be price-sensitive);
the organisation's product does not save the buyer money (if it does, then
the buyer is rarely price-sensitive);
(iv)
(v)
(vi)
(vii) the buyer poses a threat of integrating backwards into the organisation's
business.
Substitute products or services
The availability of substitute products or services limits the potential for earnings
and growth from existing products or services, since these have to be priced so
as to be more attractive than the substitutes.
Rivalry among existing competitors
Rivalry among existing competitors takes the form of seeking to increase market
share by cutting prices, introducing new products and promotional advertising.
Intense rivalry is related to the presence of:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
numerous competitors, roughly equal in size;
slow industry growth;
lack of product differentiation, or significant costs of changing;
high fixed costs or the product being perishable, resulting in significant
price-cutting to stimulate sales;
capacity which is normally increased in large increments, leading to periods
of over-capacity and price-cutting;
high exit barriers, such as the difficulty of disposing of very specialised
assets.
Once top management have assessed the forces affecting competition in the industry
and their underlying causes, the organisation's strengths and weaknesses can be
identified. The crucial strengths and weaknesses are those which relate to the
underlying causes of each force.
The 7S Framework
We have already noted in our analysis of the environment the significant role which factors
internal to the organisation, such as structure, culture and resources, can play in facilitating
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or hindering strategy and planning. For example, in the case of ETA, the traditional structure
of the organisation, based around craftsmen in small workshops, was not conducive to the
production of electronic watches; but quality was already a strong value within the
organisation which it was important to retain, as was the tradition of innovation.
Waterman, Peters and Phillips have proposed a model of the implementation of strategic
change which we can use to explore these influences in more detail. They identify seven key
factors, the interaction of which is critical to the process. This is known as the 7S Framework
and is illustrated in Figure 3.3 below. You should note that by superordinate goals the
writers mean 'the broad notions of future direction that the top management team wants to
infuse throughout the organisation' equivalent to the goal setting process which we
discussed earlier in this unit. The value of this model is that it emphasises the importance of
considering the impact of a number of different factors in the organisation, and their
interaction, when determining and, in particular, implementing strategy.
Figure 3.3: The 7S Framework
Structure
Strategy
Systems
Superordinate
Goals
Skills Style
Staff
We have considered strategy and goals already and here we look at their interaction with the
five other factors.
(a) Structure
Chandler first identified that the structure of an organisation followed strategy
development. In a study of large companies, he found that diversified activities forced
them to adopt decentralised structures. He concluded that changes in strategy often
result in management difficulties, because the current structures do not fit with the new
strategies. This leads, for example, to excessive bureaucracy, extended lines of
communication and large spans of control, and as a result, the organisation then has to
make structural changes. While Chandler's thesis seems to fit with common sense,
other theorists have suggested that the relationship between strategy and structure is
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more complex and particular structures can influence the type of strategies an
organisation adopts. For example, if an organisation has a functional structure, in
which jobs are grouped according their specialism, such as finance, production,
marketing, etc., the structure may inhibit the development of different activities as
strategic business units and restructuring may be necessary before a new strategic
approach can be adopted.
Organisations have to identify their businesses to manage them strategically. For the
purpose of considering strategic options, it is helpful to analyse the separate
businesses which make up the organisation, using the concept of strategic business
units (SBUs). Most large, diversified organisations actually comprise several different
businesses: for example, a manufacturer may produce lighting for industrial uses,
ranging from street lights to specialist lighting for TV studios, sports stadia, etc. These
are actually a number of quite distinct businesses, which necessitate different products
and separate production facilities and which supply quite different markets.
Kotler has identified the characteristics of an SBU as follows:

it is a single business or group of related businesses that can be planned
separately from the rest of the organisation;
it has its own set of competitors;
it has a manager who is responsible for strategic planning and profit performance
and who controls most of the factors affecting profit.
The purpose of identifying SBUs is to assign strategic goals to each unit and the
required resources to achieve them.
(b) Systems
By systems, we mean all the procedures within an organisation, either formal or
informal, such as budgetary systems, financial control procedures, reward systems,
management information systems, operating procedures, etc. These can have a
significant impact on strategy development and implementation. For example, portfolio
analysis requires analysis of current activities as SBUs, but can existing systems
provide financial data in the format required to assess their position and prospects?
(c) Style
By style, we are referring to the culture of an organisation: the values, beliefs and
norms shared by its members. As we have already seen, organisational culture is
principally shaped by the approach of top management: not only in their formal
statements, but also by their actions, such as how particular events are regarded, and
which skills and abilities appear to be valued. Culture can also be affected by other
factors as well, such as significant external changes forcing a reappraisal of accepted
methods of working. Culture can support the achievement of strategic plans, as we
saw in the example of ETA, where a company culture already existed which focused
strongly on quality and innovation; but it can also hinder them if the shared norms
influence behaviours in ways which interfere with the achievement of goals. For
example, an organisation with a culture which values traditional ways of doing things
and is highly risk-averse will have great difficulty implementing significant change: in
fact, such a culture may inhibit any serious consideration of such a possibility in the first
place. In discussing organisational culture, Johnson and Scholes suggest the basic
assumptions and beliefs underpinning it operate at an unconscious level. They identify
a 'take it for granted' manner in which the organisation sees itself and its environment,
which is passed on over time, establishing a particular cultural frame of reference for
the organisation (what they term an organisational 'paradigm').
Managers faced with the prospect of implementing strategic change often tend to look
for methods of achieving it within existing beliefs and accepted ways of doing things.
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The strategies which they are able to carry out may therefore be strongly influenced by
what is perceived to be acceptable, rather than logically the best strategy to adopt, and
the managers may also be constrained themselves by the organisation's past history
and accepted beliefs. This can lead to what Johnson describes as 'strategic drift',
when small changes are made incrementally in order to be more acceptable to
members of the organisation, although immediate change may be what is actually
required. Although this way of introducing change can lead to improvements in
performance in the short term, over the longer term an incremental approach may fail
to keep pace with environmental changes, unless it is subject to regular review.
Strategic change often has to be accompanied by attempts to change the culture of the
organisation. Outright attempts to change a dominant culture are likely to be met with
resistance in the form of counter-arguments and efforts to reinforce that culture.
Salancik, when analysing commitment at an individual level, showed that one of the
least effective ways of changing attitudes and behaviour is to attack them directly. This
causes more effort to be used to justify the present course of action and the present set
of beliefs, and results in those concerned being even more convinced that what they
are doing is right. A more effective approach is by encouraging and rewarding the new
behaviours that are required.
(d) Staff
As we have already seen, the management of human resources has developed from
the traditional approach of regarding labour as simply one of the factors of production
and managing staff through the operation of formal procedures such as reward
systems, appraisal schemes,. to recognising the important contribution which people
can make to organisational success. One of the characteristics of high-performing
organisations identified by Peters and Waterman in The Pursuit of Excellence was the
attention which they gave to the recruitment and development of staff.
Strategic human resource management makes the link with strategy explicit: human
resource strategy must be aligned with the development of the corporate strategy. .This
is achieved by the implementation of policies and procedures which support the
achievement of organisational goals, such as performance management.
There are also strong links between staff and style, as key staff management
processes such as recruitment and rewards have an obvious impact on values,
attitudes and behaviours.
(e) Skills
By skill we are referring not just to the individual skills of employees, but also to the
distinctive competences and capabilities which an organisation possesses, such as a
strong focus on product development, skills in project management or excellent after-
sales service.
There is an obvious link between skills and staff, as the skills of an organisation are
embodied in its employees. Specific skills may be acquired by recruitment, but also by
equipping existing staff with the new skills required.
Strategic human resource management links the acquisition of skills directly with the
achievement of goals. An important aspect of performance management is to address
the core competences of the organisation and the capabilities of individuals and teams
through continuous development.
What managers need to know about their staff includes:

Individuals' strengths and areas of with scope for improvement.
What are the triggers that activate those strengths?
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The learning style of the each member of staff, to inform the learning, coaching
and mentoring that all organisations should encourage as part of their culture.
The implications for organisations with a contemporary workforce are multifaceted,
particularly as non-traditional working arrangements such as short-term or fixed-term
contracts and flexible working arrangements are all now part of most of the UK's
patterns of working.
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89
Study Unit 4
Organisational Structure and Design
Contents
Introduction
A. Infrastructure: The Distribution of Authority
Hierarchy of Authority
Centralisation and Decentralisation of Authority
Centralised Structures
Decentralised Structures
Superstructure: The Organisation of Responsibilities
Functional Division
Output-Orientated Division
Multi-Disciplinary Projects: the Matrix Approach
Factors Influencing Organisational Design
Structure and Environment
Structure and Strategy
Structure and Culture
Balancing the Pressures for Uniformity and Diversity
The Nature of Bureaucracy
Types of Authority
Characteristics of Bureaucracy
Advantages of Bureaucracies
Problems of Bureaucracies
Co-ordination In Decentralised Structures
Need for Co-ordination
Principles of Co-ordination: Mary Parker Follett
The Role of Culture
Teamwork and Meetings
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B.
c.
D.
E.
(Continued over)
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90 Organisational Structure and Design
F. Flexibility and Alternative Forms of Organisational Design
Mintzberg's Model of Organisational Structure
The Shamrock Organisation
Outsourcing
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Organisational Structure and Design 91
INTRODUCTION
The ultimate authority to direct the organisation lies with its owners. As we have seen, the
objective of any organisation is to meet the needs of its owners its shareholders in the case
of a company and the public (as expressed through the national or local government) in
public-sector organisations. A range of other stakeholders also have an interest in
organisations, and the goals, strategies and policies of the organisation tend to reflect these
as well as those of the owners. However, in the end, the owners have to agree those goals,
etc. or they may withdraw their interest, by investing in another enterprise or voting for a
different political party.
In organisations of any size it is not practicable for the owners themselves to exercise that
authority and exert direct control over the activities of the people who comprise the
organisation and undertake the work necessary to meet its goals, policies and strategies.
Authority to plan, organise, direct and control the operations of the organisation in their
interests is, therefore, passed to appointed directors or managers, who are charged with
managing the organisation to meet the goals agreed with the owners.
Four important implications flow from this:
The purpose of planning, organising, directing and controlling i.e. management is to
enable the organisation to meet the operational objectives which reflect its agreed
goals, policies and strategies.
Management is responsible for the achievement of those goals and accountable to
the owners for their performance in pursuit of them.
Management has, by virtue of being appointed by the owners, the authority to make
such decisions in respect of the operations of the organisation as are necessary to
meet that responsibility.
Management will reflect strategy because strategy is the agreed means of achieving
those goals.

By definition, management cannot do everything itself: if it did, there would be no-one to
manage. Management must therefore employ workers to get the work done. This means
that there is a hierarchy of authority and responsibility in the organisation: those who have
the authority vested in them and are responsible for its operations are the superiors of those
who do not. As organisations grow so hierarchies also grow and become more complex;
those to whom work is delegated by top managers will themselves have subordinates to
whom they have to delegate, and so on. Thus the organisation builds a management
structure through which the agreed strategy is pursued.
Organisational design is concerned with how this structure is built. The ultimate criterion
for the structure must be its effectiveness in meeting the objectives of the organisation.
Within this, there are two key aspects to be decided.

The way in which authority is distributed through the organisation in order to put the
strategy into effect: this commonly called the infrastructure.
The way in which operations are organised into separate groupings to develop
efficiency and effectiveness in carrying out the strategy: the superstructure.
We start the Unit by considering the structure of authority. The key considerations here are
the way in which authority and responsibility are devolved throughout the organisation and
how that relates to the ultimate management authority. (Note that we shall not be concerned
with how authority is exercised and decisions made, which are our subject for study Unit 5.)
We then move on to consider the structuring of operations through different approaches to
the grouping of specialisations.
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Having established these broad parameters for organisational structure we then examine the
factors which determine the way in which the structure is designed and the characteristics of
different forms of structure under conditions of centralised and decentralised authority. The
former is generally known as a bureaucracy.
Note that, throughout the Unit, we can apply exactly the same principles under discussion to
the organisation as a whole or to the organisation of any particular part of it at department
or even section level. You should, therefore, consider the issues raised in relation to any
organisational system that you are familiar with, not just relating them to analysis of the
organisation at the corporate level.
A. INFRASTRUCTURE: THE DISTRIBUTION OF
AUTHORITY
An initial distinction must be drawn between two types of authority and responsibility within
organisations:
The chain of command or line running through the organisation whereby
responsibility for operations in pursuit of the organisation's objectives, and the authority
to make decisions about those operations, are passed directly down from top senior
management (acting on behalf of the owners) to successive levels of management who
are each directly responsible for the level below and accountable to the level above.
The responsibility to provide advice and/or exercise authority, by individuals and groups
outside of the line management structure, with the goal of enabling the line
organisation to achieve its goals. This is known as staff responsibility (and the
authority exercised is often known as functional or situational) and describes the role
of areas of specialist operational expertise, such as IT, finance or personnel.

Staff roles do not directly contribute to the pursuit of organisational objectives, but rather
facilitate the work of others in meeting them. As such, staff organisation tends to develop as
an organisation grows in order to cope with the increasing complexity of internal regulation
and support. This in turn frees the line manager from concern with the detail of specialised
areas not directly related to his or her particular management functions. Thus, there is no
need for, say, a section head to have a detailed knowledge of personnel matters since the
specialist officers of the personnel department are there to provide advice and assistance as
necessary.
Hierarchy of Authority
Line relationships take a hierarchical form, with authority being devolved down and each
level being subject to management control from above. Thus, responsibilities are passed
down and accountability flows upwards through the organisation. Clear vertical channels of
communication aid the management process and the unity of command provides for
consistency in management.
It is also the case that, at each level, there will be increasing numbers of positions of
authority as the totality of the operational task is broken down into increasingly smaller and
more detailed responsibilities.
These two features give us the normal diagram of an outline hierarchical structure, as shown
in Figure 4.1.
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Figure 4.1: The hierarchy of authority
Top management
Levels
in
the
organisation
Middle management
Supervisors
The same two features are at the heart of the two key elements of this structure:

(a)
The length of the chain of command, from top to bottom, which determines whether the
organisation is tall or flat.
The breadth of the structure at each level relative to the previous level, indicating the
span of control of individual managers.
Tall and Flat Structures
A tall structure is one that has many levels and, therefore, a long chain of command.
The major characteristic of such structures is the very detailed breakdown of
management responsibilities throughout the organisation, specified within the
organisational design. On the other hand, the large distance between top and bottom
can lead to communication problems, with the number of levels increasing the chances
of distortion, filtering and omissions in the process of defining management
responsibilities and objectives and in securing accountability, with consequent
problems for co-ordination and consistency in management action. Further, the degree
of specification of responsibility and authority may make such structures inflexible in
adapting to changing circumstances.
In addition, management levels tend to be costly, having a greater amount of
administrative activity associated with them.
A flat organisational structure is one that has relatively few levels. Comparing
organisations of similar size and operations, the flatter the organisational structure is,
the broader the responsibilities and authority are at each level. The organisational
design is unlikely to be so prescriptive and hence there may be greater management
freedom in the way in which those responsibilities are carried out and authority is
exercised. This should enable greater flexibility in response to changing requirements.
(b) Span of Control
Span of control refers to the number of subordinates who a given manager directly
supervises. This is highly significant in that it affects the total organisational structure,
communication and methods of supervision.
Tall structures tend to be associated with narrow spans of control, although in larger
organisations, broad spans of control can co-exist with tall structures. Flat structures
tend to be associated with broad spans of control, and certainly if there is to be a move
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from a tall structure to a flat one, this would necessitate a widening of the span of
control.
A narrow or small span of control limits the number of people who report to a manager.
This enables the manager to supervise them in detail. By contrast, a broad or large
span of control is characterised by less detailed supervision of numerous subordinates.
There are arguments for and against different spans of control. For example, narrow
spans provide for detailed supervision which may be necessary for certain types of
work or where there is a need to maintain close management control. On the other
hand, there is a considerable risk of managers becoming involved in the minutiae of the
work of their subordinates, thus restricting their freedom and range of work. A broad
span of control permits greater freedom for subordinates, but this may not be
compatible with the need to control, for example, quality.
There is no ideal span of control: instead it should reflect the nature of the task being
supervised. This may be in relation to its importance to the achievement of
organisational objectives, complexity, precision, need for uniformity/consistency (as
opposed to diversity), speed of operation, etc. Thus, complex work normally requires a
narrow span of control, whereas workers doing relatively simple tasks can be controlled
in larger numbers (a broad span). The other significant variable is the calibre of
subordinate staff. Inexperienced staff generally need close supervision so a narrow
span of control is appropriate, as is the case where there is ineffective performance. In
contrast, well-trained, experienced workers can operate within a wide span of control.
Centralisation and Decentralisation of Authority
We have noted that the management structure comes about because of a need to devolve
authority and responsibility from top senior management down through the organisation.
This raises the question of the extent to which lower levels of management are able to
exercise authority without reference to the immediate level above, provided that such action
is taken in pursuit of the organisation's goals within their area of responsibility. The degree of
'delegation' of authority throughout the organisation is a mark of decentralisation.
We need to be clear about the terminology and principles before considering the issues
involved in the decentralisation of authority.
Centralisation refers to the situation where authority and responsibility is retained at
the senior level in the relationship between a manager and subordinates. It is
characterised by decisions being made at the higher level while the actual work is
carried out at the lower level. Centralised authority can be seen in the relationship
between a single manager and his/her subordinates or it can be a characteristic of the
whole organisation with top senior management devolving little or no authority
throughout the organisation.
Decentralisation refers to the systematic devolution of authority and responsibility
within the structure of an organisation. Management passes specified responsibilities,
together with the authority necessary to carry out those responsibilities, down to the
next level in the hierarchy. In return, each level is accountable to the level above for
the achievement of objectives in respect of those responsibilities and for the way in
which authority is exercised. Again, we can see decentralisation in terms of the
relationship between individual managers and their subordinates or in terms of the
organisation as a whole.
Delegation is the process by which authority and responsibility is devolved down from
one management level to the next. Delegation involves the specification of what
responsibilities are being passed down and the terms under which authority may be
exercised. We shall examine delegation is detail in the Unit 5.

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No organisation can be totally centralised or totally decentralised. With complete
centralisation no-one, other than a small group of senior managers, could make any
decisions the result would be that the organisation would be paralysed and unable to
function. At the other extreme, complete decentralisation would deprive an organisation of
the overall planning, decision-making, co-ordination and control that are the functions of top
management the organisation would fall apart. There has, therefore, to be a balance
between centralisation and decentralisation that allows both centralised and decentralised
authority to perform useful functions for the organisation.
The extent and basis of decentralisation, and by implication also of centralisation, is a key
consideration in organisational design.
Note that, although an organisation may be structured into a number of different departments
and sections, this of itself does not necessarily mean that it is decentralised. It is where
decisions are made that tells us whether an organisation is centralised or not. It is quite
possible for an organisation to have many departments all of which are strictly controlled
from a single central source of authority.
(a) Centralised Authority
It is important to be aware of the role and strengths of centralised authority before
looking at the possibilities of decentralisation.
Decisions about the direction of the whole organisation corporate goals and
strategies need to be made by senior management, whether or nor responsibility is
then devolved for setting objectives and determining elements of strategy. Centralised
authority can draw together information across all parts of the organisation, whereas at
lower levels information can only be partial, so effective decision-making is necessarily
limited in its range.
Leading on from this, centralised authority can be seen as providing a unity of
purpose and leadership for the organisation as a whole, ensuring that the various
parts perform as a team within corporate objectives. This ensures corporate integrity
and prevents any divergence from corporate goals by decentralised parts of the
organisation. In the event of disputes between departments or divisions, or between
departments and the corporate whole, central authority takes on the role of referee in
resolving such conflict.
Centralisation may also fulfil other functions where corporate action is necessary,
including:
standardising procedures and approaches, by defining and promoting a unity
of style and purpose in respect of issues and practices across the organisation
(such as equal opportunities practice or customer care);
providing for economies of scale, by drawing together management control of
certain activities across the whole organisation (for example, centralised buying).
crisis management: determining without delay the action to be taken across the
whole organisation in response to sudden change in the environment (the most
common being severe financial constraints imposed at relatively short notice due
to market conditions).

(b) Decentralised Authority
Decentralisation aims to place the authority to make decisions at points as near as
possible to where the relevant activities take place. It utilises specialised and up-to-
date knowledge of situations in order to make timely and effective decisions within the
defined sphere of action. This is in contrast to centralised decision-making which can
be remote from the point of impact. There is, therefore, a clear potential gain in the
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quality of decision-making, but it must be confined to those situations which do not
have a wider impact than the area of responsibility of the decision maker.
Apart from the quality and speed of decision-making, decentralisation of authority and
responsibility has a number of other significant advantages.

It reduces the pressure on senior management associated with the very
extensive responsibilities associated with centralised management.
It facilitates the identification and assessment of performance in more detail than
is possible with centralised systems, linking objectives of individual units with
authority and responsibility for their achievement and accountability to higher
management.
It encourages initiative, stimulates job satisfaction and improves morale by
providing individuals with more control over their work and involvement with the
objectives of the organisation.
It increases the acceptability of decisions to workers when they are taken by
managers who have an intimate knowledge of a particular work situation and are
well acquainted with the sorts of problems that can arise.
It fosters the development of managerial ability at lower levels.

The principal problem of is one of the autonomy of decentralised units, where
independence from the centre can lead to working against corporate policy. This
works both ways, in that the centralised authority can lose touch with the detail of
operations in decentralised parts of the organisation, and the decentralised unit can
lose touch with its role as part of the whole.
Other problems include the following.
The possibility that, because decision-making is very close to and often involves
the affected parties, it can actually turn out to be relatively slow and represent a
compromise based on the need for acceptance.
The duplication of work throughout a decentralised organisation can prove
expensive (not reaping the economies of scale generated by centralising
operations).
Decentralisation depends on effective management at the lower levels and this
is likely to require extensive training, again at substantial organisational cost
and the ability of senior management to accept a diminution of their detailed
authority through devolving responsibility.

(c) Factors Influencing the Degree of Decentralisation
In organisational design, the principle will be to take advantage of the benefits offered
by both centralisation and decentralisation. There is no hard and fast rule about this: it
will depend upon what is best for the organisation in the particular circumstances. The
key parameter will be what best serves the pursuit of organisational goals through the
agreed corporate strategy.
Note, though, the degree of centralisation/decentralisation is not a fixed position, nor is
the trend always towards increasing decentralisation. As conditions change and the
importance of different factors varies, the pressure for either centralisation or
decentralisation may push the structure to move in either direction.
Clearly, as organisations grow in size they tend to make greater use of
decentralisation. The proprietor of a small firm may take all the major decisions
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personally. However, as the firm grows he or she just does not have the time and
expertise to make considered decisions on every issue, and so has to devolve authority
and responsibility. Thus, in large organisations we always find some degree of
authority and responsibility devolved down through the organisation.
The extent to which such decentralisation takes place and the limits which are placed on it
will be conditioned by a number of factors.
(a) Environment
The degree of stability or instability in the external environment (both general and
specific) is a major factor. In general terms, stable conditions are more favourable for
centralised decision-making and decentralisation is more suited to responding to
unstable conditions. We shall explore this in more detail in relation to the concepts of
the mechanistic and organic organisation later in this Unit.
(b) Strategy
Strategies which involve change in the internal environment such as growth through
diversification and the development of new products are generally better planned and
implemented through decentralised structures. They require the input of a degree of
specialised knowledge that is unlikely to be found solely in centralised management
and that implies devolving more responsibilities and authority so as to effectively
operationalise the strategy. By contrast, steady-state strategies can be maintained
through the existing structures and do not imply any further decentralisation.
(c) Organisational Culture
The degree of centralisation or decentralisation has both an impact on organisational
culture and is influenced by it. Autocratic management styles and the associated
patterns of behaviour involve tight control over staffs and support centralised decision-
making. Introducing greater decentralisation of authority and responsibility within such
a culture is likely to be ineffective. By contrast, democratic or participative
management and the associated patterns of behaviour encourage devolution of
responsibility and authority and thus support decentralisation. Imposition of centralised
authority in such circumstances will be resisted. We consider the relationship between
culture and organisational structure further later in this Unit.
(d) Nature of the Work
As Joan Woodward demonstrated, different types of work require different forms of
management control. Again in general terms, work requiring a narrow span of control
is likely to lead to centralisation of authority in its management, whereas wider spans of
control tend to support decentralisation.
(e) Nature of Decisions
We could state as a general principle that a decision should be taken at a point in the
organisation as near as possible to where the impact of that decision will be felt. Thus,
decisions which are crucial to the achievement of the organisation's objectives are
likely to be centralised. We can see this in the determination of corporate strategy and
restrictions placed on the level of financial commitments which it is deemed appropriate
to devolve to certain management levels. In general, it may be said that that the
greater the impact of a decision on the organisation as a whole, the higher up the
management hierarchy it will be taken. By contrast, the more specific to a particular
part of the organisation that the impact of a decision will be felt, the greater the extent
to which it may be decentralised and taken at a lower level in the management
hierarchy.
Note that it is in this area that the pressure for centralisation may be felt most strongly.
Emergencies or sudden changes of conditions call for crisis measures for example,
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the need to make across-the-board economies and these are best taken by
centralised authority. Such conditions may mean taking back previously devolved
responsibilities and authority, and this may be a source of conflict.
(f) Ability of and Acceptability to Managers and Staff
In practice, the degree of decentralisation in an organisation will also depend on the
willingness of individual managers to devolve authority and responsibility to those
below them. This may be culturally conditioned (as above), but may also be based on
personality and assessment of the abilities of their staff. The degree to which staff may
be willing to accept responsibility will also be culturally conditioned and may have its
roots in the informal organisation.
Centralised Structures
Centralised structures are characterised by management prescription of the way in which
responsibilities are performed. Responsibility is devolved down through the authority on the
basis of centrally determined rules and procedures governing behaviour. Little discretion is
allowed for management to exercise authority and make decisions which do not accord with
these rules.
Such an organisation design is known as a bureaucracy and we shall examine the
characteristics of these structures in some detail later in this Unit. For now we can note that
bureaucracies tend to be tall organisations with many levels of responsibility and, because of
the way in which authority is exercised within those levels, they are slow to react to changing
circumstances. As a result, they are often regarded as rigid structures.
The perceived wisdom now is that flat, decentralised structures are preferable in that they
provide for more flexibility in responding to the changing demands of the environment, as
well as carrying lower administrative costs from the reduced tiers of management. However,
it should be noted that there is no "best" structure the most appropriate one is that which
suits the achievement of the goals of the organisation. There remains a strong case for the
control exerted within tall, bureaucratic structures where large, complex organisations such
as many governmental bodies need to operate through clearly established rules and
procedures.
Decentralised Structures
(a) Federal Decentralisation
This approach, proposed by Drucker, aims to maximise the benefits of both
centralisation and decentralisation through an organisational structure which has both
strong parts and a strong centre. It is based on having divisions relating to products,
customers or geographic areas and maintains that, if these divisions are to operate
effectively, they must have a degree of autonomy from the central corporate authority.
In federal decentralisation each division is responsible for the day-to-day running of its
own affairs, thus maximising the advantages of decentralisation. It should have its own
functional departments (accounting, human resources, etc.) where these may be
efficiently provided. In addition, and crucially for confirming autonomy, the
decentralised unit should be a profit centre: it will have its own financial targets and
the authority to make its own decisions on how best to achieve them.
However, the 'strong centre' of the organisation has its part to play. Drucker describes
it thus: 'strong guidance from the centre through the setting of clear, meaningful and
high objectives for the whole'. The strong centre is also ultimately responsible for
seeing that each division achieves the objectives set for it. How these objectives are
achieved is a matter for the divisions themselves.
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Thus, the role of central corporate management is to provide for the greatest degree of
decentralised autonomy of individual units within strong corporate policy and central
strategic planning and control. The functions of the central authority would, under such
a scheme comprise the following.

The determination of corporate policy and setting of organisational goals;
The approval of objectives suggested by the decentralised units, and the
monitoring and control of their achievement.
The development of long-term and medium-term strategic planning applicable to
the whole organisation, including major capital expenditure and projects, and any
reorganisation.
The appointment of senior staff to decentralised units.
The provision of technical services where the advantages of scale and
centralisation are clear (for example, computers, legal advice, research, etc.).
The development and promotion of the organisation's image and ethos, both
externally and internally.

Decentralised units would need to operate strictly within the defined corporate policy,
goals and strategies, but develop their own objectives and strategies for their own
operational responsibilities (which would need to be approved by the centre). Within
that policy responsibility for the day to day running of the unit's own affairs would be
devolved, including:

Short-term planning;
financial management;
operational decision-making.
Note that this type of scheme can be seen in operation at many different levels in the
organisation, albeit not necessarily with the responsibility of being a profit centre. It
clearly applies to the relationship of departments to the centre, but can also be seen in
the way larger departments are organised with authority devolved to section heads
within a departmental corporate framework, particularly in geographically dispersed
organisations
Management theorists like Levitt and Whistler argue that even within federally
decentralised organisations there are pressures towards greater centralisation arising
primarily from the increasingly important role of computers. Computers encourage
centralisation because information flows to the centre of organisations to be processed
and analysed. However, this should not be allowed to change the federal principles of
which decisions should be taken at the centre and which should be taken in the
divisions.
(b) Strategic Business Units
The evolution of markets and business into the highly complex and competitive state
which exists today has led many companies to base their activities on strategic
business units (SBUs). This idea was first introduced by McKinsey & Co. (USA) for
General Electric in the early 1970s but it is common practice today.
The whole concept simply means that companies have identified certain units of their
business as being key sections and, as such, these sections are given individual
responsibilities.
A SBU is a separate operating unit within an organisation which is self-contained and
can relate to a single product, a product range, a department or even a subsidiary
company within a large multiple organisation.
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McKinsey & Co. stated that to be an effective SBU, the unit must meet the following
criteria. It should have:

A unique purpose in the organisation
Its own 'manager' (at any level) to make decisions
Its own plans which fit into the overall corporate plan
Its own customer base
Recognised competition
The single-mindedness of the personnel involved
No fragmentation of effort
Easier processes for purchasing, accounting, etc.
Easier monitoring and control of activities
Duplication of effort by scattered expertise in the organisation
Restrictive practices between SBUs to gain competitive advantage
Poor utilisation of resources due to 'narrow' planning activities
Wasteful purchasing effort due to smaller quantities
Self-protection activities on the part of the 'manager' and personnel
The benefits of operating on the basis of SBUs include:
The disadvantages can be:
B. SUPERSTRUCTURE: THE ORGANISATION OF
RESPONSIBILITIES
All organisations divide their operations into separate groupings in order to concentrate
resources on similar tasks and activities to achieve the goals of the organisation. These
groupings may be permanent features of the organisational structure where they are
known as departments, divisions, sections, etc. or may be temporary, set up for a specific
one-off purpose. There are a number of different bases on which grouping may be done:

function: the specialist roles played by different parts of the organisation, such as
financial, production or sales roles;
output orientation: where the focus is on the type of output or characteristics of the
market into which it is delivered;
multi-disciplinary projects: where the focus is on needs of the particular activity
and/or output which is the subject of the project. These groupings are generally
temporary, although some may last for some time, and offer the opportunity to use
matrix structures.
All these types of grouping derive advantages from drawing together specialist staff
appropriate to their operations and from the development of expertise and experience in
those operations. They all also suffer from a common problem in that there is a tendency for
competition to arise between the different groupings in the structure for resources and power,
and for each group to develop and pursue its own goals and objectives separately from those
of the organisation as a whole. In addition, each basis of grouping has its own particular
advantages and disadvantages, as we shall examine below.
Note, before we examine each grouping, that organisations very often use a number of
different bases within their overall structure: for example, having some functional
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departments and some output-orientated departments, with inter-disciplinary project teams
working in particular areas. They may also use different bases to further divide a main
grouping, so a functional division like sales may itself be organised into separate sections for
different products (output orientation).
Note too that the departments or divisions which are formed as a result of these groupings
are not necessarily a reflection of decentralised authority and responsibility. It is quite
possible for an organisation to have a substantial number of such divisions, but for authority
still to be concentrated at the central, corporate level. The same is true for the way in which
individual divisions are themselves structured. The relationships within and between
divisions and the centre are often shown as a hierarchy in organisation charts, but this does
not show (or even imply) any delegation of authority.
Functional Division
This is probably the most important form of grouping in organisations: it is very common for
business organisations to have major departments for production, marketing, finance and
human resources, etc. Each functional division can itself usually be further sub-divided on
the basis of function: for example, a human resources department may be broken into
separate sections dealing with recruitment, training, welfare and industrial relations, or the
marketing department may be divided into advertising, sales and public relations.
This is, in some sense, the most natural form of grouping, since all organisations exist to
produce goods and services, must market and distribute them, and employ financial and
human resources. These may be said to form the primary functions: further functions may be
derive from them, or from ancillary functions developed to support them
The advantages of functional division are:

Work is not duplicated because each department has its own area of responsibility
across the organisation, i.e. it and it alone performs a given function.
Professional support (education, training and development) is invariably available on a
functional basis and this can be accessed to further develop expertise.
Overspecialisation, particularly coupled with the development of professionalism, may
result in a lack of understanding of the problems of other departments or an
appreciation of their role.
Support functions may see their own goals and operational needs as more important
than the goals and needs of the front-line departments which they serve.
The major disadvantages of functional division are:

Output-Orientated Division
There are three main types of grouping based on the type of output or characteristics of the
market for that output: grouping by product, by geographical area or by type of customer.
(a) Grouping by Product
This will be an appropriate basis of grouping where an organisation produces a range
of quite different products. For example, a motor industry firm may have a car division,
a bus division, and a truck division. Each division will be responsible for all aspects of
the production and marketing of its product, although support functions (IT services,
human resources, finance, etc.) may be provided from outside the specialist division if
the individual divisions are not of sufficient size to justify having their own.
Note that this type of division is not suitable where several products share similar or the
same production processes or marketing/sales approaches. In this case, there would
be duplication of effort across the different product divisions.
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The main advantage of this form of grouping, apart from the gains made by the
concentration of specialist skills and techniques and the development of expertise, is
that it enables detailed financial analysis and control in respect of each product's
profitability, return on investment, cost control, etc. In addition, there may be beneficial
competition between different divisions in respect of performance, although this may be
disadvantageous if it is carried to the extreme of acting against one another.
Under this form of division, the problem of departments assuming their own identity,
separate from the rest of the organisation, is perhaps most pronounced.
(a) Grouping by Geographical Area
This type of grouping is appropriate where the organisation has a distinct geographical
spread to its operations: for example, where the markets for products differ from one
region (or even country) to another. Many large companies organise at least their
sales operations on this basis.
The major advantage of this geographical division is that it allows close links to be built
up with the region/country which is the focus of the division, based on an
understanding of the particular local conditions and requirements. This can result in
greater responsiveness to customer needs.
The disadvantages include:

There may be problems where decisions are taken at headquarters without
reference the division's knowledge of the local situation.
There may be problems in deciding just how many geographical divisions to set
up: too few and each may be called upon to service too large an area, too many
and resources will be wasted.
Each geographical division will require its own support services and possibly
management resources, so an organisation with numerous divisions will have
considerable duplication of resources and incur considerable additional costs.

Again, the problem of divisions taking on their own life rather than seeing themselves
as part of the whole may be very pronounced where they operate far apart from each
other and from their home base.
(c) Grouping by Type of Customer
This type of grouping is appropriate where the needs of customers vary and the
organisational response must be different for different categories of customer. Perhaps
the best example of this is in respect of hospitals where the structure is designed to
meet the needs of different types of patient: maternity, intensive care, orthopaedic, etc.
Again, the main advantage of this is increased responsiveness to customer needs and
the main disadvantages relate to the potential cost of duplication of support services
across different divisions.
Multi-Disciplinary Projects: the Matrix Approach
All organisations make use of multi-disciplinary groupings, drawing together specialists from
a variety of functional areas, for the purpose of tackling a problem of some kind. These may
vary from small-scale, short projects of limited scope concerned with, say, the
implementation of a new payroll system, to large-scale, very long projects of application
across the whole of the organisation, such as the development and implementation of a
policy of customer care. The location of responsibility for such projects may be within one of
the functional or output-orientated divisions, or it may lie within the central, corporate level of
the organisation. The personnel brought together for the project will come from anywhere in
the organisation, their involvement being on the basis of the relevance of their expertise and
their commitment will be to the project and the tasks involved in it.
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This approach to organising ad hoc operations within a divisional structure has been pursued
by some organisations as an integral part of the management structure. This was initially
developed in project-based organisations such as engineering or computer software
development, but is now a common feature of many organisations where operations may be
focused on projects, as well as staff divided into traditional functional groupings. The key
organisational feature of this approach is the matrix structure.
Matrix structures have the following features:

The main basis for operations is the project.
Membership of project teams is drawn from functional groupings.
Full responsibility and authority in respect of the project objectives is delegated to the
project team as a whole, with individual members being responsible for those aspects
which fall within their particular functional specialism.
Thus individual members have dual responsibilities: to the management structure in
respect of their own functional grouping and to the project objectives as part of the
project team.

In a complete matrix form of organisation, the project itself is the location for the
decentralisation of authority, so projects will be established by central management and the
project goals agreed at the corporate level, usually with the management of the functional
divisions. Project objectives, strategies and plans will then be determined by the project
team. Under such a structure, the role of divisions will be to serve the projects, providing a
home for staff which is mainly concerned with developing and sharing specialist knowledge
and experience.
The structure may be illustrated as follows.
Figure 4.2: Matrix structure
Board of Directors
Project A
Director
Production
Director
Marketing
Project B Project C Project D Project E
Director
Finance
Etc.
The advantages of this type of structure are as follows.
It enables a flexible response to situations which put a sudden strain on resources.
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It allows for teams to be drawn from specialist departments in just the right strength to
achieve a given objective.
There is a ready exchange of ideas, and departmental barriers are broken down.
The system calls for a high degree of administrative effort to select and co-ordinate the
teams.
Dual responsibility may cause problems for both team members and the role of the
functional division.
On the other hand, there are problems.
Despite the disadvantages, Cleland and King, in their book Systems Analysis and Project
Management, come down strongly in favour of matrix structures. They develop the
advantages as follows.

The project is emphasised by designating one individual as the focal point for all
matters pertaining to it.
Utilisation of human resources can be flexible, because a reservoir of specialists is
maintained in functional organisations.
Specialised knowledge is available to all programmes on an equal basis, and
knowledge and experience can be transferred from one project to another.
Project people have a functional home when they are no longer needed on a given
project.
Responsiveness to project needs and customer desires is generally faster because
lines of communication are established and decision points (for the project) are
centralised.
Consistency of policy between projects can be maintained through the deliberate
conflict built into the project/functional environment.
A better balance between time, cost and performance can be obtained through the
built-in checks and balances and the continuous negotiations carried on between the
project and the functional organisations.

C. FACTORS INFLUENCING ORGANISATIONAL DESIGN
The contingency approach stresses that there is no one 'best' system of organisation and
management. Rather, there are a range of appropriate systems, any of which may be 'best'
in the light of the circumstances of the organisation. The factors influencing organisational
structure include the following.

The environment: principally the degree of stability present.
The culture of the organisation
The nature of the work and activities undertaken by the organisation
Structure and Environment
During the 1950s Burns and Stalker carried out investigations in the environment/structure
relationship in England and Scotland, in some 20 firms in the electronics industry. Studies
were made from the point of view of how they adapted themselves to deal with changing
market and technical conditions, having been organised to handle relatively stable
conditions. Burns and Stalker were particularly interested in how management systems
might change in response to the demands of a rapidly-changing external environment. Their
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findings, including their two distinctive 'ideal types' of management mechanistic and
organic systems were published in 1961 as The Management of Innovation.
(a) Mechanistic Systems
Mechanistic systems are appropriate for conditions of stability. Where there is a long-
standing, slow-changing market for a product, this demand will be met by a
mechanistic-style organisation. It is based on a long tradition of doing things in a
certain way, with strictly-defined duties and responsibilities, and a formal structure of
authority. New ideas are not readily accepted, and people are expected to work their
way up from the lower levels of the organisation to its higher reaches by long and loyal
service.
Burns and Stalker identified the following set of features which were characteristic of
this type of organisational system.
A specialised differentiation of functional tasks, pursued more or less in their own
right, into which the problems and tasks facing the concern as a whole are
broken down.
A precise definition of rights, obligations and technical methods of each functional
role.
A hierarchical structure of control, authority and communication.
A tendency for vertical interaction between members of the concern, i.e. between
superior and staff.
A tendency for operations and working behaviour to be dominated by superiors.
An insistence on loyalty to the concern and obedience to superiors, as a
condition of membership.
The abstract nature of each individual task, which is pursued with techniques and
purposes, more or less distinct from those of the concern as a whole.
The reconciliation, for each level in the hierarchy, of these distinct performances
by the immediate superiors.
The translation of rights, obligations and methods into the responsibilities of a
functional position.
A greater importance and prestige attaching to internal (local) than to general
(cosmopolitan) knowledge, experience and skill.
Hierarchic structure reinforced by knowledge of actualities being located wholly at
the top of the hierarchy.

(b) Organic Systems
In contrast to the foregoing structure, where we have a volatile or turbulent consumer
demand, or where there are rapidly-changing consumer wants, we tend to find organic-
style organisations meeting the demand. These are highly flexible and informal
organisations. People tend to take command of a situation, rather than of a fixed post.
Where an expert is called for, that expert is given authority, irrespective of his length of
service. Each member of an organisation contributes, according to his abilities, to the
needs of the firm.
The organic approach is appropriate to changing conditions, where there are constantly
fresh problems and unforeseen needs for action, which cannot be distributed
automatically among the functional roles defined in a hierarchic structure: for example,
in a market subject to fluctuations, in times of rapid technical changes, or where there
is a constant need to modify and redesign products.
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The main characteristics of organic structures/systems can be summarised as follows.

Individual tasks, which are relevant to the total situation of the concern, are
adjusted and redefined through interaction with others.
A network structure of control, authority and communication, where knowledge of
technical or commercial aspects of tasks may be located anywhere in the
network.
A lateral, rather than vertical, direction of communication through the
organisation, irrespective of rank. Consultation replaces command.
Communications consist of information and advice, rather than instructions and
decisions.
Commitment to the organisation's tasks is seen as being more important than
loyalty and obedience, and also commitment to the technological ethos of
material progress and expansion.
The contributive nature of special knowledge and experience to the common task
of the concern.
The realistic nature of the individual task, which is seen as set by the total
situation of the concern.
The adjustment and continual redefinition of individual tasks through interaction
with others.
The shedding of responsibility as a limited field of rights, obligations and
methods. (Problems may be posted upwards, downwards or sideways.)
The spread of commitment to the concern beyond any technical functional
definition of grade, status, etc.
Omniscience is no longer imputed to the head of the concern. Knowledge may
be located anywhere in the network, and this location becomes the centre of
authority.
Importance and prestige attach to affiliations and expertise valid in the industrial,
technical and commercial milieux external to the firm.

Burns and Stalker did not see the two systems as being complete opposites but, rather, as
polar positions between which intermediate forms could exist. They also acknowledged that
firms could well move from one system to the other as external conditions changed, and that
certain concerns could operate with both systems at once. They stressed that they did not
favour one system or the other: what was important was to achieve the most appropriate
system for a given set of circumstances.
The Burns and Stalker study was influential on other studies, notably Lawrence and Lorsch's
study on which kind of organisation it takes to deal with various economic and market
conditions. This US research concluded that mechanistic systems/structures are closely
related to considerations of states of differentiation, and organic systems/structures have
much in common with the concept of integration. It is interesting to note, however, that,
whereas Burns and Stalker see organic systems as more appropriate to changing conditions
than mechanistic ones, their American counterparts see both systems as crucial to coping
with diversity. The more dynamic and diverse the environment, the higher the degree of both
differentiation and integration, say the Americans.
Differentiation involves several of the features of the mechanistic systems, which Burns and
Stalker see as being ill-adapted to conditions of change. This points to one of the major
criticisms made against the mechanistic versus organic approach: it assumes that change
can best be effected by organic types of structure, when this is not at all certain. Large
organisations, however great their commitment to delegation, involvement and
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communication between groups, have to maintain a high degree of structure and formality,
even when confronted by periods of change.
Structure and Strategy
Like the chicken and the egg, there has been much debate on which comes first: the strategy
or the structure. Some writers argue that the structure of the organisation flows from the
choice of strategies, whilst others argue that the structure acts as a limiting factor on the
choice of strategies. Both arguments are equally plausible. Once a strategy has been
chosen, systems (and structures) must be put into place to develop or follow that strategy.
However, organisations rarely have the luxury of designing structure from scratch and must
consider what already exists and, crucially, what it take to change it in developing
practical strategies.
The relationship between strategy and structure was explored by the work of Goold and
Campbell in their study of strategic management and relationships between the centre (head
office) and its SBUs, in 16 large diversified corporations. They identified three broad
approaches to strategic management which matched particular organisational designs.
(a) Strategic Planning Approach
In this style, the centre acts as the master planner, setting the broad strategy but
accepting inputs from the subsidiary units. The divisions and departments are seen as
agencies which deliver parts of the detailed central plan, and their role is restricted to
the operational delivery of the plan. This is because it is considered that the high risks
involved cannot be left to subsidiary managers. It results in the centre having high
levels of control and co-ordination.
This helps to provide good integration across the units, which is particularly useful
when resources such as distribution may be shared. It also enables the organisation to
achieve this at low cost, since the bureaucratic systems allow for the use of unskilled
labour. Because the decisions are made at senior level, there is less likelihood of
short-term views predominating.
However, difficulties in communication may slow things down, and it is also possible
that managers of divisions may see their relationship with the centre as being entirely
tactical, and spend most of their management time in item-by-item bargaining. There is
strong evidence that fewer low-risk strategies are pursued than might otherwise be the
case if the strategy was 'owned' by the operating unit managers. There may also be a
resistance to the closing down of poorly-performing units if the strategies have
originated at the centre.
This strategic management style tends to lead to a concentration in a few core areas
where it is possible to have a degree of expertise. Goold and Campbell cited BOC,
Cadbury and Lex as examples of this type.
(b) Financial Control Approach
This style is the extreme opposite of strategic planning. Here the centre sees itself as
a shareholder or a banker for the SBUs. The business unit managers lead the strategy,
but within a budgetary control framework. The centre's role is to:

Set financial targets
Appraise the performance of divisions
Appraise capital bids from divisions.
Empirical evidence suggests that lower-risk strategies are pursued but profitability
ratios are higher.
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This type of strategy allows for diversity, with a business unit being able to make
decisions about entering a new market or developing new products independently.
They might even have the facility to raise funds outside the parent group in order to
support new developments. Much of the growth is as a result of acquisition rather than
internal development.
Companies of this type appear to be quicker to replace managers, fiercer in applying
pressure through the monitoring process, and better at recognising and rewarding good
performance than those types classified as strategic planning or strategic control.
Goold and Campbell cited BTR, Hanson Trust and Tarmac as examples of financial
control organisations.
(c) Strategic Control Approach
Strategic control aims to be a balance between strategic planning and financial control.
In the debate about devolution of power from the centre of the organisation to its
divisions, it often appears that this results in complete independence for the divisions.
In practice this rarely, if ever, happens. Instead changes are usually concerned with
moving away from tight control from the centre in the strategic planning style, towards
strategic control, where the centre acts as a shaper of strategy. The centre's control is
then concerned with the:

Organisation's overall strategy
Balance of activities and the role of each division
Organisation's policies on such matters as employment, etc.
Strategy formulation rests with the business units but has to be tested and agreed by
the corporate management. This is a bottom-up process within central guidelines.
Power is located where the expertise lies.
Budgets and decisions cannot be over-controlled by the centre as this would result in
delays and confusion, but the centre remains responsible for assessing the
performance of divisions against their business plan, within which the annual budget
has an important part to play.
Strategic control demands that the organisation has a clear understanding of how
responsibility for strategy is split up between the centre and the divisions. Apart from
defining key policies, allocating resources to divisions and assessing the performance
of divisions, which are the centre's responsibilities, all other activities may be devolved
to the divisions themselves. ICI and Courtaulds were identified by Goold and Campbell
as being organisations of this type.
The key features, advantages and problems of the three strategic approaches, as suggested
by Goold and Campbell, are shown in Figure 4.3.
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Figure 4.3: Structure implications of approaches to strategic management
Strategic Planning
Centre's role:
Key features:
Centre acts as
'masterplanner'
Top-down
Highly prescribed
Detailed controls
Advantages: Co-ordination
Financial Control
Centre acts as
'shareholder/banker'
Bottom-up
Financial targets
Control of investment
Responsiveness
Strategic Control
Centre acts as
'strategic shaper'
Bottom-up
Strategic and financial
targets
Less detailed controls
Centre/divisions
complementary
Ability to co-ordinate
Motivation
Too much bargaining
Culture change
needed
New bureaucracies
ICI
Courtaulds
Public sector post-
1990s1990s
Potential
problems:
Centre out of touch
Divisions tactical
Loss of direction
Centre does not add
value
Examples: BOC
Cadbury
STC
Public sector pre-
1990s
BTR
Hanson
Tarmac
Structure and Culture
Structure is a key element in the range of factors which determine organisational culture.
Once established, that culture can be very supportive of the structural form and make it very
difficult for the organisation to change it.
The work of Handy and of Peters and Waterman is of particular importance here.
(a) Handy's Four Cultural Types
Handy's classification of four types of culture power, role, task and person is based
on organisational structure, and the implied beliefs and values which underpin the
structure form the basis and foundation of its culture.
Entrepreneurial structure and power culture
This structure places an emphasis on centralisation and central power. Such
power exudes from the core of the business, often in the form of a figurehead, a
very powerful and influential individual, with the power and authority to allocate
and control resources.
Handy suggests that the dominant culture in this type of structure is the power
culture, and we can characterise such organisations as being like a web with a
ruling spider. Those in the web are dependent on a central power source: rays of
power and influence spread out from a central figure or group. There may be a
specialist or functional structure, but central control is exercised largely through
appointing loyal key individuals and on interventionist behaviour from the centre.
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Such control may be exercised on whim and through personal influence rather
than, necessarily, on procedures or purely logical factors.
This type of structure can be found in small and medium-sized organisations that
are evolving (growing), are organic by nature and responsive to change.
The main advantage of such organisations is that they are strong, proud and
dynamic, and able to react quickly to external demands. However power cultures
may suffer from staff disaffection: people in the middle layers may feel they have
insufficient scope, and the interventionist pressure and constant need to refer to
the centre may create dysfunctional competition and jostling for the support of the
boss. The organisation is also dependent on the ability and judgement of the
central power; if it is weak, then the organisation will struggle.
As the power organisation grows, the centrist culture breaks down if it becomes
impossible for the centre to keep up its interventionist, co-ordinating role. The
large organisation may need to split into divisions, so creating other spiders webs
linked to the central web.
Bureaucratic structure and role culture
The bureaucratic structure is based on logic and rationality. It places an
emphasis on roles within the organisation, rather than one central figure, and
relies heavily upon the central prescription of power, authority, tasks and
responsibilities. Handy indicated that the culture that is dominant in this -
structure is the role culture.
Work within and between departments is controlled by procedures, role
descriptions and authority definitions. Communication takes place within well-
defined systems and structures (committee constitutions and reports, procedure
manuals, official memoranda, etc.). There are mechanisms and rules for
processing decisions and resolving conflicts. Matters are taken up the line to the
top of the structure where heads of functions can define a logical, rational and
corporate response. Co-ordination is effected at the very top, by the senior
management group.
Role cultures tend to develop in relatively stable environments and provide
predictability, standardisation, consistency and conformity. They tend to be
effective where economies of scale are more important than flexibility, or
technical expertise and specialism more important than product innovation or
product cost. However, role cultures may find it hard to adjust to change, when
rules, procedures and tested ways of doing things may no longer fit the
circumstances.
Examples of bureaucracies and role culture are local government and the civil
service, large insurance companies and IBM by the late 1980s. However, all
these organisations have undergone extensive change in response to the
pressures of market competitiveness and various forms of decentralisation and
deregulation. Downsizing, delayering and competitive tendering are examples of
how such organisations have restructured to become more flexible and
responsive.
Handy had developed his conception of this type of culture by proposing that, as
bureaucratic organisations decentralise to increase the flexibility of their response
to change in their environments, the culture may itself develop into a federal role
culture. The central characteristics of this remain an adherence to the application
of rules through established procedures and role descriptions, but it
acknowledges a shift in the location of authority to the decentralised unit. Thus
allegiance is given to both the central, corporate level and the local level, with
clear rules as to the scope of legitimate authority in each.
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Matrix structure and task culture
The matrix structure places an emphasis on the completion of projects by means
of project teams or groups. Expertise is pooled in order to complete large
projects that, ordinarily, could not be achieved by one person. The emphasis is
on expertise and skill as opposed to power (in the entrepreneurial structure) and
role (in the bureaucratic structure). Handy identified the culture that dominates
the matrix structure is the task culture.
Power and influence are distributed through the matrix on the basis of what is
necessary to get results. Resources are given to the right people, at whatever
level, who are brought together and given decision-making power to get on with
the task. Individuals are empowered with discretion and control over their work.
The task and results are the main focus, and team composition and working
relationships are founded on capability rather than status.
Task culture is essentially flexible and adaptable, with teams being formed for
specific purposes and then moving on, and team composition possibly changing
according to the stage of the project. This allows flexibility and responsiveness to
both the environment and client needs. On the other hand, people in the team
who want to specialise may be sucked into general problem-solving and when
the task changes they must move with it rather than pursue a particular scientific
or professional specialism. Project-based working often involves high risk and
ambiguity, which means far less security and certainty for employees (particularly
in comparison to bureaucracies).
Task culture is based on expert power with some personal and positional power.
Influence tends to be more widely dispersed with each team member feeling that
he or she has more of it. In the team, status and individual style differences are
of less significance: the group achieves synergy to harness creativity and
problem-solving, and thus gain efficiency. The aspirations of the individual are
integrated with the objectives of the organisation.
Organisational control is exercised through the allocation of projects and target
setting, project budgets/resource allocation and monitoring/review by means of
progress reporting systems. Where resources become scarce, top management
may intervene more closely and there may be competition between project
leaders for available resources. Morale may suffer and individual priorities and
objectives take over, with the result that the task culture may tend towards power
culture.
We can see task culture existing in arrangements such as network organisations,
where a large organisation effectively consists of small groups co-operating
together to deliver a project, and matrix organisations which are entirely project
oriented with ever-changing project or contract teams.
Independence structure and person culture
The focus of the independence structure is on the individual. Individuals within
this structure are far more autonomous, but meet together to make decisions that
affect them as a whole. This structure is present in small companies such as
consultancies, doctors' surgeries, law firms, etc., where individuals have their
own objectives and skills and, in some cases, are largely responsible for their
own income generation. Handy suggested that the culture that dominates the
independence structure is the person culture.
The structure exists only to serve the individuals within it: it has no superordinate
objective. Power and influence are shared, being based on individuals seen to
be equal. They will tend to have strong individual values about how they will
work and these will respected by others. Where individuals from a person culture
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are working in other cultures, they will maintain their own cultural values: for
example, the consultant or specialist who will do what is required to retain his or
her position in the organisation, but essentially sees the organisation as a base
on which they can build their own career or pursue their own interests. As such,
they are very difficult for the organisation to manage.
This cultural type may be the only acceptable one for particular groups, such as
workers' co-operatives or where individuals basically work on their own but find
some back-up useful. It is becoming increasingly popular as the number of
consultancies increases.
It is possible that such organisations are likely to only be effective for their original
members, or for small numbers of individuals. Where the organisation begins to
take on its own identity, it will start to impose on individuals, so moving towards
some of the other type of culture.
(b) Peters and Waterman's Rational and Excellence Models
The management experts Peters and Waterman have provided a comparative
classification of what they see as the two main types of organisational structures and
cultures found in modern society. They term these the rational model and the
excellence model. The rational model derives its structure and culture from the ideas
of classical and scientific management theory, whereas the excellence model is based
on Peters' own excellence theory together with the work of Singe (on learning
organisations) and Deming (Japanese ideas).
The Rational Model
The characteristics of this model are as follows:

Organisations are large, so that they can reap the economies of scale.
Low costs and cheapness of product or service are seen as the way to
success.
All activities are carefully analysed and controlled: for example, by strict
budgets, cash flow analysis, etc.
All targets are firmly set in numerical terms.
Long-range forecasts are produced in detail.
Orthodox thinking is encouraged and rewarded.
The manager's job is decision-making, and staffs implement these
decisions.
Organisational structures are complex, with detailed organisation charts
and job descriptions.
People are treated as factors of production.
They use money as a motivator, and productivity is rewarded by bonuses.
They dismiss staff who do not achieve performance targets.
They use inspection to achieve quality control.
Financial targets and their achievement are seen as the essence of
business: profits must be generated at once.
The organisation must continue to grow.
A useful way to remember the cultural and structural values characterised by the
rational or traditional model of an organisation is by using the acronym THROB:
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T Tall. This means there are many layers of management, ranging from
junior managers through middle management to top management. The
many layers of management and supervisors mean that there is a narrow
span of control, i.e. relatively few reporting to each immediate superior. A
tall organisation offers a long ladder for promotion as individuals move up
the structure.
Hierarchic. This refers to clearly defined layers of power and authority,
with instructions flowing downward from top to bottom, and information and
feedback of results being reported upwards through the layers of
management.
Rigid. The structure of the organisation is based on a clear set of
principles which can be applied to all organisations under all conditions.
Organised. There is a strict division of labour allocating people to specific
jobs, which are organised into departments, each of which has a specific
function to perform and concentrate upon to the exclusion of anything else.
Bureaucratic. The organisation is run by a strict set of rules, is formal and
impersonal, and work roles are clearly defined. There is a ladder of
promotion that may be climbed by gaining qualifications and by long
service.
H
R
O
B
Peters and Waterman criticise the rational model for, in particular, its emphasis on
numerical analysis, the orthodoxy of thought and the stress on cost reduction
which give such organisations a built-in conservative bias. In place of the rational
model, they put forward their alternative model.
The Excellence Model
The excellence model is quite different from the rational model in that it has the
following characteristics:

An emphasis on quality and value rather than purely on price.
A search for new products or services.
A distrust of over-reliance on numerical analysis, because this leads to a
fixation on costs.
A belief in the innovative qualities of staff.
The long view should replace short-termism in organisational decisions.
The main assets of an organisation are the people who work in it.
People should not be afraid of making mistakes as they strive to improve
the organisation.
Management and organisational structures should be flexible.
There is a stress on values instead of merely profits.
Parts of the organisation are encouraged to compete against each other.
Management should have vision and motivate others to share this vision.
Managers should realise that people are not always rational.
Organisational structures should be as simple and 'flat' as possible.
You can remember the excellent (or flexible) model of an organisation by using
the acronym FELT.
F Flat. This refers to there being few levels of management.
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E
L
T
Empowered. This means that workers have greater control over decisions
which affect their work, making the culture more democratic.
Lean. This refers to keeping stock-holding to a minimum by having just-in-
time (JIT) deliveries and also to outsourcing all new core activities.
Teams. This refers to the replacement of conventional departments with
multi-functional teams. Within the teams, work roles are flexible and
individuals are encouraged to learn and deploy new skills.
Balancing the Pressures for Uniformity and Diversity
Organisational design needs to achieve a balance between the pressures for uniformity on
the one hand and diversity on the other.
(a) Uniformity
Uniformity implies standardisation and common procedures, centrally administered.
The pressures for uniformity can include the following:

The cheapness of standardisation. It costs less to produce and process
standardised forms, and there are economies of scale.
The need for interchangeability. Common procedures allow interactions within
the organisation to be carried out.
The need for control of process. Uniform systems facilitate this.
The need for a standard product. Multiple stores, branch banking and airline
offices are examples of market-induced needs for uniformity of output from a
variety of sources.
The need for specialisation. By pooling all the requirements in a specific area,
the organisation can build up a competence core in that field, thus attracting
specialists.
The desire for central control: senior management's need to 'know what is going
on' is a push towards uniformity or control of the process, rather than the results.

All of these will allow the centre to monitor the daily process of the business, to be the
only pool of all relevant information, and to intervene, should the occasion demand it.
Uniformity is the hallmark of the steady state.
(b) Diversity
The other set of pressures in any organisation will be for diversity, and these include:
Regional diversity: an organisation may operate in more than one geographical
area; although it may not regard these areas as 'different' for its own particular
purposes.
Market diversity: markets can be defined in regional terms (France, or Yorkshire);
in socio-econometric terms (suburban, middle-class); by end-use (agricultural,
industrial); by customer activity (government, construction industry); or even by
social habits (television viewers, pubgoers). The number of market categories
and the degree to which they differ are important aspects of diversity.
Product diversity: this covers the number of outputs. Can they all be treated as
one, or does each product have its own peculiarities regarding market, image,
quality, need for servicing, etc.? It is the degree of difference between them the
diversity that matters.
Technological diversity: is the organisation based on one technology or a variety?
If it is a variety, are the differences between the technologies significant? Low

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technologies permit wider ranges of expertise and shorter learning periods.
Diversity in a high-technology organisation, therefore, is more pressing than in a
low-technology organisation (e.g. insurance, local government, many service
industries).
Goal diversity: does the organisation have one set of goals, to which all divisions
and departments subscribe, or do the goals vary? How much does the variety
matter?
The identity of diversity: individuals find it easier to identify with smaller groups
than with large organisations. Buried deep in a functional specialisation of a
large complex, it is hard to feel committed to the aims of the total organisation.
The pull for disaggregated control: just as the centre feels a need to hold all the
strings in its grasp, so the managers on the periphery feel a need to have more
control over the resources that they are required to organise and administer:
Power needs responsibility, and vice versa.

Conglomerates are the usual business example of diversity. Governments are another
example of diversity, with departments ranging from police and fire brigades to tax
assessments and licensing. Diversity can be highly exciting but sometimes ruinous, as
several conglomerates have proved. The advance of technology in all areas of life, the
apparent increase in the rate of change of the environment, the pressures for the
agglomeration of activities, tend to increase the pressures for diversity.
In the search for the perfect blend, organisations tend to oscillate from uniformity to diversity,
from centralisation to decentralisation, according to the economic and political forces
impinging on the environment. Questions that top management of the organisation must ask
are:

How much diversity?
What kind of diversity?
There is no objective, statistical way of answering these questions. Each member of the
organisation will have a different answer. A systematic approach will help here. Once the
right degree and right form of diversity has been decided, managers of organisations must
proceed to staff them and link them with integrating and co-ordinating mechanisms. Faced
with factors pulling in different ways, organisations have to adapt, so designs may need to be
adapted to meet these changes.
D. THE NATURE OF BUREAUCRACY
The concept of bureaucracy was developed by Weber, Fayol and Taylor. While Fayol and
Taylor were grappling with the problems of management, Weber was developing a theory of
authority structures in which he identified a form of organisation which he called bureaucracy.
The distinguishing features of bureaucracy were a definition of roles within a hierarchy, where
job holders were appointed on merit, were subject to rules, and were expected to behave
impartially.
Types of Authority
Weber viewed legitimate power and authority as the basis of organisational structure, and
identified three bases for this: charismatic authority, traditional authority and rational-legal
authority. Using this typology, Weber saw organisations developing through three stages
towards the ultimate expression of authority, that of rational-legal power in a bureaucracy.
However, it is possible to see all three types of authority present within the one organisation.
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(a) Charismatic Basis for Authority
This derives from the special personal quality or power of an individual, making him or
her capable of influencing or inspiring others. History is full of charismatic leaders who
have inspired obedience by their strength of personality, not least within business
organisations.
Organisations characterised by charismatic leadership are largely governed or
managed in accordance with the leader's wishes and invariably have staff who give
dedicated service. However, such an undertaking has a built-in instability. It is
dependent upon the quality of the leader's decisions and the maintenance of his or her
charisma, and towards the end of the leader's active life, jockeying for position can
occur, and eventually a 'succession crisis' may emerge: perhaps even fragmentation of
the concern under different disciples claiming to be the 'true heirs'. The new
management almost invariably lacks the charisma of the old and therefore the
organisation becomes one of Weber's two other types.
(b) Traditional Basis for Authority
Precedent and usage are the bases for the exercise of authority in this type. What has
always happened shall continue to happen (and it may, indeed, be viewed as sacred),
and any proposal for change is considered sacrilege, treason and so on. The leader
has the authority which by tradition attaches to the post of leader, as distinct from the
authority being personal because of the individual's 'charisma'.
In this type of system, there are no disciples. People follow the leader because of the
accepted power of the office. Distribution of power is at the disposal of the leader and
again derives from the power of the leader's office. Thus organisations may be
characterised by simple patronage, where appointments are in the personal gift of the
leader (and may sometimes be employed directly by him or her), or by feudal systems
of delegating power conditional upon continued support of the leader.
Whilst history supplies the more obvious examples of these situations, modern
management also furnishes some. It is by no means uncommon for managerial posts
to be handed down through members of a family virtually hereditary transmission of a
dynasty or for managers to bring in their 'own man' to reinforce their position.
(c) Rational-Legal Basis for Authority
The final stage of development from charismatic authority comes when complete de-
personalisation is effected. Neither the exceptional leader nor respected tradition is the
fount of authority. The system is called rational because it is, thought Weber, based on
reason or logic: the means are specifically designed to serve the ends (or 'goals'), so
the organisation is like a well-planned machine where each part takes its share of
making the whole function efficiently. 'Legal' applies because authority rests on the
acceptance of the rules of the organisation, the rules being laid down by those allotted
the right and duty to lay them down; they are accepted by staff precisely because that
power to set the rules is accepted as legitimate.
Rational-legal authority requires as its organisational system what Weber termed
'bureaucracy': a system of accepted, legitimate rules and regulations governing the
functioning of the organisation. These rules place people in offices: that is, formally-
defined positions in the organisation. These offices carry the authority, and this
authority is wielded by the holder of the office. Hence, we say that rational-legal
authority is impersonal: it exists separately from the person holding the office.
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Characteristics of Bureaucracy
Weber saw bureaucracy as being the ultimate expression of organisational form:
'The decisive reason for the advance of bureaucratic organisation has always
been its purely technical superiority over any other form of organisation'.
Certainly bureaucracy is, or at least has been, the prevailing form of organisation for most
enterprises: in industry and commerce, government institutions, trade unions, the military,
etc. etc. It has dominated management thinking as the appropriate method of structuring
and making legitimate the operation of an organisation. So, exactly what does it mean?
You will certainly be aware of the more pejorative meanings deriving from the way in which
bureaucracies often tend to operate in practice. These describe a certain kind of
organisational behaviour which, when we suffer from it, is intensely irritating and frustrating,
involving 'red tape', inexcusable delays, inhumanity, indecisiveness, blind adherence to rules,
and so on. Bureaucracy is also used to describe a system of rule by officials, whereby what
should be an open institution appears to have insulated itself against participation by the
general public and is no longer representative of the people to which it is supposed to be
responsible: the public in the case of governmental institutions, and shareholders and
customers in the case of industrial or commercial undertakings. We shall try to avoid such
meanings, although it is clear that the shortcomings of bureaucracy as an organisational form
give rise to these criticisms.
In the study of management and organisations, 'bureaucracy' is a description of a way of
organising a social institution, incorporating a specification of one approach to structure,
internal relationships, distribution of authority and working procedures. The major
characteristics are summarised below.
(a) Specialisation
'The regular activities required for the purposes of the organisations are distributed in a
fixed way as official duties.'
A clear-cut division of labour exists between the various office-holders in an
organisation, so that each has a set of clearly-defined duties and tasks to perform
(specialisation). The duties of each post are closely defined, and so are the
qualifications of the person required to fill it. The main emphasis is on the tasks and
standard of performance needed by the undertaking in order to ensure efficient
performance. Because that performance is, essentially, an impersonal thing, the
individual employee's personality and other talents are irrelevant.
(b) Hierarchy of Authority
A detailed and precise hierarchical structure of positions of authority exists throughout
the organisation. The scope of each person's authority and responsibility is clearly
defined, and is vested in the office held. Thus, each manager has clearly defined
authority (which must not be exceeded) over his or her staffs in a particular field
(beyond which he or she must not stray), and they must obey. Each office is
supervised by the one above it.
(c) System of Rules and Procedures
The duties and activities of each office in the organisation are governed by 'a
consistent system of abstract rules ... (and) ... consist of the application of these rules
to particular cases'. Hence, the bureaucracy has a firm code of procedures to cover all
possible foreseeable events; and, should the unforeseen occur, a decision is sought
from 'higher authority', with the precedent established being added to the book of rules.
Extensive written records are necessary and, indeed, verbal communication without
any written confirmation of decisions and actions is positively unsound. Training of
employees consists largely of teaching them to find their way about in the rules.
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The dominance of the system of rules and procedures should ensure that uniformity of
performance should follow, irrespective of the abilities and personality of the individual
office-holder.
(d) Impersonality
'The ideal official conducts his office ... (in) ... a spirit of formalistic impersonality,
without hatred or passion and hence without affection or enthusiasm.'
Detached impersonality governs decision-making and activities generally: both
internally, for example in dealings with work colleagues, and externally when dealing
with customers and/or clients. Impartiality and equitable treatment come from stern
non-involvement in or even a seeming unconcern for the particulars and problems
of others. What matters is how the case fits the rules and that, and only that, tells the
official what should be the higher authority's considered decision.
Employment
For a long time job security was a characteristic of the bureaucratic organisation.
Recruitment was based on a promotion and appointment system; on merit and
seniority, rather than on competences' with a clear career structure. Salaries were
related to the actual job, not the person's competence to do the job. Total loyalty and
commitment were expected with complete adherence to rules and regulations. Any
infringement was deemed to be a reason for disciplinary action.
Since the 1980s the traditional forms of bureaucracy have been under attack in their public-
sector strongholds. Practices of recruitment, promotion and remuneration have changed to
be more flexible and performance-orientated.
Advantages of Bureaucracies
The bureaucratic organisation continues to be a most enduring form, particularly in those
undertakings which are concerned with the application of set standards and of rules of
eligibility for certain services (and most notably these include governmental institutions and
financial services). To have endured in this way, bureaucracy must have something to offer,
and it clearly provides a framework in which a permanent system of work can be carried out
in a regular manner, even though the individual office holders may change. Additional
benefits are as follows.
The definition of responsibilities and duties of each position within the hierarchy derives
from the overall objectives of the organisation and there is no room for subversion of
those objectives. Work is highly regulated in that every eventuality is covered by the
laid-down rules and procedures and there is a system for ensuring that new
developments can be incorporated. All necessary tasks are covered and the hierarchy
of supervision, against prescribed methods and standards, ensures the desired level of
performance.
Thus, bureaucracy is well suited to the steady production of a standardised product
(say, manufacturing cigarettes) or the provision of a standardised service (say, the
collection of taxes).
The existence of tight job descriptions and person specifications means that, in theory
at least, staff are obtained with specific skills and abilities related directly to the tasks to
be performed.
Whilst to our more liberal perceptions of the 21st century the impersonality of
bureaucracies seems somewhat stultifying, the attractions to staff should not be
overlooked. The bureaucratic form strongly supports the application of rules and
regulations with which many employees particularly, but not exclusively, in the public
sector are concerned, and the feeling of certainty that this provides in a stressful
workplace can be very reassuring. Security of employment and the very impersonality

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of the work practices and procedures are also important, encouraging faithful
performance of duties, confidence in the system and opportunities within a regularised
promotion system.
Problems of Bureaucracies
Lack of flexibility is now recognised as the great dysfunction of the bureaucratic system. And
this is becoming increasing significant as the environment within which organisations exist is
subject to rapid change.
The dominance of rules and procedures can cause the organisation to be extremely
inflexible in its dealings with people and circumstances.
A bureaucracy may serve most of its customers well most of the time, with the
characteristic of impersonality ensuring a common level of treatment. Unfortunately,
human beings and individual circumstances vary and trying to apply rigid rules can
mean inefficiency, even injustice, in any non-standard case. No account can be taken
of individual circumstances in respect of either a member of staff or a customer/client.
The essence of this is that each activity/transaction/contact has to be categorised
according to the rules and there is no incentive to distinguish cases and develop new
approaches. This leads to a lack of adaptation to the changing needs and demands of
people both inside and outside the organisation.
Sometimes the rules and regulations become ends in themselves, rather than the
means of achieving organisational goals.
The culture engendered by this dominance of rules can also create unwarranted
adherence to them. A familiar feature to all who have been mismanaged or mishandled
by bureaucracies is that when you ask the question why something is being done,
there often seems to be no reason which can be given. What was a rule has now
become an end in itself, and what was once done to achieve the organisation's goals
has now itself become the goal. Sometimes this can be so prevalent that the goals of
the organisation become subservient to the carrying out of outdated rules.
Highly bureaucratic organisations tend to concentrate excessively on the regularisation
of behaviour. This meant that management, rather than looking outward and reviewing
the continued effectiveness of the rules and procedures in respect of the environment,
is often internally concentrated on ensuring application of the rules through the control
of behaviour checking that jobs have, in fact, been done.
Officials in a bureaucracy are employed, trained and paid to maintain routine efficiency,
to follow precedent and conform to the prescribed rules not to propose changes in
them. That is the sole prerogative of senior management who are often removed from
the point of application and less informed of the problems. Where power is largely
centralised in this way, decisions that are taken at the periphery are often bad ones,
with the result that the residual delegated power tends to be taken away, and thus
decision-making becomes more remote and poorer still.
Power relationships can become distorted, with consequences for the much-vaunted
advantage of co-ordination and consistency. When most sources of uncertainty are
removed, by provision in the rules, power rests especially with those whose role is to
cope with what uncertainty still exists and with the unplanned Thus specialists dealing
with problems may have real power quite beyond that provided in the organisation
chart and the rules
Crozier postulated that there was a 'bureaucratic vicious circle' evident from the
organisation's attempts to resolve the problems brought about by the operation of the
bureaucracy. This can be seen in the response to the poor decision-making and the
hierarchical tensions noted above being in terms of additional rules. This gives rise to
a striking conclusion:

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'A bureaucratic organisation is an organisation that cannot correct its
behaviour by learning from its errors.'
These problems make bureaucracy highly inefficient in creative, dynamic situations, such as
the computer or advertising industries. Nor, when it does face uncertainty or change, is it
effective in reaction and adaptation: a major disadvantage in the unstable environments of
commerce and governmental bodies in the present day.
In addition to lack of flexibility, the very impersonality which gives strength to the
administration and application of rules and procedures can also have dysfunctional effects.
The bureaucratic approach, concentrating as it does purely on the formal structures of
the organisation, takes no account of the human dimension to organisations. Gouldner
identified a management dilemma arising from the conflict between the formal and the
informal structures operating within the organisation. To gain acceptance, the manager
needs to conform to the existing social processes; yet management goals are set
through the formal structure and if reliance is placed solely on the authority of the
formal organisation, there is a strong risk of conflict.
We have seen that the absence of personal responsibility is a positive benefit; and
some people enjoy the freedom and lack of stress that engenders, handling problems
by 'going by the book' or alternatively 'passing the buck' instead of having to make up
their own minds. But research shows that many officials find this restricted role
frustrating. Especially at lower levels, and among newer employees, alienation from
the organisation is quite likely, particularly where the work is machine-paced, repetitive
and does not call for individual decision-making and judgement.
Interaction in work terms is solely on the basis of the impersonal performance of
organisational roles. This can reduce face-to-face contacts, so what contacts do take
place are hampered by unfamiliarity, status-consciousness, and so on. Lack of co-
operation means that further face-to-face contacts are avoided. These conditions
ignores the social and ego needs of workers and managers at the lower levels of the
organisation (indeed, removing much of the creative side of supervision), all of which is
contrary to established ideas of motivation.
Merit, and hence promotion, may be also be seen on the same basis and this often
leads to promotion being based on how long someone has been in a role without taking
into account the achievement and ability of the individual. This reduces further the
potential for new ideas and approaches to be brought into the organisation.

E. CO-ORDINATION IN DECENTRALISED STRUCTURES
Need for Co-ordination
When responsibility and authority are decentralised within the organisation, as expressed by
the approach to both its infrastructure and superstructure, it is a key function of management
to ensure that the exercise of authority and the carrying out of responsibilities are consistent
in the pursuit of organisational goals, i.e. that all sections, departments and levels of the
organisation are pulling together. This may be seen as a fundamental role of the centre in
the decentralised organisation.
Apart from the sheer size and, sometimes, geographical spread of modern organisations,
there will inevitably be problems in ensuring the consistency required, such as:
The problem of departmentalism: with decentralisation, the issues of how delegated
authority is exercised and how operations are carried out by decentralised units in
relation to the goals and policies of the centre are a prime concern for management.
With virtually any degree of autonomy, there are likely to be conflicts over the
interpretation of objectives and role between the centre and individual departments,
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competition between departments for resources, and differences in cultures between
different parts of the organisation.
Line and staff relationships: the role of specialists and professionals within the
organisation, however that is structured, is always likely to produce tensions in respect
of the differing objectives in way in which problems are analysed and solutions
proposed.
The human dimension: individuals and groups often have their own goals and
motivations which they pursue within the organisation.
The primary function of co-ordination is to address these problems within the context of both
the organisational design and operational management. The focus will be on ensuring
consistency in the pursuit of organisational goals, but to achieve this, the management
function of co-ordination must also perform the following subsidiary functions.

Timing: managers must ensure that the various tasks being performed fit together in
terms of timing, so that the various activities of the organisation are in phase.
Informing: all sections/departments must be kept informed as to what is expected of
them and up-to-date on what is going on in other parts of the organisation which link
into their activities.
Balancing: an appropriate balance of resources must be made available to each
department and section so that they can perform their functions.
Resolving conflicts within the organisation: conflicts between sections, departments
and levels within an organisation must be contained and resolved.
Integrating all the various interests of individuals and groups within an organisation.

Principles of Co-ordination: Mary Parker Follett
Mary Parker Follett is sometimes described as a bridge between the scientific management
and human relations schools of thinking, in that she introduced the ideas of togetherness
and group thinking into the study of organisations, developing Mayo's ideas into a way of
co-ordinating organisations so as to achieve the goals stressed by Taylor and scientific
management.
Follett puts the focus on groups at work co-operating with management to achieve
organisational goals. The key principles are as follows.
(a) Co-ordination by Direct Contact
In order to achieve co-ordination, managers must be in direct contact with all levels of
their staff and their colleagues. Two-way horizontal and vertical communications are
crucial to this.
Many writers agree with Follett's views and argue that managers should avoid being
shut away in their offices. They should be out and about both within the organisation
and in the wider environment. The argument here is that physical presence is a
positive influence for co-ordination. This is sometimes termed management by
walkabout.
(b) Co-ordination Through Early Consultation
If management wish to co-ordinate staffs, groups or departments, managers must
involve their staff in the early stages of decision-making. Managers must elicit the
views of staff early in the decision-making process so that they can be properly
represented. Participation is crucial for co-ordination.
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(c) Co-ordination as the Reciprocal Relating All Factors in a Situation
This refers to the importance of contingency theory to co-ordination. All the factors in a
situation interact with each other, so the personalities of the individuals concerned and
the cultures of particular departments can present difficulties for the co-ordination of
functions. For example, newly-appointed staff or newly-formed departments do not fit
easily into established organisational patterns. Management should be aware of these
problems and should take steps to overcome the difficulties for co-ordination.
(d) Co-ordination as a Continuing Process
The co-ordination of an organisation is a never-ending process. This process works
best when authority is situational and functional rather than based purely on
management position in the hierarchy.
(e) Co-ordination as a Democratic and Voluntary Process
Follett argues that the 'carrot and stick' approach of rewards and punishments has only
limited value in bringing about co-ordination. If this approach is over-used it results in
lack of respect both for and from management.
The Role of Culture
The bureaucratic approach to co-ordination is based on strong direction from the centre and
the use of standardised administrative practices and procedures, together with centralised
management information systems, to co-ordinate and integrate the various parts of the
organisation.
In order to replace bureaucracy as a co-ordinating device, Davies suggested an
organisational culture based on the ideas of the human relations school. The key aspects of
this are as follows.
Mutual interest: an organisation should have a culture which encourages a sense of
common purpose between all levels and individuals within it. Davies sums this up thus:
'In this way people are encouraged to fight the problem at hand instead of each other'.
Voluntarism: in a human relations culture organisation, every effort is made to give
employees choice in their work activities, e.g. individuals are invited to volunteer for
training for more responsible work, flexi-time working hours are offered whenever
practicable, etc.
Individual differences: a human relations culture accepts that each human being is
unique and has his or her own personality, talents and aptitudes. The organisation
should strive to make use of each whole individual rather than force them into pre-set
roles.
Motivation: this culture stresses positive encouragement for individuals rather than
pressure and an over-dependence on rules. Human relations culture encourages
managers to create the desire to succeed in their staffs. Managers should be 'hard on
the problem, but considerate with their staff''.
Human dignity: working in a human relations culture should increase an individual's
sense of their own worth and dignity. Employees at every level should be treated with
respect.

The human relations culture goes a long way towards meeting many of the objections raised
against the bureaucratic culture. It helps to create an organisational climate that is
characterised by positive images of the organisation in the minds of the employees. It is
also employee-centred: it takes account of the needs of the employees and gives them a
sense of being valuable assets to the organisation, so employees are likely to produce better
results.
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However, two strong criticisms may be levelled against the practicality of this particular
concept of culture:
Limited effectiveness: the American sociologist Chinoy argues: 'Human relations
may bring about a more pleasant social condition within which to work, but this
approach does not lessen the tediousness of tasks'. This criticism implies an over-
emphasis on social factors within a culture; boring work can still create problems for co-
ordination.
Under-estimation of conflict: the human relations culture puts such great stress on
harmony and consideration that it overlooks the degree of conflict that exists in every
organisation between individuals, between workers and management, and within
management structures. In this respect it is unrealistic.

Peters and Waterman, in promoting the excellence model, put forward the concept of
'simultaneous loose-tight'. The tight integrating element is shared values, such as quality
and service to the customer. The loose element is the coming into being of taskforces with
considerable autonomy on how to tackle tasks so long as the task is completed and the core
values are respected. Task discipline arises from the values: for example there should be no
short cuts on quality or service. Under this view, the co-ordinating links of culture should be
few but crucial.
Handy sees decentralised structures as being based on a task culture, as opposed to the
role culture which dominates under bureaucracy. This is similarly based on a shared vision
of corporate objectives which it is the role of senior management to promote and monitor
effectiveness against.
The ideas of Ouchi give considerable support to participation as a co-ordinating technique.
Ouchi points to the ways in which Japanese firms are well co-ordinated as a result of
encouraging the participation of their employees in running the organisation. Ouchi argues
that, by encouraging ideas and suggestions and involving all levels of the organisation in
decision-making, employees are woven into the fabric of the organisation. Ouchi calls his
approach Theory Z.
Many organisations are looking to the Japanese experience for guidance on how best to co-
ordinate their activities. Japanese organisational culture has shown itself strong on
integrating decentralised organisation. This is based on bottom-up decision-making, i.e.
ideas flowing up to top management and flowing down again through consultations with
people concerned. This two-way flow co-ordinates the various levels of authority by
encouraging consensus, because people are likely to agree with decisions where they
themselves have been consulted and have become part of the decision-making process.
Japanese culture is also more collectivist than Western culture, resulting in a high level of
loyalty to the organisation. Such loyalty is a powerful co-ordinator. In turn the organisation
offers long-term security to its employees; security can encourage teamwork and again
promote co-ordination.
Teamwork and Meetings
Peters refers to the breaking-up of organisational activities into team tasks and projects as
chunking, and argues that chunking encourages action, i.e. it helps to get things done.
Thus, teams or taskforces are important building blocks in effective organisations. They have
relatively few members and can be made up of members drawn from high or lower levels of
staff depending on the importance of the task being tackled. They are also flexible, coming
into being to tackle a given task and disbanding when the task is finished, but the team spirit
lives on ready for new taskforces to be formed as needed. Teamwork is more likely to be
effective when team members are volunteers and not subject to heavy bureaucratic controls.
Argyris sees teamwork as a psychological issue. Individuals develop certain psychological
features including activity, independence, versatility, and self-awareness. However, these
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qualities do not fit easily into large organisations structured into departments and divisions,
where individuals tend to feel mere cogs in large machines. Thus, effective organisational
design must find ways of integrating the psychological features of individuals with the needs
of the organisation. Rigid bureaucratic structures as shown on organisation charts cannot do
this effectively, but project teams and taskforces can.
The logic of this analysis is that:

The pre-condition for effective performance is teamwork
Teamwork is not encouraged in rigid structures.
Organisations should be structured into work or project teams.
The application of this principle may be seen in the role of meetings. These offer
opportunities for interaction between individuals (managers and/or staff) drawn from various
parts of the organisation on a formal or informal basis. They can promote co-ordination
through the exchange of information and help to develop a sense of unity. Formal integration
of meetings into the organisation's structure and operational functioning where they are
generally called committees allows these gains to be institutionalised. Thus, they may be
specified as having a co-ordinating function, both between departments and between levels
and specialisms within the organisation, or an evaluative or a decision-making function.
F. FLEXIBILITY AND ALTERNATIVE FORMS OF
ORGANISATIONAL DESIGN
The term 'flexibility' can apply to both organisational structure and working arrangements.
Both are relevant to organisational design.
Flexible organisations are rare. The early days of Apple Computers in the USA could
be said to be flexible: job titles were discarded, and bureaucracy and traditional
structures eliminated. With flexibility, the structure of the organisation changes as
circumstances dictate, and even strategy emerges from within rather than from the top
of the organisation.
Flexible working is far more common and is an important part of the newer
organisational structure scene. The term has come to imply a peripheral workforce
which may be called in as necessary. The organisation at the core owes little in the
way of future commitment to the worker apart from the immediate contract. In turn, the
peripheral worker owes little allegiance to the core except for fulfilling the immediate
contract.

Mintzberg's Model of Organisational Structure
Mintzberg was concerned with the way in which modern organisational structures are
changing, and argued that certain parts and functions of organisations are growing and
becoming more important. His approach distinguishes five key functional elements, with a
crucial link to customers/clients. Note that this is not a prescription for organisational design,
but a means of concentrating attention on key processes within the organisation.
This is shown diagrammatically as follows.
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Figure 4.4: Mintzberg's model of organisational structure
STRATEGIC APEX
(Senior Management)
TECHNOSTRUCTURE
Quality Control
Maintenance
Work Study
Human Resource
Management
MIDDLE LINE
(Middle Managers)
SUPPORT STAFF
Finance Functions
Legal Functions
Administration
Press and Public
Relations
OPERATING CORE
Sales Marketing
CUSTOMERS/CLIENTS
The five elements are as follows.
The operating core which contains those people directly involved in the primary
activities of the organisation. In a manufacturing organisation, they would be
production workers, whilst in a retail organisation they would be shopfloor workers or
retail staff.
The strategic apex is concerned with supervision and control. Senior managers or the
board of directors would generally be found at the strategic apex.
The middle line fills the gap between the strategic apex and the operating core, by
turning strategic decisions into operating plans. Thus, the middle line tends to
represent managers and supervisors.
Support staff provide services such as public relations, pensions management or staff
welfare. Unlike the operating core, they are not involved in any of the primary activities
of the organisation and work independently.
The technostructure is that part of the organisation concerned with the administration
of work, standardisation, planning and control systems. Engineers, accountants and
quality staff are found within this group. Their work is concerned with monitoring and
control of activities associated with the operating core.

The model is not a sequence of activities. Rather, it is organic: that is, all the parts function,
interact and modify to meet changing needs. As organisations develop, so the relative
importance of each element can change. As an organisation moves from small-scale
production to mass production, for example, so tasks such as monitoring quality and
standardisation become more important. In other words, the technostructure becomes a
directing force. The development of modern organisations has seen the growth of the
technostructure and support staff. The flexible organisation can adapt by allowing certain
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sections to expand, while increasing productivity can bring lower numbers of workers to the
operating core.
The Shamrock Organisation
Mintzberg's model is reflected in Charles Handy's concept of the 'shamrock organisation'
which is based on the ways in which organisations are now forming employment or work
relationships. The three leaves of the shamrock represent three different types of
relationship.
Figure 4.5: The shamrock organisation
Core workers
Flexible
labour force
Contractual
fringe
(a) Core Workers
These will be those people who have permanent positions in the organisation. Their
work would be considered essential to the core business of the enterprise.
Organisations are, though, involved in a lot of other things which are peripheral to their
core business. They run ancillary operations such as providing services to their
employees, for their buildings, to meet statutory requirements, etc. Exactly what
constitutes the 'core business' may be difficult to define. It may be clear that certain
activities are peripheral, such as catering or cleaning, but the status of other activities
such as payroll or even personnel may be more contentious. The provision of such
services is increasingly being 'outsourced' through what Handy calls the contractual
fringe.
Organisations' demands for labour fluctuate over time, in terms of both the need for
staff to carry out the core activities and the need to develop new materials, equipment
or working practices in order for the core business to be maintained. This demand is
increasingly being met from the flexible labour force.
(b) The Contractual Fringe
The contractual fringe is made up of both individuals and other organisations with
whom the organisation contracts to supply services to a specified standard for an
agreed fee. Such arrangements may be on a relatively long-term basis (for example, a
five-year contract to provide cleaning services) or on a very short -term basis (for
example, bringing in professional trainers to deliver development programmes as and
when needed).
Outsourcing the needs of organisations for specialist services or peripheral activities
involves contracting with both individuals and organisations. Such organisations may
be shamrock organisations in their own right, having a core workforce and contracting
with others for the services that they require and using the flexible labour force as and
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when necessary. Individuals in this position are likely to be self-employed
professionals or technicians, and may often be past employees of the organisation
A common example of outsourcing is the decision by many organisations no longer to
run their own catering service for staff and, instead, to put the service out to tender
among private catering contractors. The organisation simply pays a fee for the
complete service to be delivered in accordance with its specification of the level and
standards required. Thus, the service continues to be provided, but not by the
organisation, which concentrates on its core activities.
Outsourcing has also become common in large public organisations since the 1980s,
with the prime aim of reducing costs.
(c) The Flexible Labour Force
This third element in the organisation is characterised by temporary and part-time work
carried out under a contract of employment. This is substantially different from the first
category core workers working under contacts of employment. The rights of short-
term and part-time employees may be substantially less than those of permanent staff.
The labour market for this kind of work can be characterised as 'hired help', which is
available for employers to dip into as and when necessary. Work carried out under
these arrangements is often at very low rates of pay and of an unskilled or semi-skilled
nature. However, that is not always the case, and there are professional and technical
workers who prefer the flexibility of short-term contracts or part-time work to suit other
aspects of their life.
One aspect of this is becoming more common with the growth of project-based work
within organisations. This is the practice of employing people on short-term, fixed
contracts of employment for the duration of particular projects. This enables
organisations to bring in appropriate staff to undertake specific work, usually of a skilled
or professional nature, but not to take them permanently onto the workforce. During
the period of the contract, such workers are considered to be employees, and often
have the same benefits as core workers. They may well also be paid higher salaries
than permanent staff, to compensate them for being ineligible for certain benefits and
for having fewer rights: for example, in relation to pensions. A good example of this is
in the broadcasting industry where people are employed on contracts for the life of, say,
a television programme or series of programmes and leave. They may, of course, be
re-employed at a later date when the need for their services arises again.
Outsourcing
Outsourcing, or contracting out internal services to external providers, was one of the key
strategic trends of the late 1980s and throughout the 1990s. However, the cost of
outsourcing has caused a great deal of concern, especially with the lack of co-ordination and
control measures to make effective use of the external provider. BP was an organisation that
failed to put in place such control and monitoring processes and they were criticised for their
learning and development programmes which only had a few people attending (in some
instances as few as four employees). This was obviously not cost-effective, and BP
management renegotiated the terms with which the provider had to comply.
Outsourcing was originally intended to reduce headcount costs by contracting out services
that were not regarded as core to the organisation's effectiveness, although many
enterprises outsourced human resources, transport, mailing systems and payroll
administration. Activities such as catering, security and grounds maintenance were also
areas for outsourcing and were generally regarded as routine, non-value-adding activities
which carried significant overheads if provided by employees.
One other way in which organisations have changed their structure is by franchising their
brand name and marketing expertise to people who wish to start up their own businesses but
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without the risk of establishing their own identity in the market. The relationship in these
cases is not one of employer-employee but that of a commercial contract in which the
franchisee uses the franchisor's brand name and standardised products or services in return
for a fee or share of the profits. This approach may be seen as outsourcing in the sense that
the franchisee is effectively an autonomous unit of the central organisation, the franchisor.
The franchisor's organisational structure is one of a strategic core with a large contractual
fringe (the franchisees), which allows growth not through expanding the core but through the
fringe, at the latter's financial risk.
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129
Study Unit 5
Authority and Decision-Making
Contents
Introduction
A. Authority
Authority, Responsibility and Accountability
Authority and Power
Delegation
Purposes of Delegation
The Process of Delegation
Benefits of Delegation
Barriers to Effective Delegation
Empowerment
Facilitating Empowerment
Advantages and Problems of Empowerment
Decision-Making in the Organisation
Levels of Decision-Making
Routine and Non-Routine Decisions
Programmed or Structured Decisions
Decision-Making Structures
Groups and Participation in Decision-Making
The Process of Decision-Making
The Rational Decision-Making Model
Approaches to Decision-Making
Decision-Making Techniques
The Human Factor
Dealing with Risk and Uncertainty
Alternative Models of Decision-Making
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B.
C.
D.
E.
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130 Authority and Decision-Making
INTRODUCTION
A key aspect of the organisational structure is the way in which authority is exercised through
it. This is a very live debate in many organisations as traditional concentrations of
centralised authority are being questioned in the pursuit of more flexibility, speed of response
and quality in decision-making.
There are two aspects to this:

the distribution of authority throughout the various levels and divisions of an
organisation,; and
the passing of authority to act and make effective decisions from one level of
management to the next, generally known as delegation.
We looked at the distribution of authority in Unit 4. In the first part of this Unit we examine
the basis of delegation through the concepts of responsibility and accountability, and the way
in which delegation operates. The extent to which authority is handed down or shared
throughout the organisation is the subject of much debate. We shall examine conflicting
views, including those of the empowerment movement which challenges the balance of
power within the traditional hierarchy.
Delegation is essentially concerned with making decisions, which is the subject of the second
part of this Unit. Continuing the theme of the distribution of authority and responsibility
through the organisation, we shall explore the way in which decision-making is structured in
organisations. This relates closely to the formal organisational structure and the way in
which delegation operates, but also responds to the nature of decisions themselves.
Finally, we consider the way in which decisions are made, looking at the classical model of
decision-making the rational model and assessing its implications and limitations.
A. AUTHORITY
Authority may be defined as the right to issue valid instructions which others must follow.
There are two other key concepts associated with this:

responsibility, which is the obligation to achieve certain objectives through making
decisions and/or carrying out tasks; and
accountability, which is the obligation to report (give an account) to a higher authority
for the discharge of those responsibilities.
Authority, Responsibility and Accountability
Accountability is a crucial concept in management. It is the control exercised by more senior
levels in the managerial hierarchy over subordinate managers. Any person who accepts
responsibility also accepts the need to be accountable for that responsibility.
Accountability thus flows upwards in an organisation, while responsibility is assigned
downwards.
If a person is to assume responsibility for certain objectives, and to be held accountable for
his or her success or otherwise then that person must have the right to take action and make
decisions commensurate with achieving those objectives. Without this right, he or she
cannot be truly accountable for the performance of the responsibility. This requires that
responsibility must be accompanied by authority, i.e. the ability to issue valid instructions (to
subordinates, but also to others, such as the finance department to issue payments for
services, or the purchasing department to supply particular resources) in order to get the
work done.
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Authority and Decision-Making 131
The relationship which exists between three concepts, then, must be in balance.
Responsibility and authority must go hand in hand, and accountability cannot be expected to
flow upwards unless authority and responsibility have first flowed down.
Problems can arise where this balance does not hold true. It is by no means uncommon for
managers to lack the authority necessary to discharge their responsibilities: for example,
through having to refer routine decisions or requests for supplies to more senior levels, or by
more senior management interference in giving instructions to staff. In such circumstances,
it would be wrong to hold a manager accountable for failure to achieve their objectives.
There is, though, a difficulty with all of this: the problem of dual responsibility.
Subordinates are given responsibility for the duties assigned to them by their manager, and
are accountable to that manager for their performance. However, the manager remains
responsible for seeing that these duties are, in fact, carried out satisfactorily. He or she is
accountable to a higher level of management for that responsibility.
Thus, delegation of responsibility is not an abdication of that responsibility.
Authority and Power
Authority is the right to do something. In an organisation, it refers to the scope and amount
of discretion given to a manager to make decisions, by virtue of the position which the
manager holds in the organisation.
Power is the ability to direct or modify the behaviour or attitudes of another person. It is the
ability to influence.
Power is not the same as authority. A manager may have the right to expect subordinates to
carry out instructions, but may lack the ability to make them do it. On the other hand, an
individual may have the ability to make others act in a certain way, without having the
organisational authority to do so. Informal leaders are often in this position.
This raises the questions as to where authority and power come from and how they are
distributed within the organisation, relative to each other.
(a) From Where Does Authority Derive?
The ultimate authority within an organisation rests with its owners in case of private
sector concerns, and with the elected government (on behalf of the people) in the
public sector. That authority is delegated down through the organisation in a series of
steps which forms its scheme of management. Each position in the management
scheme will have delegated responsibility for some element of that overall authority.
So authority rests in the position within the organisation.
This view of the distribution of authority is known as 'from the top down' because
managers can pass on some of their authority to subordinates in assigning tasks to
them.
Note that authority can also be conferred 'from the bottom up'. The normal process for
this is through election whereby people give their authority to representatives to act on
their behalf in respect of certain matters: to MPs and the government system for
example, in respect of the matters of the law, the economy and the public services, to
local councillors in respect of local affairs and to a board of directors in respect the
people and institutions which own a company. This process also operates within
organisations whereby workers are represented by trade unions, while companies may
have directors representing different stakeholders.
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(b) From Where Does Power Derive?
Charles Handy (Understanding Organisations) identified six types of power from
different sources:

Position power is the power which is associated with a particular job in an
organisation. Such power derives from the authority of the organisation.
Resource power derives from the control over resources which are valued by
the individual or group to be influenced.
Expert power is the power which belongs to individuals because of their
expertise, although it works only if others acknowledge them to be experts.
Negative power derives from the ability to use disruptive attitudes and behaviour
to stop things from happening: for example a subordinate might refuse to
communicate openly with a superior and might provide false information.
Personal power is derived from the popularity or charisma of the individual.
Physical power: the power of superior force is absent from most organisations
but it is sometimes evident in poor industrial relations, such as when there is
shopfloor intimidation.

For organisations to work effectively in the interests of their owners (or the public), position
power should be the norm reflecting the structure of delegated authority. This implies a
top-down approach.
It is increasingly being recognised, though, that major gains may be available through
increasing the contribution of people to decision-making processes who would normally be
outside this structure. This implies empowering people at lower levels in the organisation,
and requires a different approach to delegation.
B. DELEGATION
Delegation is assigning responsibility from one level of management to a lower level within
the hierarchy.
We can identify three types of responsibility which may be assigned to a lower level in the
organisation:

Assigning responsibility for the performance of tasks.
Allocating authority to issue orders.
Allocating decision-making powers in defined areas.
In terms of structure, this diffusion of task performance or issuing of orders and decision-
making throughout the organisation forms the basis of decentralisation and associates
authority within the various levels in an organisational structure. It is often formally
recognised in the organisational setting through a 'scheme of delegation' which is, effectively,
the framework of distributing authority. Although an organisation may have several divisions
or departments, this of itself does not necessarily mean that it is decentralised. It is where
decisions are made that tells us whether an organisation is centralised or not. It is quite
possible for an organisation to have many divisions and departments all of which are strictly
controlled from a single central source of authority.
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Purposes of Delegation
Delegation in any organisation serves a number of purposes, which can be summarised as
follows:
Fundamental to organisation
The whole concept of organisation is based upon delegation. An organisation arranged
with different levels of staff reporting to superiors above them is only possible if the
principle of delegation is used.
Decisions taken at most appropriate level
Delegation permits the application of one of the most important principles of good
organisation. Decisions should be taken at the lowest practicable level, only referring
back to a higher level where necessary.
Distribution of workload
As organisations grow, in terms of both volume of work and hence personnel, it is
necessary to delegate the work involved in carrying out the operations necessary.
Delegation enables the workload to be spread more evenly and fairly over the available
personnel.
Distributing the workload means that tasks can be given the priority, time and attention
they deserve and, as a consequence, work is done more quickly and more efficiently.
Development of ability
Delegation is a means of developing the abilities and skills of staff to take on increased
responsibility and assume higher positions in the organisational structure. Apart from
providing for continuity of management and succession, it improves morale and growth
of both individuals and teams through recognition of their contribution.
The Process of Delegation
The process of delegation involves a conscious series of steps:

Planning: the identification of tasks and/or functions which could usefully be delegated
and the selection of staff considered capable of assuming the responsibility.
Specification of the terms of delegation: determination of the objectives and scope
of the responsibility to be delegated and communication/explanation of the terms
(included expected standards) to the staff.
Monitoring and review: checking progress and results at suitable intervals, without
maintaining such close control that the autonomy of the staff to carry out the delegated
responsibility is undermined, but enabling support to be provided should it prove
necessary.

It is important in considering delegation to remember our previous discussion about authority,
responsibility and accountability. The manager delegating a responsibility cannot abdicate
that responsibility: he or she retains the ultimate responsibility and is accountable to more
senior management for its discharge. However, that is no reason to fudge delegation.
Delegation involves passing the responsibility to someone else, and for this to be effective,
full authority commensurate with the responsibility must accompany the delegation. Having
decided to delegate, the manager must be prepared to live with the consequences: providing
support, advice and guidance by all means, but allowing the staff to fulfil the responsibility if
at all possible. It is also important to remember that it is the responsibility that is delegated,
not the way of doing it. The staff should be judged against the objectives and standards
associated with the responsibility, not against how the manager would do it.
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Benefits of Delegation
To large extent, the advantages and disadvantages of delegation, in organisational terms, are
similar to those of decentralisation, as considered in Unit 4.
On the personal level, delegation brings benefits to the organisation, individual managers
and employees.
(a) Organisational Benefits

(b)

(c)

Work is carried out more efficiently.
Less time is lost.
It enhances a company's reputation for good management.
Morale is improved, with less need to recruit from outside.
Labour turnover is reduced.
More freedom to look ahead.
More planning time.
Satisfaction is gained from helping others.
Less worry and nervous strain.
Relief from the worry of minor details.
Improved reputation as an organiser.
Promotion process is assisted if someone is trained to take over.
More time for communication with others.
It provides training on the job.
It helps in the promotion process.
It gives supervisory experience and confidence.
It provides additional interest.
It helps to develop a sense of responsibility.
Benefits to Managers
Benefits to Employees
Barriers to Effective Delegation
Responsibility for performing tasks, issuing orders and decision-making can be delegated
down through the organisation only to the lowest level at which they can still be
satisfactorily carried out. The extent of delegation will, therefore, be subject to a number of
limiting factors.
(a) Nature of the Task, Order or Decision
The nature of the authority and responsibility may be such that, either in itself or in
particular circumstances, it is not appropriate to delegate. This may be in terms of the
seniority of management role involved (for example, in setting corporate objectives or
policies), work of a confidential or otherwise highly sensitive nature, highly specialised
tasks or extremely creative work.
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(b) Company Policy
Delegation below a specified level may not be permitted by particular organisational
policies: for example, most companies have restrictions on which levels of
management can commit the organisation to certain levels of expenditure.
(c) Co-ordination and Span of Control
As discussed earlier, the span of control is the number of people reporting directly to
the same superior. Very wide delegation may stretch the span of control and make it
increasingly difficult to co-ordinate activities.
(d) Abilities of Staff
Delegation cannot, and should not, take place if the staffs available are not capable of
carrying out the work in the first instance. Furthermore, if training or coaching facilities
for these staff are not available, then the opportunity to delegate will be limited.
(e) Characteristics and Willingness of Managers to Delegate
Individual managers very often do not take advantage of the possibilities and prefer to
continue to exercise close control over most of the detail of their various
responsibilities. There are various reasons advanced for this, such as:

it takes more time to explain what to do than to do the work oneself;
staffs lack the knowledge, skills and/or experience necessary ('if you want
something done properly, the only way is to do it yourself');
lack of trust in staffs the potential consequence of mistakes being made is too
great or costly (or may reflect badly on the manager);
staffs do not want the additional responsibility, especially with no additional pay or
reward.
To a large extent, this is a reflection of a traditional autocratic culture where there is a
fear of losing role and status associated with the distribution of authority. However, it
demonstrates weakness in management style and approach
C. EMPOWERMENT
Tannerbaum and Schmidt suggest that all staff should be empowered to do the job for which
they are being paid and, provided they are given clear guidelines, to take responsibility for
performing that job. It is only when they have specific issues or problems to solve that are
outside their sphere of influence that they need involve their immediate manager.
Delegation in the widest sense allows the individual member of staff to 'use their discretion'
within the constraints of the organisation's culture and methods of operating. This discretion
allows an individual to make decisions without referring to their immediate manager or senior
manager at a higher position within the hierarchy. The member of staff and their manager
agree the limits of responsibility for decision-making.
Empowerment is based on the process and practice of enabling teams (or individuals) to
achieve both their own and organisational goals. The empowered team will have goals and
objectives agreed with management and will have, by combining the talents of their
members, the expertise to achieve these objectives. Essential conditions include control
over the resources needed to achieve the objectives, access to all necessary information,
communication with and access to superiors, and feedback on progress and results. Within
this, teams are encouraged to share responsibility and develop their own working practices,
under their own day-to-day operational control, without always having to refer to
management for a decision.
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Empowerment can be practised within any level of the hierarchy but it is vital that clear
guidelines for decision-making and the extent of responsibility, authority and accountability
are understood (and accepted) both by those who are thus empowered and those
empowering them.
Facilitating Empowerment
Empowering means making sure that individuals are able to develop and use their skills,
aptitudes and knowledge so as to achieve both their individual goals and the goals of the
organisation. The techniques to enable this include the following:
(a) Organisational Design and Management
The design of the organisation should be such that it encourages participation of
employees. Participative management style is directed towards encouraging workers
to be self-motivated as far as possible in a given work situation, and creates an
environment of co-operation.
Participative management involves employees in decision-making within clear
guidelines.
Ouchi suggests that motivation will be evident in an organisation that has a participative
culture. Bottom-up decision-making encourages a culture of effectively working
together. Employees are more likely to agree with decisions when they have been
involved in the decision-making process.
Ouchi also propounds that being actively involved is a powerful motivator where a
democratic culture can encourage and stimulate employees to 'go that extra mile' and
become totally engaged with the organisation's strategic direction.
Pfeffer, Guest, and Huselid suggest that a flat, flexible structure can increase employee
motivation. This is because there are fewer levels within the structure for ideas and/or
decision-making to get 'lost'.
(b) Job Design
Job design sets out to do two things:

to meet the needs of the organisation for effectiveness, efficiency, quality and
productivity; and
to meet the needs of the individual for job satisfaction arising from interesting,
challenging work which is appreciated by management.
Empowerment offers the opportunity to develop jobs which meet both of these under
the control of the people who best understand the way in which tasks are carried out.
(c) Training and Personal Career Development
In order to be successful, empowerment must occur in conjunction with proper training
and development to ensure teams and individuals are equipped with the abilities
necessary to make sound decisions. This should be accompanied by career
development programmes. Employees must be encouraged and offered the means for
achieving self-betterment, progress and the development of their talents.
(d) Feedback and Communication
The role of management changes under empowerment. From one of directing and
organising staffs, it becomes one of giving direction, facilitating success and providing
constructive feedback. This is based on effective communication between empowered
teams and their managers.
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Advantages and Problems of Empowerment
Empowerment offers a number of benefits to the organisation.
The reduction in management levels associated with flat structures and empowered
teams is likely to result in faster, more flexible and more appropriate decision-making.
It can also provide financial savings.
Communication throughout the organisation is improved, with shorter lines of vertical
communication increasing speed and accuracy in the flow of information.
Motivation should improve as employees are given more autonomy and increased job
satisfaction. Empowerment gives employees an increased sense of contribution and
commitment to the organisation as they, rather than their manager, decide, on an
everyday basis, the fitness of their work. The duty to do a good job is on the employee
and they are less able to blame their manager for poor decision-making.
Senior management is able to devote more time to strategic considerations:
determining direction and arranging the conditions and resources required for
implementation, rather than with the detail of how that implementation is carried out.
The training and development programmes should raise the competences of the
organisation, making it more responsive and capable to meet future challenges.
The potential for a breakdown in co-ordination between different parts of the
organisation.
Loss of management control through inappropriate monitoring of empowered teams, or
the span of control being too wide.
Difficulties encountered and mistakes made because of the inexperience and/or
inability of staff to assume full responsibility for their delegated responsibilities.
Management resistance: managers may become protective of their positions, assert
authority in a number of bureaucratic ways and lack confidence to make difficult
decisions, referring them up the organisation instead.

On the other hand, there are risks with empowerment.

D. DECISION-MAKING IN THE ORGANISATION
The overall objective of decision-making is to ensure effective action. This invariably
involves choosing between alternative courses of action in order to resolve a problem of
some sort. Therefore, decision-making involves understanding both the process of making
the decision and the nature of the problem faced.
While this is simple to state, it is far more difficult to achieve. It may be said to involve three
elements: making the right decision at the right time in the right place:

The right decision is the one which resolves the problem, and this can only be made
by analysing the circumstances and objectives of the problem.
The right time acknowledges the fact that decisions are followed by action: decisions
must be made at the appropriate time so that effective action can be taken.
The right place ensures that decisions are made in the most effective location in the
organisational structure. This is particularly important in large organisations with
extended communication channels. Frequently the right place for making decisions is
where the action they relate to will be carried out.
The use of the word 'right', particularly I relation to the 'right decision', implies a degree of
certainty which is not usually available. All decisions are made with the knowledge and
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expertise available at the time they are made, and in the circumstances existing at that time.
All these can suddenly change, so affecting the consequences of acting on the decision. The
decision was still 'right', however, in the light of the information available at the time it was
made.
Decision-making is an essential activity in all organisations and the process of management
can be seen as essentially one of continually making decisions. There are a phenomenal
number of decisions to be made in organisations on a day-to-day basis and they do not all
require the same approach. Consider the range of such decisions to be taken in a small
independent clothes shop on one typical day: whether someone is entitled to a refund for
goods purchased, how to resolve a dispute between two members of staff, how to promote a
new line of jackets being introduced, how to increase profitability, etc.
Levels of Decision-Making
We have seen that the management structure (chain of command) of any organisation
consists generally of three levels, each having its own functions and responsibilities:

The directional or strategic level: the board of directors or council and top senior
management
The executive or tactical level: senior and top middle management
The operational level: middle management and first-line supervisors.
This chain of command will be reflected in a scheme of delegation which identifies areas of
responsibility for making decisions, so decisions may be classified in relation to the hierarchy
of the organisation. You can see this illustrated in Figure 5.1
Figure 5.1: The hierarchy of decision-making
Strategic
Decisions
Tactical
Decisions
Operating
Decisions
The types of problem addressed and the way in which they are resolved will be different at
each level. They will also require different types of information.
(a) Strategic Decisions
The problems faced at this level are concerned with the direction of the organisation:
overall goals and objectives, usually for the long term.
Decisions taken in response to these problems will form the basis for the establishment
of detailed tactical plans by the next level of decision-making. They also set policies
within which all other decisions are taken.
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The decision-making process at this level will involve the most senior corporate
management (directors, main divisional managers, etc.) and is likely to require
approval by the ultimate authority within the organisation: AGM, council, board of
directors, etc.
Information required for such decision-making must be both refined and concise. It
needs to be:

(b)
Not too technical, as it is the overall situation which top management needs
General and not too detailed: essentially summaries of the key considerations
and options, supported by appropriate recommendations
Not produced frequently.
Tactical Decisions
The problems faced at this level are concerned with the establishment of working plans
and their implementation, generally on the medium term (one year, perhaps), designed
to put into effect the objectives determined at the strategic level. These condition the
day-to-day operations of the organisation and set the parameters within which
operational decisions will be made. Note that decisions made at this level are
themselves conditioned by the policy and objectives determined at the higher level.
Tactical problems relate to the organisation and direction of work activities and will,
therefore, be taken in the context of the nature of organisational activities and the size
and structure of the organisation. Thus, if an organisation is structured by function,
tactical decisions will relate to each specialist function for example, marketing,
production, personnel and finance, etc. whereas if an organisation is structured by
region, tactical decisions will relate to each area, or if an organisation is structured by
product type, tactical decisions will relate to each product classification.
Decision-making at this level will involve divisional managers together with their own
senior staffs (from middle management).
The information requirements for effective tactical decision-making are more detailed
than for strategic decision-making, needing the following characteristics:

Technical detail, produced by specialists
Detailed analyses, supported by summaries
More frequent production figures, to allow plans and implementation to be
monitored and adjustments made if necessary.
Much of the technical detail will originate from the operational level in the form of
regular routine reports, although some may be the result of trigger activity.
(c) Operating Decisions
The problems to be resolved at this level are those encountered in carrying out the
day-to-day activities of work within the organisation. They will be dictated by the nature
of the work itself and events which occur, either regularly or occasionally. Again,
decisions made will be conditioned by the general policies of the organisation as a
whole and by tactical plans and decisions.
These are decisions made by operational (low-level) managers. Where the problem
raises issues relating to tactical considerations, they will be referred up to the higher
level.
Effective operational decision-making is an essential requirement for the successful
running of an organisation. Situations can quickly deteriorate when operating problems
arise, so the requirements of decision-making at this level are that they are taken
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Quickly, enabling fast action to be taken.
By a trained decision-maker.
Close to where the action is to be executed, so that action can be instantly
controlled by the decision-maker.
Operational decisions require highly detailed, accurate and up-to-date information
derived from constant monitoring of, and feedback on, performance and outputs. This
requires effective systems and procedures to control working processes which are
mostly, nowadays, run through computers. There are, though, still many manual,
clerical systems by which work is monitored and information about performance
gathered.
Routine and Non-Routine Decisions
The distinction here is between problems which arise on a regular basis and may be
resolved by the application of accepted solutions, and those which arise infrequently and
therefore have to be resolved on an ad-hoc basis.
(a) Routine Decisions
Most operational decisions are routine decisions and most managers find themselves
making this type of decision far more frequently than non-routine decisions. Routine
decisions have less dramatic consequences for the organisation as they are invariably
short-term and take place at lower levels in the firm.
As noted above, these are the types of decision which arise on a regular basis, if not all
the time. To continue the example of the clothes shop, this could include the purchase
of general supplies, determination of discounts, dealing with a member of staff being
late for work, dealing with shoplifters, etc.
By their very nature, routine decisions have been made before. Therefore, they can be
guided by the previous decision and, in many situations, by codified procedures or
established practices. Thus, there may be an established method of dealing with a
single incidence of an employee being late, and another for persistent lateness. Such
procedures and practices will often have been determined or sanctioned by higher
levels in the organisation because of their power to effectively bind decision-making
and action in the particular circumstances.
Note that the existence of accepted methods of making routine decisions does not
necessarily absolve managers from treating them with due care and attention. In
particular, they must be certain that the nature of the problem accords with the
circumstances within which the procedure can be applied. If this is not the case and
the problem can be distinguished from others, it must be treated as a non-routine
problem.
(b) Non-Routine Decisions
These types of decision also known as basic decisions are concerned with
problems which have not arisen previously, although they may be very close to
previous or routine problems (perhaps distinguished by just a few new facts). In such
circumstances, there is no experience to draw on and some form of full decision-
making process needs to be undertaken. (We shall look at approaches to decision-
making in the next section of this Unit.)
Non-routine decisions can occur at all levels of the organisation; they are by no means
confined to the strategic or tactical levels. They tend to be more complex and of far
greater importance than routine decisions, in that they are likely to have long-term
consequences and be difficult to change: for example, determining organisational
direction or levels of resources, changes to working practices or systems, etc.
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Note that, once a non-routine decision has been made, it provides the basis on which
other identical problems (or very similar ones) may also be resolved. Thus, the
procedures and practices upon which routine decisions are based will have emerged
through the build-up of non-routine decisions.
Non-routine decisions sometimes have to be referred up through the organisational
hierarchy for ratification or approval where there are implications for the concerns of a
higher level.
Programmed or Structured Decisions
We shall see in the next section that, in a systematic approach to decision-making, one of the
key steps is to explore fully the exact circumstances of the problem. In many cases, once a
particular set of circumstances has been determined, there is a known and predictable
outcome to the decision, usually based on the application of experience or policy. To take a
simple example, it may be company policy that a discount of 2% will be applied to purchases
of 10 items or more and a discount of 5% for 25 items or more. It is then a simple process to
determine the circumstances and then make the appropriate decision.
The same process may be used for much more complicated problems. Take, for example,
the way in which quotes for car insurance premiums are made. The exact circumstances of
the applicant are determined by working through a series of questions about age, location,
type of car, driving history, etc. Once these have been established, there is pre-determined
decision about the price to be quoted.
Decisions which may be taken automatically as a result of following a series of steps to
establish the exact circumstances are known as structured or programmed decisions.
Many routine problems in organisations fall into this category and it is possible to develop
specific systems to cope with them. The type and scope of information required to establish
the circumstances may be determined in advance, and then the system will be a simple
matter of collecting that information and applying the decision-making rules. Thus, the
problem of ordering new stock may be resolved by a rule that a certain stock item will not be
allowed to fall below 100 units, and setting up a system to monitor stock levels such that,
when this level is reached, the storekeeper will automatically act to replenish the stock.
Problem-solving and decision-making can be structured by using a computer program.
Consider the example of car insurance: the answers to each question asked about the
customer's circumstances are fed into a computer and, at the end of the process, the
computer will produce the result, using pre-determined rates applicable to the particular
circumstances. One of the advantages is that only the specified relevant information is
elicited: with more complex information systems, producing more information than is needed,
staff are required to sift that information for the relevant material.
The major problem with the widespread use of programmed decision-making is that it
requires the circumstances to exactly fit the prescribed categories. This is not a problem with
most physical circumstances; the number of units in stock, age of machinery and/or
equipment and so on; but can be difficult where general descriptions, such as occupational
categories have to be interpreted before they can be fitted into a specific category for
analysis. Problems also arise in the use of certain categories as the basis of decision-
making: for example, where some stereotyping elements are present, especially where
employees from a certain background are restricted because of the potential high risks, as
previously identified by another source.
Further, programmed decision-making systems should not be so inflexible that they cannot
be overridden in particular circumstances: for example, if a business suddenly had an
opportunity to buy stock at a reduced price then the original programmed decision about the
maximum stock level may be ignored.
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Clearly, not all routine decisions are programmable; and non-routine decisions cannot be
structured. In these circumstances, the outcome has to be determined by the judgement of
the decision-maker. However, the application of structured decision-making can often make
a significant contribution to the determination of the outcome. Thus, the decision about
making a new investment may be made on the basis of a programmed analysis of the
possible circumstances considering outcomes in relation to different interest rates and
possible returns, etc. but the final decision will be made in the light of judgements about the
likelihood of particular circumstances or after considering a number of non-programmable
variables, such as the ability to raise finance.
The techniques used to analyse the decision variables in structured decision-making will be
examined in the next section.
Decision-Making Structures
As we have noted, decision-making in an organisation takes place within a scheme of
delegation which distributes the authority to make decisions through the organisation. The
way in which delegation is structured has important consequences for the way in which
decisions are made, particularly in respect of decisions about objectives, plans and policy.
(a) Systems Approach
The systems approach allows us to see decision-making as a dynamic process. We
can show this as follows:
Figure 5.2: The decision-making system
Environment
Inputs Decision Unit
Feedback
If we consider each element in this we can see the complexities in the process.
What are the inputs?
The traditional approach is to see these as information from the environment
about the circumstances which are relevant to the subject of the decision.
However, a more sophisticated approach would also include the bodies and
individuals influencing the process, such as interest and pressure groups (both
internal and external to the organisation) and other specialist advisers, managers
or staff, together with their ideologies, and the personal qualities of the individuals
in the decision unit.
What constitutes the decision unit?
The decision unit will include all those actually involved in making the decision.
This may be one individual manager exercising delegated powers or it may be a
group of some kind. Many organisations use formal committees for decision-
making.
Outputs
(action)
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What are the outputs?
This is relatively easy to see in terms of the actual decision and its
implementation.
What constitutes feedback?
This is will be way in which action taken as a result of the decision being
monitored.
What do the arrows mean?
These interconnections are often ignored but are themselves a part of the
system. They can be elaborated upon to see if there are any intermediary
stages, particularly in the form of 'gatekeepers', which stand between the different
elements and condition the way in which the process operates. For example,
managers may be very adept at ensuring only certain information is passed on,
or is passed on with a particular slant to it, or the decision may be subject to
interpretation by others in way in which it is implemented.
(b) Structural Approach
This emphasises the need to analyse the decision unit in terms of the set of rules,
conventions and practices which regulate the way in which decisions are made. The
most obvious expression of this is in the formal institutions of committees. However,
we are concerned not just with describing the formal structures, but with their
dynamics: how they actually operate in terms of accessibility, opportunities for
bargaining and compromise, and the enforcement of decisions. This effectively means
studying the way in which groups and/or individuals manipulate or work the structures
in a creative way in order to achieve their own goals. From this perspective, then, we
need to consider the involvement of not only the decision-makers themselves within
committees and the formal rules under which their business is conducted, but the way
in which interests operate within the decision-making arena. This embraces the
negotiations between parties (particularly where there is no dominant interest), the
extent of external, stakeholder pressures (for example, staff, unions, outside pressure
groups such as environmental lobbies, etc.), and most especially, the role of
gatekeepers in determining the types of decision which are referred to the decision
unit, the information available and the way in which decisions are interpreted and
implemented.
The approach also encompasses the degree of participation in decision-making. There
may be two views of the way in which the structure operates:
the pluralist view, which accepts that a variety of groups or individuals have
access to the process and act together in some way within the decision-making
structure; and
the elite view, which considers that one small group, or individual, is
disproportionately influential and dominates the process to the effective exclusion
of the broad mass of other interested parties. This view would consider that
debates are a mere charade and disguise private dealings and understandings.

It is possible to see both views at different times within the decision-making structures
of most organisations. Certainly we can see the elite approach as characteristic of the
way in which centralised organisations operate. Consultation with divisional managers
or staff may well take place, but the extent to which this is a meaningful exercise may
well vary.
In addition, one can see that access to the structure may be limited in various ways: by
managers acting as gatekeepers to disbar certain views from consideration, and the
active promotion of others where they would tend to support the dominant group. Thus
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there may be a hybrid between the pluralist and elite views which constrains
involvement to 'acceptable' groups or individuals.
Groups and Participation in Decision-Making
Organisations have always used groups in the decision-making process, at least at the most
senior levels in terms of reporting to boards. However, most large organisations also have
an extensive network of formal management committees. In addition, there is a general
movement away from the idea of the individual as the key decision-maker, towards the view
that groups offer a number of benefits for decision-making. This gives rise to the concept of
empowered groups.
(a) Management committees are formal groups within the organisation empowered to
make certain types of decision in certain specified areas, as determined by the scheme
of delegation. Their membership and operation will generally be specified by some sort
of constitution (written down or simply generally understood) and will be drawn from
interests relevant to the area of decision-making. They tend to mirror the formal
structure of the organisation. Examples include policy-making bodies such as the
boards of limited companies, the many different types of committee found in all
governmental bodies, and the management groups found at all levels in the
organisation from senior management to section level.
At all levels, they may be supported by advisory committees, technical forecasting
groups and working groups, which study complex issues and recommend courses of
action.
(b) Empowered groups aim to increase participation in the planning and execution of
work by including stakeholders in the decision-making group. This generally comprises
managers and workers, but may also include customers and possibly suppliers.
Examples range from autonomous work groups with quite extensive responsibilities
and powers to small groups with very limited powers (such as menu setting in a staff
restaurant). These groups will have the same formal standing in the organisation as
management committees, and may be similarly supported by advisers.
It is important to realise that using groups has certain advantages which should always be
considered.
Variety of solutions
In proverbial terms, 'two heads are better than one'. There are likely to be more
solutions to a problem generated by a group than by a single individual, simply
because a wider range of knowledge or experience is assembled.
Furthermore, interaction between group members will tend to develop solutions which
might not have occurred to an individual: the effect of synergy. Obviously though, in
the few cases where only one person has all the facts, a group decision is not feasible.
Quality of analysis
A group decision, by its very nature, depends on communication: everyone actively
participating needs to know which pattern of thought is being followed and, moreover,
needs to clarify his own thoughts in order to communicate them to others. Thus the
analysis will often be more rigorous than that of an individual, who may never need to
clarify, or even state, his assumptions.
A further advantage is that errors are likely to be seen more quickly, for it is unlikely that
a whole group of people will make the same mistake at the same time.
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Speed of the decision
Normally this will be a disadvantage of using a group to make a decision, as it
obviously takes longer to obtain a consensus opinion than to make the decision
oneself. This is especially true where the decision to be made concerns a relatively
simple problem.
On the other hand, for those decisions where several disciplines are necessary for a
solution, it may well be quicker to call them all together, so that their different opinions
may be obtained simultaneously rather than sequentially. Thus, where several areas of
a company are concerned in a decision, it is as well to make it a group exercise.
Quality of the decision
Because of the factors already discussed, a group decision is often of higher quality
than an individual one. However, in certain circumstances it will not be. For example,
where the group has been competitive rather than co-operative as often happens in
business enterprises the final decision will often be a compromise which is not as
good as any of the individual alternatives suggested. This can also occur where the
group's objectives do not tally with those of the firm.
Effect on commitment
If the decision is based on a genuine consensus of those affected by it, then
commitment will be high and implementation easier. Even if it is a majority decision,
group pressure will be brought to bear on individuals to obtain conformity.
If, on the other hand, the group exercise was basically carried out to put into effect the
ideas of one person passive acceptance will not be followed by active commitment.
Indeed, resentment so caused will be carried into the implementation stage, and
people who have nominally helped to make the decision will try to make it fail.
Participation and the welding together of groups will often result in greater
cohesiveness of the anti-management feeling, especially if genuine participation cannot
be continually employed. Further, any member of the group whose ideas have been
rejected in that group may become frustrated and demotivated: motivation by
participation is by no means universally successful.
E. THE PROCESS OF DECISION-MAKING
Having considered the nature of decisions and the way in which decision-making is
structured within an organisation, we shall now examine the way in which decisions are
made. We noted above the need for a systematic approach to decision-making, and the
generally accepted methodology for this is the rational model which we explore first.
However, whilst this may be seen as the ideal and is often the method we all strive to use in
most circumstances, we must recognise its limits and take note of other processes which
may be at work.
The Rational Decision-Making Model
This is an example of a 'process' model. Such models attempt to explain their subject by
identifying the various stages involved. Thus, process models of problem-solving and
decision-making seek to present a series of steps which must be passed through in order to
arrive at a solution and decision.
This approach derives from the classic model developed by Herbert Simon (1960). He
identified the process as comprising essentially three stages which need to be worked
through in addressing any problem or decision: intelligence (in the sense of gathering
information), design and choice.
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We can refine this approach by identifying six stages, as follows.

Definition: specifying the exact nature of the problem.
Objectives: defining exactly what you want to achieve in solving the problem.
Options: generating alternative courses of action which may result in the achievement
of the objectives.
Decision: determining the best of the available options for achieving the objectives.
Action: putting the decision into practice.
Review: monitoring the effectiveness of the decision in resolving the problem.
This last stage provides the information for feedback which makes the process a cycle, as
illustrated in Figure 5.3.
Figure 5.3: The rational decision-making model
Definition of problem
Setting objectives
Identification of alternative courses
of action
Evaluation of alternatives
Selection of appropriate alternative
Implementation of selected alternative
Review, evaluation and feedback
It is worth considering some of the key issues at each stage.
(a) Problem Definition
The problem definition stage is of particular importance. In many ways, a simple
dictum for problem-solving 'define the problem, then solve it' encapsulates the
importance of this stage. Many of our failures in problem-solving arise when we go
straight into solving the problem, thinking we already know what the problem is. The
model emphasises that this must be consciously addressed.
One of the key issues here is to differentiate between the symptoms of a problem and
the problem itself. To achieve this, we need to carefully investigate and analyse the
circumstances which are giving cause for concern. For example, suppose that an
office manager is aware that work is beginning to pile up despite the fact that a lot of
overtime is being worked. Delays in meeting customers' requirements are becoming
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apparent and staff morale appears to be at an all-time low, with a high level of short-
term sickness. These facts do not constitute the underlying problem; they are merely
the symptoms of the problem, and could be interpreted in more than one way. We
need to find out the cause(s) of these symptoms, which could include:

A lack of proper supervision.
Poor communications with staff and/or customers.
Staff being unclear about their objectives.
Poor planning of work, with no proper system for prioritising.
Note, too, that the decision-maker must be clear that the problem is his or her
responsibility and not someone else's. Uncertainty over this is by no means
uncommon in organisations and incorrect assessment of responsibility for all sorts of
reasons can itself cause additional problems.
(b) Objectives
Examining the nature of the problem is likely to clarify what we want to achieve in
resolving it. This should be expressed in specific objectives possibly both short-term
and long-term and these need to be clearly understood by all concerned in the
decision-making process as well as, at a later stage, by those concerned with
implementation of the decision.
This may mean that we have to deal with conflicting objectives at least carrying them
forward to the decision-making stage where choices can be made about whether and
how they may all be satisfied.
Objectives clearly need to be set which resolve the problem, but this is often not the
only consideration which needs to be addressed. The solution must be compatible with
the objectives and policies of the organisation, and be co-ordinated with other
decisions made now or in the past. This can place important constraints on the way in
which the problem is resolved. There may also be additional constraints which must be
considered in developing decision objectives: for example, in relation to the resources
available or the timescale to be applied.
The objectives set as the conditions for resolving the problem will also be relevant at
the review stage.
(c) Alternatives Courses of Action
It is important to generate ideas which may yield possible ways of resolving the
problem and to meet the set objectives. These may be derived from research that
examines all the actions that were taken in the past by everyone involved in the
tasks/activities. This requires creativity and innovative thinking to develop new
solutions. There are a number of techniques that help to generate new ideas, and
some are explained below:
(d) Evaluation of Alternatives
There are likely to be a number of possible solutions to a problem and the task is to
assess which one will be the most effective in meeting the defined objectives. The
approach will be to develop the ideas or solutions in relation to the problem and
evaluate their expected effects against the objectives.
(e) Deciding between Alternatives
A decision may be taken that the information available is not sufficient for an alternative
action to be decided upon. There may also be a decision to leave the situation as it is
because none of the available solutions is satisfactory.
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(f) Implementation
This is what turns the decision into action. At this stage communication is very
important so that those who have to take the action know exactly what it is they are
expected to do.
The timing of the action is also very important. Some decisions have to be
implemented immediately, e.g. where health and safety are involved. Others, by their
nature, have to be kept private for a while, until the time is right: the timing of a sale, for
example, or the launch of a new company onto the stock market.
(g) Review
All decisions should, be reviewed to assess their effectiveness in resolving the
problem, and to confirm that they continue to work and should be used.
Assessing effectiveness is generally carried out against the objectives, but the
implications for the problem itself should also be evaluated. It may be the case that the
objectives have been met, but the problem remains unresolved. This would mean that
the objectives themselves were not entirely suitable for the problem and need to be
amended.
Monitoring is generally taken to imply a continuous process of collecting information on
performance and, as such, forms a part of the normal control processes of
management. Review often means a specific structured process whereby the
information derived from continual monitoring is evaluated. This may be carried out by
an internal body or the resources of an outside organisation could be employed.
Reviews are either performed periodically or on an ad-hoc basis.
The rational decision-making model provides a systematic approach to problem-solving and
decision-making by breaking down the process into its constituent parts and stressing that
each of these parts needs to be addressed. So, gathering information about and defining the
problem is the first, crucial, stage in progressing towards a solution, and this is followed by a
series of necessary steps which provide a logical route to resolving your concerns.
There are a number of assumptions behind this. For example, it assumes that, in any given
situation, it will be possible to clearly define the problem, identify the various options for
resolving it and make a clear and logical choice between the alternative options available.
Life, however, is not that simple! There are many problems in practice with the notion of
'rationality', such as these:
It is not always the case that the problem can be clearly defined. There is often a lack
of detailed information to inform the analysis, or it may be that what seems on the
surface to be the problem may, in fact, mask a deeper problem.
There may not be any clear courses of action to choose from.
Choice may be constrained by particular circumstances as to what is acceptable to the
decision-maker and/or to others.

That said, the rational model offers an approach to the process which is extremely valuable.
It stresses logical and structured analysis, planning and organisation as the basis of tackling
problems and decisions, and these have considerable benefits in ensuring a focused and
systematic approach.
Approaches to Decision-Making
If we accept the value of the rational model as the basis for approaching problem-solving and
decision-making, we must also accept that there are certain stages to be gone through in
completing the process. There are a number of strategies which we can use to help us
during these stages, principally in identifying possible courses of action and choosing
between them. We shall consider three such general approaches here.
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(a) Generating Ideas
Sometimes, once we have analysed and defined the problem, solutions become
apparent. Often, though, we have to work at designing potential solutions. One
common approach to this is brainstorming.
You are probably familiar with this term, but may be less so with what it actually
involves. There are two aspects to brainstorming:

the generation of ideas, possibilities or alternative courses of action;
the development and evaluation of these ideas, etc.
The first aspect involves coming up with as wide a range of possibilities as possible.
These can be absolutely anything; no judgement as to their suitability is implied. It is
important to recognise this and not constrain the process. However wild and
improbable a suggestion might be, it may have the germ of a successful idea that can
be picked up and developed.
In order to do this, you need to think creatively, but there are some additional 'rules' to
help you:

suspend judgement: do not criticise any of the ideas that emerge, at least not
initially;
let go: be as wild in your ideas as you like;
quantity: come up with as many ideas as you can;
piggyback: use one idea to create more;
clarify: without criticising, work to explain and develop an idea.
The second aspect of brainstorming involves thinking through and developing the ideas
in relation to the problem and the objectives in resolving it. To some extent this can
take place as the ideas are generated, but it should not constrain that process. A half-
developed idea is better than none!
As an idea is developed into a possible course of action, you should be constantly
working to evaluate its potential against the problem and your objectives. That is the
whole point of the exercise. Start with the most likely ideas and push them to the limits
before discarding them if they don't seem to be working. Taking them as far as
possible may produce results which will be useful when considering other ideas, or
itself may generate completely different approaches.
Brainstorming is often done in a group, and there are considerable gains from this in
terms of the number of different ideas, viewpoints and contributions which can be
made. However, it is perfectly possible to do it on your own.
Brainstorming emphasises the need to cast the net as wide as possible in the search
for possible solutions, but also that they need to be worked through and evaluated
against the problem. Ideas on their own do not resolve problems: they have to be
converted into solutions. But solutions depend on ideas in the first place.
(b) Choosing Between Alternatives
Such strategies can range from tossing a coin (not really to be recommended!) to
extensive structured approaches which take into account the full range of information
and personal and environmental factors which impact on the decision.
The first step in applying any strategy is to be clear about the evaluative criteria to be
used in determining the most appropriate course of action. These should be
established in the light of the decision objectives and may be quantitative or qualitative.
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Quantitative criteria cover all those factors which can be expressed in measured
units, as in the following examples.
Profitability: commercial undertakings operate with profit maximisation as a
primary objective, and business decisions should be made with this objective in
mind. In business, the effect of a decision on profitability is an important
consideration.
Effect on cash flow: many decisions, especially those involving the investment
of funds, affect the organisation's cash flow. You must appreciate that cash is a
limited resource which places a severe constraint on management action.
Sales volume: another factor that must be considered is the effect of a decision
on the sales volume of a product or service. This is very important in pricing
decisions, decisions affecting the quality of a product and decisions that affect a
product or service availability.
Market share: in a highly competitive environment businesses consider market
share to be an important factor. In such a situation the effect of a decision on a
firm's market share for a particular product or service should be taken into
account.
Time value of money: another important factor to consider in long-term decision-
making is the fact that money in the future is worth less than it is at present.
Techniques which take this into account are widely used in long-term decision-
making: for example net present value (NPV) and the internal rate of return (IRR).
Efficiency: organisations also operate with maximisation of efficiency as an
important objective. Efficiency is measured by using the output/input ratio:
If this ratio is less than 100% it means some resources used have been wasted.
The effect of decisions on the organisation's efficiency should be taken into
account. Many decisions should be made specifically to improve efficiency: for
example, to reduce idle time, to improve the productivity of the workforce or to
eliminate the loss of materials.
Time taken to make a decision: one quantitative factor often overlooked in
decision-making is how long it takes to make a decision. To be effective it should
always take less time to make a decision than it takes to effect action from the
present time. For example, if action must be taken within the next three months,
the decision whether to take action or not must take less than three months.

Qualitative criteria essentially involve identifying the impact on the organisation's
stakeholders.
Competitors: in a business situation some decisions, such as those affecting
prices, conditions of trade, availability of products and services, marketing,
takeovers and mergers and the quality of goods and services, will result in
competitors reacting to them in a certain way. The likely reaction of competitors
must be evaluated carefully before such decisions are made.
Customers: many decisions made within organisations affect customers. The
effect of business decisions on customers must always be considered if a firm is
to survive and be profitable. Such decisions will be those which affect marketing
and prices, product/service availability, product/service quality and the
organisation's image.
Government: some decisions, particularly strategic ones, must take into account
the attitude of both central and local government. Such decisions will be those
affecting employment, location of premises, takeovers and mergers, importing
and exporting. The government can support, oppose or prevent decisions being

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made, e.g. the Monopolies Commission can prevent one company merging with,
or taking over, another business.
Legal factors: the effect of laws on decisions must also be considered, e.g. the
effect of the relevant employment legislation must be taken into account when
making decisions relating to personnel matters. The relevant tax laws are also
important legal factors which must be considered. Taxation can also be viewed
as a qualitative factor.
Staff morale: the effect of decisions on the morale of the workforce must always
be considered. Decisions to close down part of an operation, discontinue a
product line, make staff redundant or purchase products or components from
outside suppliers instead of manufacturing them in-house all tend to lower the
morale.
Suppliers: suppliers must also be taken into account. An organisation which
becomes dependent upon just one or two suppliers becomes vulnerable if a
supplier decides to change its product range or specification. The supplier can
then dictate terms and increase its prices knowing that the customer is
dependent upon him. Another factor to consider in this situation is what may
happen if a competitor was to take over a major supplier.
Environment: it has become increasingly important in recent years to evaluate
the effect of a decision on the environment. Organisations are open systems
which interact with their environment
Flexibility: the environment is constantly changing. It is important that flexibility
is considered when making decisions. Decisions should always be kept under
review and new decisions made when necessary. Management should always
remember that decisions can be changed right up to the time action is taken. An
adaptive approach to decision-making should always be taken.
Risk: decisions are made about the future based upon information available at
the present time. In such a situation there is always a risk that actual events,
when they occur, will not be as expected. This means that there is always a risk
that decisions may not work out as expected. The longer the time horizon
affected by the decision, the greater the risk.
Availability of information: a decision-maker must consider whether sufficient
information is available to make a decision. Frequently decisions have to be
made with incomplete information; this is where a manager's ability to judge a
situation is important. A decision-maker must also be able to assess the reliability
and accuracy of information used. Many bad decisions are made because of
inaccurate information.

In addition, the following further qualitative factors need to be considered.

Decision-Making Techniques
Techniques which enable these types of criteria to be assessed include the following.
(a) Operational Research (OR)
OR refers to a whole range of techniques which use scientific and mathematical
methods in the process of decision-making. The key concern is to bring together the
best available information and then calculate the probabilities of success of each
possible course of action.
OR makes use of models (often using computers) to represent real situations. Various
possible decisions are tried out and their likely consequences are evaluated in terms of
the model. The evaluative criteria are based on the following key risk rules:
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Minimax rule: this sets out to establish a solution which guarantees either a
minimum benefit or else that losses will not exceed a given level. An
example of the first type of minimax rule would be a decision which, even if all the
adverse possibilities occurred, would still produce a given benefit. An example of
the second type would be a decision to commit only a given amount of resources
to a course of action, so that if it failed completely, all that would be lost would be
that initial input of resources.
Maximax rule: the aim here is to select an alternative that, if successful, will yield
the highest possible benefits even though the risks are also high. An example
would be if a firm needed a given sum of capital by a certain date in order to
survive. Any alternative which produced less than this sum would be of little use
no matter how risk-free it was. Such a firm would have to disregard risk and
select an alternative which, if successful, would produce the required benefit.
Average rule: this treads a line between the other two rules. The aim is to be
prepared to take reasonable risks which are carefully balanced against greater
benefits.

The selection of which rule to adopt in making a decision will very much depend on the
priorities of the organisation at the time. Where it participates in speculative activities it
is likely to favour maximax; where its activities are more conservative, it is likely to
favour minimax.
Frequently, OR adopts cost/benefit analysis in planning and combines it with the use of
charts into what are known as decision trees. We shall look at each of these.
(b) Cost/Benefit Analysis
Cost/benefit analysis has been developed to help take account of the consequences of
a given decision, both in the direct pursuit of a goal and the side-effects that may arise.
The technique sets about balancing the cost of each alternative solution against the
benefits which should accrue. Costs are reckoned in terms of capital, labour, physical
resources and time. The course of action with the highest ratio of benefits over
costs is the one to be adopted.
This technique is generally of most value in assessing quantitative criteria, since there
are considerable problems in measuring qualitative outcomes, whether positive or
negative, intended or unintended.
(c) Decision Trees
A decision tree is a method of breaking down the implications of different decisions and
predicting the consequences which flow from them. This can be very simple as in
modelling the process of making structured decisions; but in large organisations
decision trees can be very complex, with numerous possible choices and
consequences requiring computer-aided analysis. However, the principles to be
applied are the same.
For example, Figure 5.4 shows the sequence of events involved in an investment
decision where the organisation is trying to assess the costs and benefits of investing
in a major computing program.
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Figure 5.4: Decision tree
Each activity on the tree may be assigned a mathematical probability of its happening,
which helps to assess the likelihood of success at each stage. Costs can also be
added to improve the level of detail available.
Decision trees helps in decision-making by ensuring that the problem is approached in
a structured manner and forcing the decision-makers to look at all the possible
outcomes. They do not necessarily improve the quality of the guesses and estimates,
but do encourage logical thinking.
(c) Situation Analysis
It has to be accepted that problem-solving and decision-making take place within
certain constraints, and our third technique considers how the characteristics of the
situation impinge. Force field analysis is an evaluation strategy which is partly to do
with identifying choices, partly to do with choosing between them and partly to do with
implementation.
To some extent, the process of developing ideas into workable solutions (as considered
in brainstorming) can be seen as trying to overcome the perennial barrier of the
objection 'yes, but . . .'. Force field analysis is concerned with where these sorts of
barriers come from.
This technique considers the forces within any problem situation which may help to
bring about its successful resolution or act to prevent it. These forces are referred to
as:

restraining forces: those that constrain action and act against success; and
facilitating forces: those which enable action and act for success.
We can represent the actions of these forces diagrammatically as follows.
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Figure 5.5: Force field analysis
SUCCESS
Restraining forces
Formatted
Facilitating forces
Force field analysis can be used throughout the stages of generating possible
solutions, evaluating them in coming to a decision, and implementing that solution. It is
concerned with opening the way for solutions by decreasing the restraining forces and
increasing the facilitating forces which are inherent in the problem situation.
The analysis can be done one step at a time to ensure you cover all the aspects
involved:

list all the restraining forces that might get in the way of achieving objectives
(brainstorming can be useful here);
list all the facilitating forces which may help you to achieve objectives (you need
to be very positive in your approach here);
identify which forces in each list are most critical to success or failure (deal with
these first, as you may find the less important do not actually need to be
considered);
identify ways of reducing significant restraining forces and of strengthening
significant facilitating forces.
In fact, you may find that is often enough to reduce the restraining forces, as they will
not then be a barrier to success. The use of force field analysis is widespread in the
management of change in organisations and we shall consider it again in that context
later in the course.
The Human Factor
The scientific approach to decision-making is useful to assist management with analysing
problems, but cannot completely replace the human element in important management
decisions.
The ultimate decision has to be made by the decision-maker, or in consultation with or indeed
approval of a group of decision-makers. The key psychological influences on decision-
making are bias, personality and capacity for intuition and insight.
(a) Bias
All individuals, irrespective of their occupational category, have biases and prejudices
about a whole range of factors. Parents, education, media, peer group, the social
environment and life experiences help to form this biases and prejudices. Individuals
may also have a personal interest, financial or otherwise, in the outcome of the
decisions for which they are responsible. They may either sub-consciously or
consciously have a set of political, social, and environmental ideologies which are likely
to influence their personal goals in any situation.
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All these factors will affect decision-makers' behaviour, and it is sometimes impossible
to overcome bias completely. Its effects on decision-making can be minimised by
admitting its influence and, in groups, declaring it. This is essential to ensure ethical
standards are set and maintained.
(b) Personality Factors
Depending on the personality type of the individual (maybe as highlighted by Myers
Briggs Type Indicators), an extrovert person is likely to be a high risk-taker because of
the degree of uncertainty. On the other hand, the introvert may prefer to consider every
angle of the issue/problem before taking a decision. All organisations do need both of
these personality types.
Psychologists stress that human beings have feelings and different attitudes. Some
managers like harmony and peace in the organisation, to such a degree that they are
reluctant to take necessary action in case they upset other employees: this makes
them conservative in their approach and reluctant to institute change. These 'sensitive'
managers are often keen to be liked by their colleagues and staff and this may
influence their judgment in decision-making.
At the other extreme are managers who thrive on conflict and controversy; the danger
is that they may overlook the case for leaving things as they are.
Arroba's model (1977) stresses the influence on decisions of the style of the decision-
maker, and identified six basic types of decision styles:

logical, where the situation is coldly and objectively appraised;
no thought, where no objective consideration is made;
hesitant, where the decider postpones the moment of final commitment;
emotional, where the basis of the decision is solely subjective preferences or
feelings;
compliant, where decisions are made in accordance with the perceived
expectations of others or self-imposed expectations about the situation;
intuitive, where decisions are based solely on personal feelings of what is right
or inevitable in the circumstances.
People tend to have a preferred style of decision-making, although they may use
different styles depending on the circumstances of the situation. For example, where
the perceived importance of the decision is high, people are more likely to use a
'logical' style of decision-making. Or a 'compliant' style might be appropriate if the
degree of acceptability associated with different choices is constrained by external
factors.
(c) Intuition and Insight
Psychologists argue that these are important factors in decision-making. A manager
with intuition may tend to favour instant solutions to new problems, and dislike going
through the long decision-making process. This approach can be useful when sudden,
quick decisions are called for. Insight refers to the sudden breakthrough which
perceives a new solution to a problem. Insight may well occur after long struggles with
a problem, but the intuitive manager may rely on almost instant insight. If the intuitive
approach works it can have brilliant results, but problem-solving based on hunches,
inspired guesses and attempting to consider various solutions simultaneously can have
serious pitfalls.
In this context we can consider the place of creativity in decision-making. One
definition of creativity is: a natural human process resulting in an escape from
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assumptions and the discovery of new and meaningful perspectives or an escape
from mental 'stuckness' (Richards).
Creative problem-solving comes from creative people, who tend to have the following
characteristics:

Intellectual ability, with capacity for abstract reasoning
A broad background of information use, i.e. 'knowledge' workers
Reasonable self-confidence and ability to take criticism
Fairly independent and persistent.
Some situations, particularly in the area of non-programmed decision-making, require a
creative approach, especially if other approaches have failed.
Dealing with Risk and Uncertainty
These two factors are often present in decision-making, but are not the same thing.
(a) Risk
Risk is present in a situation when there is the possibility of alternative, known
outcomes occurring. The probability of these outcomes, if not known, can at least be
estimated.
The chief means of dealing with risk is to estimate the probability of these undesired
outcomes, and use the laws of statistics to calculate their overall incidence with a view
to:

(b)
reducing the overall incidence to previously defined acceptable levels (taking out
insurance of one form or another would be one way of doing this); or
ensuring there is a connection between the level of risk and the level of reward
that in the long run ensures that rewards are earned in spite of the risks.
Uncertainty
Uncertainty is present when the outcomes themselves are not known and involve
contingencies which cannot be predicted. Uncertainty, in short, represents the set of
unfavourable events which could be conjectured, but which could not be forecast either
as to their existence or the probability of their occurrence. Uncertainties are outcomes
against which no insurance is possible in the normal underwriting sense.
The chief means of dealing with uncertainty is simple diversification. Here, instead of
using probabilities, we merely ensure that investment is kept in watertight
compartments, as it were. The failure of one or more compartments to hold water
should not risk the stability or the capability of the whole vessel to remain afloat.
To take this nautical example a little further, we could, in designing a ship, say how
many compartments in one area would have to be holed in order to destabilise the
vessel, causing it to turn over. And we could calculate how many compartments in total
would have to be breached before total buoyancy became negative. Without being a
naval architect, merely looking at a plan of two alternative ship designs with different
patterns of watertight compartments would enable you to assess their absolute and
relative safety levels, compared to each other. And the costs could be calculated to
fine limits. Without being aware of the probability of shipwreck, you would have a lever
to operate against uncertainty: the better and wider the distribution of independent
centres of buoyancy, the lower the effects of uncertainty. This analogy applies without
much alteration to choices under uncertainty. And there are few businesses in which
you could not quickly identify opportunities to reduce the damaging effects of
uncertainty.
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Note that we discuss lowering the effects of uncertainty. In general, we can reduce the
level of uncertainty itself only by quitting a particular activity. By definition, if we do not
know what the components are of any risks we are running, due to uncertainty, we
cannot operate on them. Thus, we simply spread ourselves around, hoping to reduce
the size of each area of uncertainty, and hence the chances of lethal damage occurring
overall.
One method of dealing with risk or uncertainty is to apply conservatism to any estimates
used. This involves erring on the side of caution so that, for instance, income estimates are
reduced by a factor of, say, 10%, while cost estimates are increased by the same figure. The
problem with this approach is that it is rather arbitrary and unscientific and, if it is overdone, it
can cause incorrect decisions to be made. It also ignores the range of possible outcomes
that may be available.
To overcome this problem, a straightforward way of dealing with risk is to estimate the full
range of potential outcomes that may occur across a range of values. The final decision as
to which of the possible approaches to take will then depend on how risk-averse the
company is. Consider the following example where a company has produced estimates of
sales at different prices and calculated the potential outcomes in terms of contribution:

10
7
3
Units
40,000
30,000
20,000

120,000
90,000
60,000

12
7
5
Units
30,000
16,000
13,000

150,000
80,000
65,000

14
7
7
Units
22,500
12,000
8,000

157,500
84,000
56,000
Sales price per unit
Variable cost per unit
Contribution per unit
Sales:
Best
Most likely
Worst
Potential contributions:
Best
Most likely
Worst
From this you can see that pricing at 14 gives the highest 'best' outcome but it also gives
the lowest 'worst' outcome. A price of 12 per unit gives the highest 'worst' figures, while
pricing at 10 per unit gives the highest 'most likely' estimate. If management has a low
aversion to risk it will probably price at 14 while a high aversion would lead to a price at
either 10 or 12. (See also the minimax/maximax rules described above.)
One of the prime factors that makes risk different from uncertainty is measurability. And
measurability (or, to be precise, the capability of being estimated) is a function of
repeatability and quantity. The parameters of a risk are perfectly known if there is a
constant probability of occurrence of a specific event (its likelihood of being repeated), and
there is a sufficient quantity of instances:

in the past, to allow the constant probability to be measured; and
in the future, to allow the average of a number of results to even out the inevitable
variations among specific instances.
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Alternative Models of Decision-Making
(a) Limitations of Rational Approach
Whilst there is much merit in the rational approach as a description of the various
elements which go to make up the ideal way of developing policy and making
decisions, the application of the model in practice is limited. It can be criticised on a
number of grounds.
It is not necessarily the case that those who make decisions act, or are capable
of acting, in an entirely rational way as proposed by the model. We have noted
the intrusion of human characteristics and their capacity to cut across the rational
identification of courses of action in the model. Further, it is rarely the case that
decision-makers have access to complete knowledge and information in order to
make rational choices, or that they possess the necessary skills and
understanding to do so.
In many cases the totality of the requirements is excessive, impractical and
disproportionate to the situation. They would demand a level of information and
analysis that is simply beyond the resources of most organisations, in terms of
both time and finance, for virtually any type of decision. There are also
arguments about the reality of being able to define problems and goals with any
certainty, and especially in ways which allow the effectiveness of the decision to
be measured against them.
Decisions are invariably made in the light of some tradition or history of the way
in which the same or similar or related decisions and policies have been made in
the past. Organisations, if not necessarily prisoners of their past, are naturally
affected by it and their structures and particular processes are established over
time and are not easily changed to meet the demands of the model.
The model also assumes a certainty in the information upon which decision-
making is based, a level of certainty which is highly unlikely in the rapidly
changing modern environment.

The rational model is a statement of what the policy-making process should be rather
than what it actually is. It describes a set of principles which, however admirable they
may be, are often not followed in full.
Given the limits to rationality, particular consideration has been given by theorists to
alternative approaches which better represent the reality of policy and decision-making.
There are two main views of this bounded rationality and satisficing, as advanced by
Simon; and incrementalism, as advanced by Lindblom.
(b) Bounded Rationality and Satisficing
Simon's approach was to assert that decision-makers seek to achieve rationality, but
have to recognise the limitations as described above. Working to the same principles,
but within the limits of available information, cost and time constraints and cognitive
capacity, constitutes what Simon termed 'bounded rationality'. Under these conditions
decision-makers cannot achieve the optimum solution as projected by unfettered
rationality. Instead, they seek to achieve a satisfactory solution from a limited range of
plausible alternatives, one that meets at least some of the identified goals and resolves
some of the key problems. This approach is known as 'satisficing' and includes the
necessity to compromise on both goals and means in order to get any sort of decision
made.
(c) Incrementalism
Lindblom advocated what is in reality the more common approach, incrementalism: the
progressive adaptation of the existing situation in small steps to meet the demands of
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the problem faced at the lowest level. This approach is essentially short-term in that it
cannot make significant shifts of policy which can realign the goals of an organisation
and help it adjust to major change. However, it does recognise the reality of much
decision-making and its essential links with the existing situation.
The key elements of incrementalism may be summarised as follows:

decision options differ only slightly from the existing position;
instead of developing resources to meet predefined ends, the desired ends are
chosen in the light of the available means;
a relatively small number of alternative decision-making strategies are considered
and compared;
problems are not solved by the policy, but are attacked, and the policy which is
both acceptable and attacks the problem will be selected.
Lindblom perceived incrementalism as a positive approach, rather than a negative
reaction to the limitations of rationality. There are advantages to it, not least in the
'softly, softly' approach to change which may turn out to be a more acceptable, and
ultimately as effective, way of moving forward to new goals with the support of all
interested parties.
There are two significant critiques of Lindblom's advocacy of incrementalism:
Dror argued that incrementalism was not appropriate to situations where present
policies were known to be grossly unsatisfactory, and where the nature of the
problem and/or the means of dealing with it have changed significantly. The
basis of this view is that incrementalism is essentially conservative, and there are
times when radical action is needed. Lindblom agreed with the analysis, but
countered that the extent to which such situations arose in practice was itself
limited and therefore did not invalidate the main thrust of the incrementalist view.
Etzioni suggested that the type of approach varied with the type of decision.
Bigger, important decisions were more likely to be made using the rational model,
whereas small relatively unimportant decisions were wholly incremental. In
between, there is a tendency towards a bit of rational analysis and a lot of
incremental analysis, an approach he termed 'mixed scanning'. Lindblom
accepted this view of a kind of aspiration to do better than mere incrementalism
in certain decisions, although again the extent to which the full rational model
could be applied was questioned.

There is an ongoing debate about one aspect of incrementalism: whether it is a
reasonably accurate description of what actually happens. However, the
persuasiveness of the rational model is such that there remains dissatisfaction with the
seeming inevitability of incrementalism.
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161
Study Unit 6
Developing Organisational Effectiveness
Contents
Introduction
A. Principles of Control
Elements of a Control System
Closed-Loop and Open-Loop Control Systems
Operation of Control Systems
Locating the Point of Control
Characteristics of Effective Control Systems
Control as an Organisational Process
Determination of Areas to Review
Establishment of Standards of Performance
Measurement of Performance
Comparison of Performance Against Standards
Taking Appropriate Action
Measuring Performance
Economy, Efficiency and Effectiveness
Approaches to Measuring Performance
Performance Measures
Performance Indicators
Benchmarking
Principles of Benchmarking
Purpose and Benefits of Benchmarking
Limitations to Benchmarking
The Benchmarking Process
Techniques of Performance Management
Management by Objectives
Organisation and Methods
Measuring Individual Performance
Measuring Board Performance
Managing Outsourced Operations
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C.
D.
E.
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162 Developing Organisational Effectiveness
INTRODUCTION
Stakeholders in any kind of organisation will want to know whether its management has been
effective in utilising its resources, so as to provide acceptable levels of service to customers
while maximising returns to investors or minimising the cost to the taxpayer (in the case of
public-sector organisations). To satisfy stakeholders' expectations management has to
monitor inputs, activities and outputs of the organisation against a range of performance
measures. These measures will be derived from the goals, strategies and objectives of the
organisation as a whole, and of each part of it. Evaluation focuses on the way in which the
strategy has been planned and implemented; and the means by which monitoring of inputs,
activities and outputs is carried out in organisations is through the management function of
control.
The way in which the control function operates as a system provides the key to developing
effective methods of monitoring performance. We consider the elements of a control system
and explore how the dynamic of their relationships with the subject of control affects the
process of control.
We shall then move on to look in detail at the performance measures used in organisations.
This includes a consideration of the concepts of efficiency and effectiveness, and of
approaches to establishing performance measures, among them comparative forms of
analysis, i.e. benchmarking.
The Unit concludes with a review of management techniques designed to develop the
organisation's performance through the promotion of efficiency and effectiveness.
A. PRINCIPLES OF CONTROL
Control is the means by which the organisation ensures that the plans which have been
made for its operations are effectively carried out.
More detailed definitions are:
'Control consists of verifying whether everything occurs in conformity with the
plan adopted, the instructions issued and principles established' (Fayol).
'... The function whereby every manager, from President to foreman, makes sure
that what is done is what is intended' (Koontz and O'Donnell).
Note that these definitions do not say that control is about finding out where and when things
are going wrong. Certainly that is part of it. However, control is essentially about making
sure things are not going wrong. Thus, it is perhaps broader than you may think.
Control is about reviewing all aspects of the operation and performance of the organisation,
so that management may take appropriate action. Such action may, of course, be to correct
deviations from the expected position. It may, though, be to do nothing since everything is
satisfactory, or even to consider what to do where better than expected results are being
achieved.
Management control has five major purposes:
detecting irregularities: identifying variations from the established and expected
standards of operation and performance (against various indices including cost, quality,
staffing, etc.);
coping with changes: identifying changing operational and/or environmental factors
which may affect performance now and/or in the future (whether or not they are having
an impact at present);
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Developing Organisational Effectiveness 163

identifying opportunities: assessing successful performance as the basis for
expansion of activities;
handling complex situations: ensuring effective co-ordination of activities;
decentralising authority: ensuring the effective discharge of delegated and devolved
responsibilities at lower levels in the organisation.
Elements of a Control System
In any control system there are four basic elements.
A standard, which is a given value for satisfactory achievement in whatever state or
characteristic of the operation it is decided to measure. Usually it will be a value placed
on an output of the operation: for example, the quality of goods produced by a given
department or the number of orders despatched by the company in a day. Sometimes,
however, it will be for something which is inherent in the operation itself, such as the
usage of fuel in a production process.
A sensor, which monitors the actual performance of the operation under consideration.
This may be anything from a complicated automatic air-quality-sensing device, to a
person taking measurements of the size of ball bearings produced, to a manager
reviewing the work of a subordinate. The way in which actual performance is
measured must be in the same terms as the standard set. The information provided by
the sensor is known as feedback.
A comparator, which is some device or person able to compare the measurement
made by the sensor with the standard. The comparator must therefore be given the
standard, compare it with feedback, and indicate any difference between them.
Information about any deviations will then be passed to whoever or whatever takes
action
It is possible for the sensor and the comparator to be the same thing or person; in fact
this is usually the case, for example a 'go/no go' gauge, or an accounts clerk assessing
outstanding invoices against a credit limit.
A corrector: the taker of corrective action is usually an integral part of the process. No
control has been exercised until some decision has been taken with regard to
appropriate action. The corrector can be a person or a machine.

The ways in which these elements are combined into a system will determine the way in
which it operates and its suitability for the control of different types of operation.
Closed-Loop and Open-Loop Control Systems
There is an initial distinction to be drawn between these two types of system since they have
significant implications for the types of operation to which they may be applied for control
purposes.
(a) Closed-Loop Systems
Here all the elements of the control system are contained within the operating system
itself, and the process of correcting any deviations in performance from the set
standard takes place as a normal part of the operations. The best example of this is a
central-heating system where the thermostat senses if the temperature has gone
above the required setting and, if it has, it cuts off the power and so maintains the
required temperature.
This type of system can be shown diagrammatically as follows.
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Figure 6.1: Closed-loop control system
Operational system
Inputs Activity/Performance Output
Corrector Comparator
Control system
Sensor
Note that this system does not identify the cause of the deviation from standard; it
merely corrects no matter what the cause. For this reason, closed-loop systems are
used to regulate relatively simple operations where deviations may be caused by only
one of a very few factors. These are mainly mechanical or electronic operations, but
can also include routine clerical tasks (such as accounting operations or the input of
data into computer systems) as well.
The advantage of closed-loop control is that the operational system is generally very
stable, provided that the control system can react quickly to deviations from expected
performance standards. This requires the sensor to monitor output regularly, and the
corrector to take appropriate action as soon as the comparator identifies any deviation.
We can illustrate this by considering, again, the operation of a central-heating system.
The thermostat mechanism constantly measures the output temperature and, when it
detects that it has risen beyond the desired setting, acts to shut off the fuel, causing
system to produce less heat. When this happens the temperature will fall; and when
the thermostat identifies that it has fallen beyond the desired heat, it will act to increase
the fuel supply and cause the temperature to rise again. Thus, the system is regulated
by a series of steps which keep the temperature oscillating around the standard as
follows:
Standard/expected performance:
The degree of oscillation around the standard will be a function of the tolerance limits
placed on the comparator, so it may only trigger the corrector when the temperature is
w the standard operating temperature. We shall consider tolerance
levels in more detail below.
(b) Open-Loop Control Systems
This type of control goes beyond measurement and correction and analyses the
causes of the deviation. In complex organisations there are many combinations of
factors which may affect performance and make it deviate from standard. Open-loop
control systems are designed to analyse and discover which elements are causing the
deviation. They operate by changing some elements and then receiving feedback to
inform them whether performance has improved. The technique here is one of
experiment until the cause is found, and then action is taken to correct the elements
found to be causing the deviation.
If we take the example of falling production, the open-loop system would review the
possible causes: for example, physical conditions of work, the psychological state of
the workforce and its morale, and the sociological conditions of group or organisational
attitudes, etc. It would then make changes in each of these areas in turn, measuring
the effects of its action by feedback on changes in production performance. Having
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identified the problems causing the fall in production, it would increase the corrective
measures until performance was back up to standard.
We can illustrate this process diagrammatically as follows.
Figure 6.2: Open loop control system
Operational system
Corrector Comparator
Control system
Sensor
These types of system are not as stable as closed-loop systems, since there can be
some delay between the detection of a deviation and the implementation of an effective
course of action to correct it. This means that, in the meantime, the deviation will
continue and there is, therefore, no oscillation around the standard. On the other hand,
once the appropriate course of action has been identified, it should be possible to bring
the performance back exactly to the expected standard (which is not possible in a
closed system).
As a result, open-loop systems cannot be used where the standards of performance of
the operating system need to be very tightly controlled: imagine a central-heating
system with no thermostat! However, they are appropriate where deviations are not
critical and may have a variety of possible causes.
Most organisations will have some operations controlled by closed-loop systems and others
by open-loop systems. Highly structured operations lend themselves to closed-loop control
since sensors can be built in at each stage of the operation, where there are relatively few
variables to cause problems. Thus, operations which need tight control need to be broken
down into as many sub-systems as possible in order to allow closed loops to be applied.
Many closed-loop systems are designed to include the reporting of deviations for analysis
outside of the system. This can be very important where it is crucial to know what has
occurred as well as there being the means to resolve the deviation at the time. For example,
a nuclear reactor plant will have many closed control loops in order to minimise the problem
should any deviation from the standard operating levels occur, but it is also critical that the
cause of any problem is identified and investigated to ensure that it will not happen again.
Operation of Control Systems
There are a number of key considerations in setting up a control system.
(a) Tolerance Limits
.The required standard of performance may allow for minor deviations between an
upper and lower level within which performance is allowed to fluctuate. These are
known as tolerance limits, and only when performance breaches these limits is control
activated to change performance.
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An example of the use of tolerance limits might be the hours worked by an employee.
The standard set by the organisation (line y in Figure 6.3 below) may be 40 hours per
week. The upper tolerance level may be 50 hours per week; up to this level the firm is
prepared to tolerate employees working overtime (line x). If an employee tries to work
above the upper limit, the sensors (in this case people checking work sheets) will
detect the deviation and will trigger action from the control unit, who will act to forbid
excessive overtime. Likewise, if the lower tolerance level is 30 hours per week (line z),
where an employee fails to attend work for 30 hours the sensors will detect this and
report short working or absenteeism to the control unit, which will act to correct the
situation.
Figure 6.3: Tolerance limits
Unit of
measurement
x
Formatted
Upper limit of
tolerance
Standard set by
organisation
Lower limit of
tolerance
Formatted
y
z
Time
The advantage of using tolerance limits is that it reduces the intervention of the control
unit, so long as the deviations do not have serious consequences for the organisation.
The width of the tolerance band will depend on the circumstances. For example, in
precision engineering the allowable deviation from standard will be very small indeed,
whereas in other tasks in an organisation there may be considerable leeway allowed
for deviation from standard performance.
(b) Feedback Screening
If the sensor monitors performance continually there is a strong likelihood that more
feedback information will be generated than can be assimilated by the control system.
Some form of screening is therefore needed to ensure only sufficient and relevant
feedback is provided. There are two aspects to this.
Feedback regularity
The regularity with which the sensor monitors performance and provides
feedback will essentially be a function of the speed with which critical problems
may arise. Thus, the operations in a chemical plant will require constant
monitoring, but actual spending against budgets may only be monitored and
reported every month.
It is important to get the speed at which feedback is provided right. The ideal is
real-time control: finding out that something is going wrong as soon as it starts
to happen so that immediate corrective action can be taken. However, this is not
justifiable or practical in many situations. On the other hand, where feedback is
delayed beyond the point at which it can be used effectively as a measure of
performance (known as feedback lag), severe problems may arise.
One further aspect of this is that constant monitoring may be counter-productive
where a manager is dealing with staff. People do not take kindly to having every
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action checked and reviewed, effectively having their manager standing over
them all the time. Close control like this should only be used in circumstances
which demand it, and with the co-operation and understanding of the staff
concerned.
Management by exception
The application of this principle means that only deviations outside the tolerance
limits should be reported to management for possible action. Thus, where
monitoring does not find any significant variations, this should not be the subject
of feedback.
The advantages of this technique are that managers are not overloaded with a
mass of routine information which may obscure important facts and figures. They
are, then, better able to concentrate attention on significant events and act
immediately, resulting in quicker responses and more effective use of time. It
also aids the process of delegation in that staff do not need to constant report to
those to whom they are accountable, except in exceptional circumstances.
The effectiveness of this technique depends upon setting the performance
standards and tolerance limits precisely. If they are not properly determined,
problems may be missed or irrelevant information will be generated.
(c) Types of Feedback
Feedback may be negative or positive.
Feedback is described as negative when the correction it causes takes place in
the opposite direction to the original divergence in order to offset the error and
return the system to equilibrium. This kind of feedback causes the system to
remain close to the required state and is therefore very important in the control of
the system.
Positive feedback is where the indications are that the organisation should take
steps to push performance in the direction in which it is already going: for
example, if production is rising. This type of feedback is often ignored in many
organisations, but is very important in both motivating staff and driving up
standards of performance. Note, though, that inappropriate use of positive
feedback will result in deviations from the standards becoming more pronounced.

Locating the Point of Control
We can consider any operation system as comprising three components, as follows:
The point at which the sensor is located in the system gives rise to different types of control.
(a) Feed-Forward Controls
These focus on the regulation of inputs into the system, ensuring that they meet both
the quality and quantity standards required by the activity/performance stage and
envisaged in plans for the whole process. Thus, the concern is with expenditure being
in accord with budgets, the right staff being in post, materials and equipment being
supplied to the right specifications at the right time, etc.
The accent here is partly on ensuring that the activity/performance stage can take
place efficiently and effectively in accordance with plans. For example, in introducing a
new computer system, feed-forward controls would be used to ensure that the staff
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were appropriately trained in its use so that it may be effective on day one of going live.
Techniques to facilitate this include critical path analysis.
Feed-forward controls also address some of the drawbacks to the idea of control by
feedback. Important among these is the time element: clearly it must take time for
negative feedback to become apparent and corrective action to be taken, or for positive
feedback to be applied and opportunities for growth exploited. In today's rapidly
changing environment, these time lags can prove extremely costly to an organisation.
The use of feed-forward controls encourages environmental analysis as the basis for
planning future action, as we saw in Unit 3. This will include attempts to predict future
problems and opportunities, using models to simulate future conditions and identify
alternative scenarios that the organisation may have to face, and building responses in
anticipation of future changes.
For effective feed-forward control, the key influences or variables that are acting on a
project must be identified and included in the model. These must be constantly
updated so that an accurate picture of the present can be used to build in possible
future developments. The control element must monitor changes and take appropriate
corrective action. In a dynamic environment strategic (long-term) forecasting is
problematic.
(b) Concurrent Controls
These are concerned with the regulation of ongoing activities and operations, and
require careful specification of rules and procedures through which work is conducted.
This is often associated with bureaucratic organisations and may be criticised for what
may be seen as the red tape of administration. However, all operational processes
have their regulations and fixed methods of working, and control would break down if
they were not observed.
The objective here, perhaps, is to build sufficient flexibility into the rules and
regulations, and this can only be done by devolving authority to make decisions about
their application to a point closer to the actual application. Centralised authority
requires rigid concurrent control, whereas decentralised and delegated management is
more capable of flexibility.
(c) Feedback Controls
These are implemented after the event in the form of a review of completed
performance against objectives. All organisations, and parts of organisations, need
these controls since they provide the means of measuring the success or otherwise of
their operations.
The problem with such control is that, it takes place after an operation has been
completed, or at least after sufficient evidence is available of completed instances to
provide meaningful information. If this shows problems in performance, a great deal of
resources will have been wasted. It is important that feed-forward and concurrent
controls are also in operation. For example, careful (concurrent) checking of the
preparation of a new form may prevent having to destroy 5,000 copies of the
expensively printed finished product when it is noticed (after the event) that there is a
mistake in a phone number.
Characteristics of Effective Control Systems
There are a number of characteristics which may be identified in an effective control system.
These include the following.
The system must be understandable to all who are involved in its operation. The level
of understanding required to operate a particular system will depend upon its level of
sophistication, but the information which it provides must be appropriate to the needs
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and technical competence of its operators. In particular, the control standards which
are to be applied must be clearly stated and understood, generally being set with the
participation of those controlled.
Any control scheme should be specifically designed for the area in which it will
function and be related to the specific management position where responsibility for
the operation is located. The information supplied must be specific to the operation
and the area of management responsibility.
Deviations from the achievement of planned objectives must be fed back to managers
in good time for any necessary adjustments to be made. For instance, it is no good
waiting until a planned annual budget has been spent before informing responsible
managers. They need to be made aware at regular intervals of how much is still
available, in order to make any necessary changes to the original plan and get back on
target.
The information supplied should be selective, i.e. it should concentrate on those key
areas which are critical to the operation of the decision centre. If too much information
is supplied then often the most important points are missed.
The control system must not become too rigid. In the case of many banking cheque
cards, for example, the financial limit was set at 50 and has remained unchanged for
many years: consequently it has now become very restrictive due to increases in
inflation. Any good control system will be flexible, and capable of taking into account
changes in relevant circumstances. As objectives change, so should control
parameters. This implies that control systems should be reviewed regularly to ensure
their continued effectiveness.
Good control systems have within them the ability to indicate suitable courses of
corrective action in order to improve performance.
The system should be economic to set up and maintain, i.e. the cost of the system
must be proportionate to the gains achieved in its use. If errors are inexpensive, it is
not worth installing an expensive control system to prevent their occurrence.
Controls should not concentrate unduly on factors which are easily measurable. The
system should control whatever are the important factors, whether they are difficult
to quantify or not.

B. CONTROL AS AN ORGANISATIONAL PROCESS
The activities of control are crucial to management. They complete the cycle of management
by providing the means by which success in achieving objectives is measured and
determined.
The control process is summarised in the following diagram and each stage considered
below in relation to its implications for organisation and management.
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Figure 6.4: The control process
(Planning
process)
Determine areas
to review
Establish standards
of performance
Measure actual
performance
Compare performance against
standards
Take action as appropriate
Adjust plans, standards and
measures as necessary
Determination of Areas to Review
It is clearly impossible to try and control every aspect of an organisation's activities. Choices
are necessary about what aspect to concentrate on.
A good control system will identify the key elements in the operation under review: those
aspects which are crucial to success and will yield the information necessary to understand
what is happening. In most cases, these can be derived from the goals and objectives
developed in the planning stage, but since these are usually output-based there may be a
need to consider other aspects in the form of feed-forward and concurrent controls. For
example, the objectives of a road-building project may be to complete each stage on time
and within budget, but other control points may be required in respect of ordering materials
for the next stage.
Establishment of Standards of Performance
Control targets must be clearly specified in order that the degree and quality of their
achievement can be measured. This is crucial, since unless it is clear what the organisation
is trying to do, there will be no means of deciding whether it has been successful or not.
Ideally, targets should be expressed in quantitative terms. However, there are considerable
problems with establishing quantifiable output objectives in certain areas: for example, in
relation to the goodwill of a business, or the morale of a workforce. This is also a problem in
the public sector where, because of the difficulties of specifying standards in some areas of
service provision, control has traditionally focused on inputs and operational standards,
rather than output achievement.
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Modern approaches seek to address this by means of 'performance indicators' which are
measurable aspects of operation and output which can be taken as indicating overall
performance.
We shall examine the bases for setting performance targets in the next section.
Measurement of Performance
There are two aspects:

deciding the means of measurement;
deciding the frequency of measurement.
The easiest methods available are quantitative: using raw numerical data (number of units
produced, amount or percentage of income collected, number of meals served, etc.) or
statistical manipulations and relationships such as accounting ratios, time series, etc. to
provide information about the operation. However, as we have seen, many objectives in the
public services are qualitative and there are problems with measuring their achievement.
More subjective methods need to be employed: for example, seeking and interpreting
opinions through questionnaires, face-to-face interviews, and so on. Employee satisfaction
may be assessed by analysing timekeeping, absenteeism and labour turnover rates.
This rather implies a rigorous systematic process of collecting objective information through
automatic sensors built into mechanical or electronic systems or by planned management
action. However, a manager's job is to carry out regular reviews to find out about
performance, employee motivation, output in all of its varying facets and level of customer
satisfaction.
As mentioned already, the frequency of control is a measure of the attention deemed
necessary to ensure that operations are working effectively. Clearly certain operations
require close control: the running of a nuclear power station, for example, needs constant
monitoring. Not everything, though, needs such frequent measurement, and indeed very
close control can be counterproductive. In addition, there is a limit to the amount of
information that management can cope with, and over-frequent monitoring runs the risk of
overlooking significant items in the wealth of detail. The frequency of control needs, rather,
to be matched to the importance of the objectives or event being monitored, the degree to
which change may occur and the consequences of problems occurring.
The close control associated with frequent measurement of performance invariably
necessitates a narrow span of control for management. The extent of the span of control will
vary with the nature of the task which must be controlled and the tolerance levels that can be
allowed. Where tolerance limits are small, the span of control is reduced because control
has to be ready to intervene if there is even a slight deviation from standard performance.
Comparison of Performance Against Standards
Information from performance measurement needs to find its way to a 'control unit'. This
may be a line manager or a separate unit dedicated to performance review, such as a quality
control section or a management committee. It will depend on the type of control information
and the organisation structure as to who deals with what type or level of problem.
There are a number of management techniques which establish procedures and processes
to deal with this aspect of control: for example, budgeting, achievement of objectives and so
on. The most important techniques are examined later in this Unit.
Again we should emphasise the danger of the control unit being deluged by a mass of facts
and figures, particularly with the ease of generating such information from computers. The
answer to this is to apply the technique of management by exception, whereby only control
information which differs significantly from the standards is referred to management, thereby
saving time and concentrating attention on problem areas. Many computerised information
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systems have some sort of filter mechanism built in, so that only 'exceptional' information is
reported. It is also usual for manual systems to be concerned mainly with identifying
variations from the standards expected. Control is not only about problems, however, and
the danger of this approach is that achievement will go unnoticed and unrewarded, which
can be demotivating for employees.
In operating a system of management by exception, it is important to be aware of what
constitutes the 'exception'. In comparing actual with planned performance, a relatively small
deviation may not be crucially important. Standards often allow for minor deviations and, if
this is the case, we talk of tolerance limits. Tolerance limits usually have an upper and lower
level, within which performance is allowed to fluctuate: only when performance breaches the
limits is control activated to change performance. So, in a flexitime system, a standard may
be set for the hours worked by an employee each month (based on the contractual hours of
staff of the organisation) and an upper and lower tolerance limit set of 10.5 hours and 7 hours
respectively. Staff working more or less than these limits will be reported to the control unit
(usually in the personnel section) and appropriate action taken, such as loss of extra hours
worked above the limit, or reporting to head of department, or even loss of pay for those not
logging sufficient hours.
Taking Appropriate Action
With the emphasis in control invariably on identifying problems and taking corrective action, it
is easy to lose sight of the need to recognise satisfactory or exceptionally good performance.
It is often said that if performance is up to standard, no action is called for. This is wrong:
such performance deserves recognition and/or rewards (in line with motivation theory)
ranging from a simple 'well done' to bonuses, etc.
Where performance is not up to standard, corrective action is usually necessary to rectify the
position. This will usually require an analysis of the reasons for the shortfall in performance:
whether it is the employee's fault (and why), the equipment, external factors or the standards
themselves. The latter point is important in that the standards may be deemed inappropriate,
usually in the light of changed circumstances, and themselves need changing.
The results of control, in terms of comparison of performance against plans, feeds back into
the review of standards and measures, and also into performance by action taken to
recognise, reward, encourage and correct present levels.
C. MEASURING PERFORMANCE
We have looked at the importance of monitoring and review of progress and how
measurement may provide feedback so that corrective action, if required, can be
implemented. Measuring performance is a vital part of control. It establishes how well
something or somebody is performing, and applies not only to the mechanical processes
involved in any system, but also to the human elements involved.
Traditionally organisations have concentrated on measuring performance in terms of simple,
mainly financial indices such as profitability or other quantifiable objectives. Performance
measures are wide-ranging; the critical success factors for many organisations include areas
which are difficult to quantify, such as customer satisfaction levels. The increasing
importance of quality and the need for organisations to compete on a global basis have led to
a recognition that success is not exclusively by increasing productivity and/or reducing costs,
although these factors are still important.
Performance measurement also measures the contribution of individuals at every level of the
organisation, including senior management and the chief executive.
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Economy, Efficiency and Effectiveness
We need to understand the difference between these three principles.
Economy involves the acquisition of inputs (the resources necessary to deliver a
service or execute a policy) of a given quality specification at the lowest cost. Lack of
economy would be demonstrated by, for example, overstaffing or the use of overpriced
facilities.
Efficiency involves obtaining the maximum possible output (in terms of services
produced or delivered) from a given level of inputs, or alternatively the use of the
minimum inputs to achieve a given output. These alternatives give us two routes to
increasing efficiency:
(i)
(ii)

the productivity route, whereby the inputs remain constant, but output grows; or
the economising route, whereby the inputs reduce, but output remains constant.

Effectiveness involves achieving the goals of the organisation or operation. This is
normally considered in terms of the ratio of actual outputs to planned outputs.
However, this assumes that the outputs do actually represent the goals of the
organisation. In the public services in particular, goals may be seen not so much as
the outputs themselves, but as the outcomes of those outputs, i.e. the impact that
services have in terms of the effects on clients or users. This is likely to accord more
closely with policy, which is concerned with outcomes in respect of the community as a
whole or the welfare or quality of life of particular groups. (We are touching on one of
the major problems of performance management here the determination of objectives
and we shall come back to it in more detail below.)
We can summarise the relationship of the three Es to each other and to the elements of the
systems approach as follows:
Inputs Activities Outputs Outcomes
Economy relation Efficiency relation Effectiveness relation
An alternative and very succinct summary of the basic thrust of the three Es is provided by
Drucker:
'Economy and efficiency are concerned with doing things right, effectiveness is
about doing the right things'.
Drucker also argues that it is crucial that effectiveness and efficiency be separated out for
analysis. He points to the danger that managers may over-concentrate on efficiency (i.e.
doing better what they do already) and neglect effectiveness (i.e. seeking out new things to
do). Thus, managers should 'manage for results' and goal achievement at lower costs,
though desirable, is not enough. The goals themselves may need to be raised.
Approaches to Measuring Performance
As we have noted, what is measured in terms of performance depends to a large extent on
who is doing the measuring and where their particular interests lie. For example, junior and
middle managers will be interested in day-to-day operations and thus concentrate on
deviations from expected results at an operational level, whilst senior managers will be
interested in variations over a longer term, concentrating on trends. In addition, external
bodies may also have an interest in performance measurements. Regulatory bodies have an
interest in the performance and profit levels of the organisations they regulate, parents have
an interest in the performance of the schools their children attend or may attend, council-
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taxpayers have an interest in the performance of their local authority, etc. Performance
measurements must, therefore, take into account the interests of various stakeholders.
The approach an organisation has towards what constitutes the key elements of performance
will dictate the nature and type of measures adopted, and there are a number of different
concepts on which this may be based.
(a) Systems Resource Approach
This approach concentrates on the view that an organisation is a system which
receives inputs and processes them into outputs. The organisation's success in
carrying out its day-to-day activities and meeting customer needs for the future through
its outputs is based upon its ability to obtain resources. Criteria for success, therefore,
will be based upon primarily upon input factors.
For example, where parents are able to choose the school they send their children to,
they will judge a school, at least in part, on the academic success of past pupils. A
school which attracts the right blend of pupils and attracts and retains high-quality
teachers is more likely to achieve good academic results with a higher percentage of
pupils attaining good results and transferring to university. Factors viewed as
measures of success will therefore be linked to these issues, including the number of
pupils applying for places each year, staff retention rates, number of applicants for
teaching posts, etc.
This approach is useful where the 'output' is hard to measure quantitatively.
(b) Internal Process Approach
This approach concentrates on the internal efficiency of the organisation rather than
effectiveness. It suffers from one major drawback in that it ignores the needs of
customers. Thus an organisation can be exceptionally efficient at making widgets, but
not satisfy the needs of its customers.
The internal approach can also be criticised for lacking objectivity. The managers who
provide the judgement as to organisational health are often rewarded for reaching their
'targets'. It is in their interests, therefore, to set their targets in such a way as to be
easily achievable.
The internal approach tends to concentrate on operational indicators, which include
good team spirit, efficient use of resources (for example, ratio of inputs to outputs),
good communications and quality. Whilst the indicators may demonstrate efficiency,
they may not be indicators of effectiveness. Furthermore, they ignore strategy. The
organisation may well have a happy workforce, but are they engaged in activities which
are right for the organisation in the light of the current economic climate, etc.?
(c) Goal Approach
This approach to performance measurement measures effectiveness by comparing
actual performance with the stated objectives of the business. Measurements can be
linked directly to the corporate objectives of profitability, growth, market share, quality,
etc. The approach is easy to use but does rely upon the organisation's goals being
right for the organisation. It can also become too inward-looking if comparisons with
other organisations are ignored.
The goal approach can also lose impact if inappropriate measures are used. For
example, there is an understandable tendency to opt for measurements simply
because they are easy to make, rather than because the factor is significant to the
business. Thus, a tourist information office might measure the number of people
visiting its premises as an indicator of performance. A more realistic indicator might be
the level of satisfaction of those customers, although it would be much harder to
measure or evaluate.
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(d) Stakeholder View Approach
An alternative to performance measurement is the stakeholder view approach, which
considers the many groups which have an interest in the organisation and in what it
does; and the nature of their interest.
Stakeholders can be identified as being internal to the organisation (employees and
management), connected with the organisation (e.g. shareholders, customers,
suppliers) or external to the organisation (e.g. pressure groups, local authorities,
government). Clearly the nature of the interest that each has in the organisation will
differ.
The stakeholder model of effectiveness (sometimes called the 'ecology' model of
effectiveness) considers the relationship between the organisation and its stakeholders
in terms of the extent to which the organisation is dependent upon the stakeholder and
the degree of that dependence. The approach requires the company to identify its key
stakeholders, the degree of dependence upon those stakeholders, the goals of each
stakeholder and the organisation's ability to satisfy those goals.
This might sound a little complex, but an example may help. A small manufacturer
might be dependent upon one or two customers for most of its sales. Clearly, those
customers are of major importance to the company. The company will want to
demonstrate to its customers how it can meet their needs and contribute to their goals
in order to retain and build upon that relationship. Performance indicators therefore will
be directed towards demonstrating how well customer needs are being met.
(e) Competing Values Approach
The competing values approach acknowledges that organisational goals and
performance indicators are generally set by top and middle managers. However,
different managers or groups have different orientations and the interplay of these
orientations will determine the emphasis in performance measurement.
Managerial focus can be analysed in two dimensions:
Internal/external: an internal focus suggests that the manager is concerned with
such issues as employee job satisfaction or departmental efficiencies. An
external focus suggests that the manager is concerned with issues such as the
organisation's performance compared with competitors, market share or business
environment.
Stable/flexible: managers may prefer a stable environment with hierarchical
structures, centralised decision-making and clearly defined roles, or they might
prefer a more flexible approach with greater empowerment of individuals, less
formal structures and a task-based approach.

Different managers will have a tendency towards different goals depending on the
nature of their work activities and, to an extent, their position in the organisational
hierarchy. Thus a financial manager will probably tend towards an internal, stable
approach whilst a sales manager will tend towards an external, customer-focused
approach.
The prevailing approach of an organisation to key performance areas can often be
linked with the relative power of different functions within it. For example, some
organisations with an internal/flexible bias will demonstrate this by concentrating on
internal goals such as employee performance, staff morale and employee
development. Human resources will occupy a position of relative strength, perhaps
with a human resources director appointed to take a strategic role. Contrast this with
an external/stable bias which is geared more towards productivity, efficiency and
profits. In such an organisation, performance indicators are more likely to be profit-
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related, and relatively greater power will be enjoyed by departments involved in
production and finance.
(f) Balanced Scorecard Approach
The balanced scorecard approach, developed by Kaplan and Norton, is an attempt to
look at the overall organisational performance from four main perspectives, as set out
below. To some extent these perspectives mirror those considered above, but the key
difference is that no one aspect dominates the process.
Customer perspective
This perspective seeks to examine the key elements of the business's
performance as seen through the eyes of its customers. It identifies what
customers expect from the business, sets objectives to meet those expectations
and measures performance against the objectives. For example, if customers
want a short lead time on deliveries, the customer objectives might include '95%
of deliveries to be made within five days of receiving customer order'. One of the
performance indicators would be to measure the time between customer orders
and deliveries.
Internal business perspective
The internal business perspective identifies the business processes and
technologies which are critical to success (such as meeting customer
expectations identified in the customer perspective above). Objectives set in this
perspective might include goals relating to manufacturing capability (or
manufacturing excellence), quality, and manufacturing efficiencies, with
performance measurements being set against the objectives.
Financial perspective
The financial perspective considers factors of relevance to the financial health of
the business and to providers of finance, such as shareholders, council-taxpayers
(for local authorities), etc. Objectives might include those related to solvency
(measured by cash flow) and growth (measured by income growth or sales
growth or increase in return on investment, etc.).
Innovation and learning perspective
This asks the question 'How do we continue to grow and improve?' and therefore
considers the future needs of the business. Setting objectives here can be
difficult, but there has been much attention given to the development of indices of
the capacity of the organisation to develop and progress. We shall consider
aspects of this both below and l Unit 7, we look at organisational development
and the concept of the learning organisation.
Key elements might include improving staff morale, encouraging greater
participation in decision-making, and promoting personal development amongst
staff. Performance indicators might, therefore, include the value of training
undertaken per employee, time taken to develop new products, etc.
Using multiple measures of performance via a balanced scorecard can present some
difficulties, particularly if one measure of performance can be improved but only at the
expense of another: this is often the case. For example, market share might be
improved by concentrating more on marketing techniques, but such techniques may
result in a reduction in profits. The balanced scorecard approach does enable some
trade-off of objectives in the interests of the organisation as a whole.
To use the balanced scorecard approach successfully it is vital that general statements
of mission and goals be translated not just into broad corporate objectives, but refined
through the organisation into divisional, departmental and individual objectives which
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can be measured. Furthermore, it also requires excellent communication systems
throughout the organisation to ensure that the measures on the scorecard are
recognisably linked and understood.
Organisations which have adopted the balanced scorecard approach also advocate the
linking of rewards to performance measures across the scorecard: not just l to financial
targets, which is the more traditional approach. Linking reward systems (such as
bonuses) to financial targets only can lead to short-termism as managers base their
decisions on the potential for generating immediate reward. By linking some elements
of reward with non-financial indicators, there is greater encouragement to base
decisions on the needs of the organisation.
Performance Measures
Measures of performance imply, by their very nature, that what is to be assessed is capable
of being measured. Thus they must be quantitative.
Many of the objectives of all organisations can be expressed in quantitative terms. Indeed,
we saw earlier in the course the importance of establishing 'SMART' objectives: those which
are specific, measurable, achievable, realistic and timed. Thus we have a range of targets
expressed as specific values, ratios, percentages, etc. both financial and otherwise
against which actual performance can be compared.
However, there is a problem in relation to the many organisational objectives which are
qualitative in nature: for example, in relation to staff morale or where schools have a general
goal of developing students' potential or a company has an objective of being more
environmentally friendly in its operations. In these cases, the approach to establishing
performance measures has been to find quantifiable indices which can be said to be
indicative of performance in respect of such objectives. These are known as performance
indicators and we shall consider them further below.
(a) Types of Performance Measure
We can categorise performance measures in relation to two main bases, efficiency and
effectiveness, using the definitions which we discussed previously.
Measures of efficiency
Measures of efficiency are concerned with the way in which inputs are converted
into outputs through the activities of the organisation. The range of performance
measures on which this may be based includes the following:
(i)
(ii)
(iii)
(iv)
(v)

activity counts and throughput in relation to time;
productivity and utilisation rates, in relation to inputs of labour or raw
materials;
quality, in relation to numbers of rejected items;
costs and expenditure levels, compared to budgets;
Financial outturns, including profitability.
Measures of effectiveness
Measures of effectiveness are concerned with the outputs of the organisation.
There are a large range of bases for assessing this, including the following:
(i)
(ii)
volume of output units (sales), in relation to such comparators as over time,
within particular markets (market share), etc.
revenue earned from outputs, in relation again to comparators such as over
time, from particular products or markets, etc.
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(iii)
(iv)
quality of the goods or services delivered, in relation to complaints, returns,
etc.
customer satisfaction levels.
Note that profitability is classed as a measure of efficiency, even though it is
traditionally seen as a primary objective. However, the achievement of profitability may
entail a reduction in effectiveness in other areas: for example, the use of cheaper raw
materials (to reduce costs and thereby improve profitability) might lead to a reduction in
quality which may have greater significance for the organisation than profit levels. In
addition, some activities can only be loosely linked to profitability, if at all. An example
might be in an organisation which is taking steps to improve employee retention levels
because of local skills shortages. Appropriate measures such as improving the staff
canteen, providing childcare facilities or offering flexible contracts are difficult to link
directly with company profitability.
In practice, therefore, a variety of measures of efficiency and effectiveness will be used,
partly because relying upon only one type is likely to give a biased picture of the
organisation in view of the diverse nature of the business as a whole.
So far we have taken a rather general approach to this subject to set the scene. We
will now look at some specific measures commonly used. For simplicity we will take a
traditional approach to measuring efficiency and effectiveness (system resources,
process and goals), but you should not lose sight of the implications of other
approaches discussed above.
(b) Performance Measurement for Overheads
A variety of performance measurements are also used for overhead costs and
utilisation. In a production environment, for example, the ratio of machine downtime to
total machine usage (or machine hours) can be an indicator of machine efficiency: the
lower the ratio, the more efficient the machine.
Another example within a production environment might be the ratio of production time,
sometimes referred to as 'value added' time, which measures the time the product is
actually being made, against total production cycle time, which includes start-up time,
breakdown times, idle times, essential cleaning time, etc. In theory, the higher the ratio
the more efficient the process.
Qualitative measures are sometimes also used for overhead measurements.
Adequacy of lighting, heating and ventilation may be assessed as, if they are not at an
optimum level, worker performance may be compromised.
(c) Performance Measures for Sales
Traditional measures for sales include target market share, revenue targets, volume
targets, etc. They can be analysed geographically, by product, by sales team, and so
on. Their flexibility and ease of understanding means they are likely to be used in most
sales environments.
However, different approaches to performance might entail different measures. A
customer-oriented approach might adopt indicators such as:

Number of customer rejects (or the ratio of returns to total sales)
Number of people served or the speed of service
Level of customer satisfaction.
Where the focus is on profitability, measurements might include product profitability or
customer profitability. This latter measurement identifies the extent to which a
customer generates profits for the company, and may take into account the quality
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demanded by the customer (some customers may require additional quality checks, for
example), financing costs (dictated by the time the customer takes to pay for goods),
the nature of sales costs (telesales activities are cheaper than a visit by a dedicated
member of the salesforce), discounts offered to the customer and the nature of the
product purchased. Such information can be useful to managers because not only
does it identify customers who are either profitable or unprofitable, but it can help to
identify ways of improving the profits earned from customers.
(d) Performance Measures for Materials
Traditional approaches to performance measurements for materials include standard
costs for materials, stock turnover and material performance (particularly in an
environment where the inherent qualities of a material are valuable, such as strength,
appearance, etc.).
For example, in a soft drinks bottling plant, carbonated drinks can be bottled in glass or
plastic. On the glass packing line the quality of the bottles is highly important, as
bottles which are substandard are more liable to break during production and may
cause injury to consumers if they break after filling. Bottles which break during
production cause the line to be stopped and cleared before filling can recommence, so
non-productive time is increased. Packaging material performance is, therefore, of
importance to the company and is measured by the number of reported breakages on
arrival, during and after packaging. As customer safety is of vital importance, and a
priority, where packaging material performance fails to achieve minimum standards
(measured as the ratio of breakages to volume supplied), the whole consignment (filled
or empty) is rejected by the company.
(e) Performance Measures for People
Labour costs are a traditional method of measuring the utilisation and management of
staff within the organisation. Other employee-related measurements might include:

Sales per individual employee
Units of production per production operative
Number of invoices posted per data-entry clerk
All aspects of a business's performance can be measured in terms of the different
individuals or groups who do the job.
Qualitative measures of performance are also common and performance appraisals
may incorporate such factors as communications skills, customer service skills,
interpersonal skills, etc.
Many organisations will, at some time, attempt to measure factors which include
employee satisfaction and morale. They are difficult to measure, but staff satisfaction
surveys have gained momentum during the last decade.
Performance Indicators
All organisations have a number of objectives which are qualitative as opposed to
quantitative.
In the private sector, these qualitative measures are intangible principles such as goodwill,
staff morale or public image, which can be extremely important to any organisation. In the
public sector, where profitability is not the main factor, output objectives are traditionally
expressed in qualitative terms, such as quality of care and developing potential (although
keeping spending within budget will be a major quantitative measure).The key to measuring
performance in relation to such objectives is to establish factors which are indicative of
achievement, as the measurement of the actual objectives is difficult because of their
intangibility. This is straightforward in relation to activities where measures of efficiency can
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be assessed as being a reflection of the progress towards the achievement of intangible
goals. Staff morale may be measured by reference to such factors (or trends), as absence
rates, labour turnover statistics and outputs. Qualitative outputs do easily reflect
achievement.
The traditional approach has been to use volume of outputs as an indicator of performance,
often couple with measures of efficiency and volume of inputs. Thus, public image goals
might be assessed in relation to the amount of PR activity and the resources used, or a
housing association might assess its performance by reference to the response times for
dealing with repairs. In the NHS, much attention has been given to throughput indices
(number of days per stay in hospital for different types of condition) and resource utilisation
rates.
Increasingly, in the public services, there are a number of output measures which have been
proposed as contributing towards the assessment of performance. In the education and
training arena, these include volume and levels of achievement of students and the work
force in general in relation to assessment tests, examinations and qualifications. In respect
of empowerment goals (within the organisation or among users of the public services), the
range, characteristics and forms of interaction of participating individuals and groups may be
assessed.
It should be noted that there are potential problems with the use of both efficiency and
effectiveness measures in relation to the achievement of qualitative goals. In particular, there
is a danger that management may focus on those measures which are quantifiable to the
exclusion of other less tangible objectives. This is a strong complaint in the NHS and
education system where efficiency targets and examination success rates have been seen
as disproportionately important and less attention is paid to other, equally important goals,
such as personal development and long-term health improvement
In recent years, more attention has been paid to the impact of outputs and activities on
stakeholder groups. The use of sophisticated research and analytical techniques to identify
and explore attitudes and responses to organisations and their outputs has enabled detailed
performance measurements to be drawn up in relation to levels and types of customer and
employee satisfaction. These also contribute to the achievement of qualitative goals but,
again, may not encapsulate their full range, so again there may be a problem of the
organisation being led by inappropriate targets.
D. BENCHMARKING
The process of comparative analysis, referred to as benchmarking, gained wide acceptance
in the 1990s throughout both the public and private sectors as a means of evaluating both
efficiency and effectiveness. It has, however, since lost some of its momentum.
It involves comparison of performance not against internally set standards, but against
performance in other parts of the same organisation or other, similar, organisations.
Principles of Benchmarking
Benchmarking can be used in three ways:

In the form of a simple comparison between organisations, either on an individual basis
or against general standards within the industry or sector.
As a corporate learning tool to identify how things are done elsewhere and why results
are achieved.
As a performance improvement tool by deliberately seeking out examples of 'best
practice' which can be adopted if appropriate. This is known as best practice
benchmarking (BPB), and compares activities and performance levels with those
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organisations considered best by their customers or acknowledged as such by their
competitors.
It is also possible to carry out a benchmarking exercise on an internal basis, whereby
comparisons are made between units, divisions, plants or subsidiaries within the same
organisation. This does make comparison of like-with-like easier, and relevant data are
easier to obtain. Internal benchmarking has drawbacks, however, as it is mainly inward-
looking and tends to be narrow in perspective.
It is possible to make comparisons across national boundaries, but unless the comparisons
are made within the same group and accounting policies are standardised, the process is
fraught with problems because of differing local conditions, including culture. Some
companies do use international comparisons, but generally do so within their own group,
based on local results being compared against local standards, and the results of
performance against local standards.
Benchmarking activities can be differentiated according to the type of comparison being
made between organisations:

Functional benchmarking compares performance relating to a single business
function.
Process benchmarking compares performance relating to a structured set of activities
designed to produce a specified output for a particular customer or market. This type
of benchmarking looks at the activities of competitors supplying the same or a similar
customer or market and may involve activities within more than one functional area.
Customer service
Manufacturing
Human resources
Information services
The main business functions which are subjected to benchmarking are:

An area where benchmarking is gaining popularity is within the not-for-profit or non-
commercial environment, where there are diverse aims and objectives, rather than an overall
aim to make a profit for shareholders. In the public sector, the Audit Commission has
supplied benchmarks of performance to local authorities and the NHS. League tables for
schools provide similar benchmarking data.
Purpose and Benefits of Benchmarking
Benchmarking has been defined as identifying best practice from other organisations and
comparing it with practice within one's own organisation, in order to understand how to
improve its operations. It is more than a simple comparison of quantitative data between
companies.
Specifically, the aims of this form of comparative analysis are:

To understand how your organisation compares with similar organisations and/or world
class leaders in appropriate industries.
To determine the gap that exists between your own organisation's performance and
that of those with which the comparison is being made.
To ascertain the best practices that must be introduced to improve performance and to
close the gap with the best.
In terms of actual performance, to increase productivity, reduce costs and improve
customer service.
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There are few evaluative studies of benchmarking, but those companies regularly using the
technique claim the following benefits:

It enables more meaningful and realistic targets to be set
It increases motivation of staff through sharing with them what can be achieved
It provides an early warning of competitive disadvantage
It promotes teamwork and cross-functional learning.
Limitations to Benchmarking
Cox and Thompson in On the Appropriateness of Benchmarking in 1998 identified certain
'risks' associated with benchmarking:

Selection of an inappropriate set of performance measures
Selection of a benchmarking partner not representing good practice (best practice is
thought to be impossible to define or recognise)
Inability to gain access to appropriate benchmarking data, and
Insufficient understanding of the contingent circumstances supporting the data
collected.
This last point is important. There are a range of external factors which can have an impact
on results: for example, labour costs may be higher in one area than another, or the skills
base may be better. These variations need to be discounted in any comparisons drawn.
The Benchmarking Process
A full benchmarking exercise aimed at operational improvement and leading to a programme
of change will follow the process broadly outlined below:
Understand and measure critical success factors applying in the organisation and
examine practice, processes and performance measures (related to both efficiency and
effectiveness). This ensures that the exercise can be focused on core areas and
factors that determine their success.
Select the areas of performance to be benchmarked by determining the activities and
measures to be used. A decision will need to be made whether to benchmark a wide
range of activities and levels of performance or whether to focus on a few key strategic
areas. The latter will not necessarily be at the corporate level, but may be anywhere in
the organisation where performance is seen having a significant impact.
Select a benchmarking 'partner' using appropriate criteria, such as similarity of type of
business, culture, process technology, etc. This will involve assessing competitors
(local, national and international)l and also leaders in other industrial/commercial
sectors, so as to determine the most appropriate level at which to benchmark.
Comparison of one department of an organisation with another in the same
organisation is comparatively straightforward. Comparison with another excellent
organisation will depend on access to the information needed for comparison.
Frequently an organisation will wish to benchmark against a leading competitor.
Collect data in 'partner' organisations using techniques similar to those employed in
one's own organisation. This may require the services of research agencies.
Carry out a comparative analysis of data, quantified as accurately as possible so that
you are comparing like with like. The aim should be to identify areas of differences in
performance and to consider their root causes in terms of activities, decision-making,
etc.

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A positive benchmark result shows that the organisation is ahead of its competitors, but
this must not breed complacency. In particular, it is possible to identify where the
organisation is performing better than its benchmark partner and mark these areas as
strengths to be built on.
A negative benchmark result, placing the organisation behind its competitors in
particular areas of performance, will be an impetus for change.
E. TECHNIQUES OF PERFORMANCE MANAGEMENT
The process of control is a key function of management: indeed, it is an essential part of
implementing plans to ensure that objectives are being met. In this last section, we review
some of the main techniques used by managers to ensure efficiency and effectiveness in
performance.
Before we start to look at some of these techniques, we should note that managers are not
necessarily free to develop their own approaches to the way in which they control staff and
activities. They will be guided by policies, procedures and rules which have been established
for the organisation as a whole.
Policies, you will recall, are guidelines which constrain management decision-making. They
generally emerge from the organisation's aims and objectives, such as in a policy to offer
refunds to dissatisfied customers, whether there is a fault with the product or not. Other
policies may arise from compliance with legislation (such as the requirement not to
discriminate on the grounds of gender, marital status, ethnic origin or disability) or may be
established as a result of negotiation with the workforce (such as a policy to recruit initially
from within the organisation).
Procedures are a logical sequence of actions for performing a certain task or completing a
process. Procedures are likely to exist at all levels within the organisation and, again, some
may be established to comply with legislation or as a result of an adopted policy. Procedures
may be written down in a manual, which has the advantage of allowing those unfamiliar with
a job to have quick access to information about how to perform a task or job. Procedures
can be a form of control or standardisation to ensure that tasks of a similar type are
performed in the same way throughout the organisation.
Rules are specific actions which must be taken in a given situation. Again, organisations
may impose rules as a means of standardisation or to comply with policies or legislation.
Unlike policies which are general guidelines, rules allow no discretion or deviation from the
prescribed action. An example of a rule might be that employees are not permitted to make
personal telephone calls or send offensive emails.
A manager may set his or her own rules and procedures as an approach to planning and
standardisation of tasks. For example, a payroll manager might specify that all overtime
claims must be received prior to a certain date in order to be paid with that month's salary.
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Management by Objectives
(a) Definitions of MbO
Management by objectives (MbO) is a process of positive action for results, comprising
the setting of objectives, planning of work for their achievement and monitoring results.
It may be applied on a departmental, unit or individual basis.
MbO has the capacity to serve a wide range of functions in the organisation, as can be
seen from the various ways in which it has been defined by different commentators:
'a dynamic system which seeks to integrate the company's need to classify and
achieve its profit and growth goals with the manager's need to contribute and
develop himself' (J. W. Humble, the main proponent of MbO)
'the superior and the subordinate managers of an organisation jointly define its
common goals, define each individual's major areas of responsibility in terms of
the results expected of him and use these measures as guides for operating the
unit and assessing the contribution of each of its members' (G. Odione)
'a comprehensive managerial system that integrates many key managerial
activities in a systematic manner, consciously directed toward the effective and
efficient achievement of organisational and individual objectives' (Koontz)
(b) Links With Other Management Activities
If we draw out the key elements of these definitions we can see the links between MbO
and other management activities.
Planning: Humble stresses the spread of corporate planning down through the
organisation by the use of MbO techniques, whilst Koontz emphasises that
planning must take into account individual as well as corporate objectives if it is to
be implemented effectively.
Organisation and direction: Odione stresses the need for clarity of
responsibility and accountability in the definition of objectives and assessment of
achievement, and the interaction of superiors and subordinates emphasises
participation and involvement as a basis for decision-making.
Control: MbO is an effective control technique through the accent on monitoring
and reviewing performance, providing at one and the same time strong
managerial control over the performance of subordinates and increased
autonomy for the subordinate in determining programmes of work (and thereby
enhancing motivation).
Communication: the process of interaction in the setting of objectives and
review of achievement puts a premium on effective interpersonal communication,
whilst the emphasis on results requires appropriate information systems able to
support the process.
Performance appraisal: properly used MbO allows appraisal as part of an
integrated process, rather than something outside normal management
interactions and roles.
Co-ordination: MbO forges links between managers at various levels in the
organisation, so increasing vertical co-ordination with specific reference to
objectives and performance.

(c) The MbO Process
Management by objectives focuses on the end results of activities, rather than the
activities themselves. This reduces the danger common among managers at lower
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levels in the organisation of becoming so caught up in the day-to-day running of
operations that they lose sight of their objectives.
The MbO process starts with an assessment of jobs in the light of the overall strategic
and/or operational objectives and plans, identifying the key aspects which contribute to
their achievement. Specific objectives are then developed for those key aspects which
may then be monitored over the forthcoming period, prior to a general review and
repetition of the process. This is akin to the general cycle of planning, control and
feedback in respect of the total management process.
Let us consider this in a little more detail.
The job
The first stage of the process is defining the exact purpose(s) of the job. This
may not be as straightforward as it seems, since job holders and managers often
have different perceptions. The crucial aspects here are that the definition should
be agreed between the job holder and his or her manager, and that it should take
into consideration the overall objectives and plans of the department or section
within which the job is located.
Key results analysis
This is the heart of the MbO process, and comprises four elements:
(i) an analysis of the various aspects of the job itself to identify the key results
in respect of the achievement of the purposes of the job, and hence the key
tasks;
for each key task, the development of a set of performance standards
which define the conditions which should exist when the required results
are being satisfactorily achieved, preferably measurable in such terms as
quantity, quality, time, cost, etc.;
for each performance standard, the identification of control data which
establish what information is necessary to provide evidence of results
achieved; and finally
suggesting improvements in respect of action which may be taken by the
job holder and/or the organisation in order to assist in either the
achievement of the desired results or the means of monitoring.
(ii)
(iii)
(iv)
The aspects are brought together on a form such as that shown below.
Extract from a key results analysis form for a payroll assistant
Key
Task/Result
Make authorised
payments,
claims & returns
to external
agencies
Performance
Standards
Payments, claims
& returns correct
and made within
specified
deadlines
Deduction records
reconcile with the
payroll system
Control Data
Monthly reports
and diary
schedule logs
Improvement
Suggestions
Returns dates
need to be
added to diary
schedules
No error reports
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This key results analysis (KRA) needs to be discussed and agreed between the
job holder and manager to agree the conclusions drawn and establish any
constraints or problems (for example, in terms of finance or equipment available,
time, relationships with other work and plans). On the basis of an agreed KRA,
an action plan can be drawn up.
Action plans
The action plan is a personalised statement of activities designed to enable the
job holder to meet the performance standards. It is likely to include intermediate
as well as final outcomes related to key results, and to have target dates for their
achievement.
This plan forms the basis for the last part of the MbO process the review.
Review stage
The regular review of performance and achievement is a fundamental part of
MbO. The frequency of review will depend upon a number of factors relating to
the degree of control the supervisor wishes or needs to exercise over the
operation and/or the staff concerned. In most administrative jobs, a six-monthly
review is usually quite adequate.
The purpose of the review is to consider results in terms of the action plan drawn
up for the preceding period, and to discuss successes and failures, and the
reasons for them. As with any review and appraisal system, the accent should
not be on criticism and punishment, but rather to assist in developing the
individual and the organisation. Indeed, MbO operated in a punitive manner will
not work because job holders will manipulate the process in order to disguise
personal failings and over-emphasise successes.
The outcome of the review process should be a new action for the next period
and, if appropriate, changes in the key results analysis. This latter will occur
where there needs to be a shift in emphasis in key results in order to fit into
changing organisational/sectional objectives and/or where changes need to be
made in the light of either achievements or problems.
(d) Benefits and Problems of MbO
We have noted the multi-functional nature of MbO which confers considerable
versatility on the technique. However, there are a number of other benefits accruing
from the use of management by objectives:

individual objectives are integrated with the objectives of the organisation, thus
aiding co-ordination of goals and plans;
the emphasis on planning for results, rather than merely planning how work
should be done, helps to establish priorities for the organisation and individual
jobs, and also ensures that managers and job holders are clear about
expectations;
the review process, and the built-in consideration of suggestions for
improvement, facilitates communication with a positive, developmental outlook
based on clearly agreed criteria;
the involvement of job holders in the definition of the contribution their jobs may
make to the organisation, the accent on achievement of results and the relative
autonomy afforded in how to achieve them, all contribute to enhancing employee
motivation.

Despite its many strengths, however, MbO is not without its problems. In particular, we
have seen before the difficulties associated with objectives: problems of exact
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specification, quantitative driving out qualitative objectives, the impact of environmental
factors on achievement, difficulties in measurement. Other weaknesses with the
process include:

the tendency for it to become over-bureaucratic, time-consuming and costly with
continual review of objectives, form-filling, consultation, etc.;
lack of commitment and understanding by management, with the result that the
process tends to become either a paper exercise with little meaning or a punitive
means of control;
the potential conflict between personal and organisational goals on the part of
both managers and subordinates which may distort the process (although
consultation and agreement about objectives and results should be capable of
reconciling these).

For these reasons MbO is a far less popular management technique now than in its
1970s heyday.
Organisation and Methods
Organisation and methods (O&M) is a term covering any systematic attempt to increase the
efficiency of an organisation by improving procedures, methods and systems,
communication, controls and organisation structure. O&M is therefore involved with getting a
job done more efficiently (and so more cheaply) or questioning whether the job needs to be
done at all.
It is generally thought of in relation to the carrying out of a specific study looking at working
practices and procedures, etc.; but is worthy of wider appreciation as a management
technique (or rather a set of tools) which can be applied by managers as part of the
continuous monitoring and development of efficiency in the activities and operations of an
organisation.
(a) Work Planning
Work planning involves the establishment of methods of work and practices to ensure
that objectives are met at all levels, and involves the following elements.

Allocating tasks to individuals and/or machines
Prioritising tasks and establishing systems for identifying and dealing with
unexpected tasks
Co-ordinating the work of individual and group efforts
Establishing methods of measuring performance.
There are a number of techniques available to assist in this process, some of which we
will now consider.
Work allocation
It is the role of managers to allocate work to available staff. Whilst some
allocations are obvious specialist tasks to specialists a certain amount of
planning will be necessary to deal with other tasks:
(i) Some functions might be centralised, such as filing or typing, whilst others
might have to be carried out by the department itself. The department
manager will have to consider whether to allocate this task to one
individual, or to require all staff to undertake the administrative functions
themselves.
Some tasks will vary in workload with peak and slack periods. This may
require some re-distribution of workload during peak periods.
(ii)
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(iii) Work has to be allocated to the best person for the job. This will require
consideration not only of abilities of individual staff, but also of the
temperament or personality of individuals. For example, even with training,
some individuals might be better suited to roles involving direct customer
interface than others. Of course, it is important to maintain flexibility where
possible so that others can also undertake a particular task.
Individuals' perception of their role is an important consideration,
particularly in a bureaucratic organisation. Flexibility may be hampered by
individuals' perception of their role/seniority.
Individual work must be co-ordinated so that all those involved in an activity
work as a team.
(iv)
(v)
As well as allocating tasks, it is important that appropriate resources are available
for the task. In an office environment this might include ensuring appropriate
supplies of stationery are to hand, and that reprographic facilities, files, etc., are
readily available. Efficiency is encouraged by ensuring that routine tasks are
handled in a methodical manner, using schedules, plans and checklists as aids.
The establishment of work routines can also help ensure methodical working, for
example by requiring certain tasks (such as filing or putting things away) to be
completed at the end of the day.
Control systems will also be required to ensure that tasks which cannot be dealt
with in a single activity are properly completed. For example, if information is
required from another source to complete a task, it is reasonable to expect that
there might be some time delay between requesting the information and receiving
it. A follow-up system such as a note in a diary to remind the employee to bring
forward the files or paperwork at a particular date in the future can help ensure
the task is completed on time.
Prioritising
Some jobs are routine and can clearly be performed at any time and in a logical
sequence. Most jobs, however, are not and some method of prioritising tasks so
that those which are the most important are done first and the rest either done
later or delegated. Assessing what constitutes a priority will depend upon the
nature of the work, the deadlines, etc., and there are also some techniques
available to assist:
(i) Pareto analysis (also known as ABC analysis)
Pareto's law assumes that 80% of output is achieved by 20% input. This is
an interesting ratio and one which seems to apply to a number of situations.
For example, in many quoted companies it is found that 80% of the shares
are held by 20% of shareholders. Alternatively 80% of sales might be
attributed to 20% of customers. Pareto's law helps to prioritise by allowing
attention to be concentrated on the crucial 20%.
A Pareto analysis therefore involves dividing items into three groups:
A: those which are very important
B: those which are fairly important
C: those which are less important
Thus we can identify the 20% which are most important. Scarce resources
can then be concentrated on the 20% and policies and procedures devised
to deal with the remaining 80%.
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You should bear in mind that this type of technique is not intended as a
method of discounting in total the remaining 80%, nor does it suggest that
small items should be ignored. Small customers, for example, can become
bigger and therefore the analysis should be repeated at intervals.
(ii) Contribution basis
Another method for assessing priorities involves concentrating limited
resources on items where there is the greatest contribution (revenue less
variable costs) per unit of the scarce resource.
(iii) Sensitivity analysis
Sensitivity analysis is a technique which identifies potential risks in a
project. It can be used for allocating scarce resources or prioritising tasks
by identifying where there is greatest potential for risk. Scarce resources,
for example, can be employed to reduce that risk, thereby increasing the
project's potential for success.
(iv) Essential versus non-essential tasks
Identifying which tasks are essential for the success of a project (the critical
success factors) can help to direct resources where they will be most
useful. For example, opening the post on a daily basis might be an
essential task for a secretary, whereas filing that post once dealt with is
probably less essential and can be done on a weekly rather than daily
basis.
(v) Dependent tasks
Where a task (A) is dependent upon another task (B) being completed, it is
clearly essential that task B is completed first and therefore becomes a
priority.
(vi) Deadlines
Where work has to be completed by a certain deadline, then the closer the
deadline, the more urgent the task. Deadlines can be quite important as
failure to meet them will usually have an adverse effect elsewhere in the
organisation or will delay a subsequent task.
(vii) Network analysis (critical path analysis)
Network analysis (also known as critical path analysis) is a tool which takes
into account the length of time required to complete a task and the
relationship between tasks, so that tasks can be scheduled to begin and
finish in the proper sequence. Network analysis is particularly helpful in
project management.
(viii) Diaries, etc.
Do not overlook the value of simple planning and scheduling aids such as
diaries and year planners. No doubt as you work through this unit, you will
be aware of the examination date you are aiming for and will have (either
formally or informally) worked out how much time you have to spend on
each subject you will be sitting, before the examination date, by reference
to a calendar or diary.
Work Scheduling
Work scheduling takes into account priorities, durations, timescales and
deadlines, to make the best use of available resources. Using your examination
as an example, you should have decided which examination series to enter by
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considering a realistic time allocation for studying (taking into account other
priorities, such as work, family commitments, time for hobbies or relaxing), and
the suggested study time per module. An alternative approach is to work
backwards from a deadline in order to establish when tasks should be
completed.
Activity schedules provide a list of necessary activities, in the order they must be
undertaken, in order to complete a task or job. For example, an activity schedule
to book a holiday might include the following:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Agree holiday dates with partner/employer
Obtain brochures
Study brochures to identify preferred resort/hotel
Check availability of hotel on preferred dates
Visit travel agent to book holiday
Pay deposit
(vii) Check passport is still valid
(viii) Ascertain requirement for inoculations and book appointment at medical
centre
(ix) Pay invoice balance.
Activity schedules can be useful for routine tasks, to plan each day's work, or to
set up standard procedures for regular jobs.
adding the time an activity takes to an activity schedule is useful for setting
deadlines. It is also useful so that an estimate can be made of the total time a
project/activity will take. Ideally, time estimates should be realistic and should
allow room for delays, and take into account activities which can take place
simultaneously.
Activity schedules are often best displayed as visual aids using charts, diagrams
or year/month/week planners.
(b) Work Measurement
The aim of work measurement is to set standards for the quality, quantity and time
taken for work.
Some types of work are better suited to measurement than others. Routine or
repetitive jobs in production, or those involving machine operation with specific
elements of 'output', are easier to measure than non-routine or office-based work
where interruptions from callers or telephone calls frequently disrupt tasks. Jobs
involving meetings, planning, research, etc., are more difficult to measure or set
standards for, which suggests that managerial functions are difficult to include in work
measurement exercises. That said, there is no reason why aspects of the process
cannot be applied to certain parts of virtually all jobs. It is certainly the case that
managers know roughly how long a particular piece of work should take and tend to act
in accordance with this.
Work measurement is based upon 'standard time', which is the total time in which a job
should be completed at 'standard performance'. The British Standards Institute defines
'standard performance' as the rate of output which qualified workers will naturally
achieve without over-exertion as an average over the working day or shift, provided
they adhere to the specified method and provided they are motivated to apply
themselves to their work. A standard rating is calculated based on a scale, with 100 as
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the standard rate, being the rate that an average, qualified, worker will perform the
task. Time is not the only basis for the calculation as effectiveness is also relevant. An
allowance for effectiveness must be made to the calculation before arriving at a
standard performance to cater for all times for workers. By adjusting the rating for
different types of worker, a fair and equitable time can be issued for each task studied.
This is often a controversial aspect of the measurement.
Like all activities where standards are set, there must be a purpose for the
measurement. Standard time is usually used as a basis for pay incentive schemes, for
planning purposes (for example to ascertain overtime requirements), as part of a
method study exercise, to determine standard costs and, of course, as part of a control
system.
Once standard times have been set, actual performance can be measured against
standards. The methods of measurement will vary according to the nature of the job
and the organisation, but commonly include the following (which are similar to the
means used to establish the standards in the first place).

Time sheets
Activity sampling
Observation
Computer recording
Using diaries
Computer recording systems solve some of the difficulties of observing complex
clerical tasks, as many computers can provide a record of tasks undertaken using that
equipment.
As a final word about work measurement it is worth noting that most, if not all, clerical
or managerial functions will involve 'thinking' time of some sort and as yet, systems to
measure brain activity (or lack of it) are not available. However, this does not mean
that measuring managerial performance is impossible.
Measuring Individual Performance
As we have noted, work measurement is a method of measuring individual performance
where that performance is based upon work which is measurable. Often, however, an
individual may carry out tasks which cannot be scientifically measured in the same way as,
say, a production worker. Furthermore, individual performance is not just about the time
taken to perform a task, but encompasses a whole range of elements, including qualitative
aspects like attitude to work, commitment, loyalty, etc., and in many cases is highly
dependent upon the performance of others. For example, if you want to know how good a
manager is at managing, it is difficult to separate out the individual performance of that
manager with the economic performance of his or her unit, which may not be down to the
individual performance of the manager.
The main method of measuring the performance of individual managers (at the supervisory
and middle management levels) is subjective. There will be some form of appraisal
whether part of a formal system or not carried out by the manager's line manager, or
someone impartial but who knows the work of the manager and the difficulties he or she
faces. This will be based on a review of achievements in relation to objectives.
There are, of course, many variations now on the appraisal format and it is outside the scope
of your syllabus to look in detail at the pros and cons of each variation. However, you should
be aware that appraisals can be performed by managers on those who report to them (i.e.
the classic downward appraisal); they can be upwards (i.e. by subordinates on managers); or
views can be sought from all parties with whom the manager has contact, including
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customers, etc. (called a 360 degree appraisal). To be an effective measure of performance,
it is important that they are perceived as fair, supported by managers and subordinates and
those operating the system are properly trained to appraise in a fair way.
Measuring Board Performance
When we considered individual and managerial performance above, we made an
assumption that someone (often a superior) is ultimately the recipient of information on the
performance of an individual. This suggests that when we get to the top of the corporate
tree, we have a problem. Yet, with continued emphasis on reviewing the way boards
operate, how can board performance be measured? Indeed, should board performance be
measured?
Reviewing board performance is common in the USA but has been slow to gain favour in the
UK. One of the reasons for this is that, in the UK, board performance has traditionally been
seen as reflected in the results of the organisation as a whole. Thus accounting
measurements have been seen as the overall measure of performance of boards of
directors. Increasingly, however, formal evaluation of the board either by outside experts or
as a self-evaluation process is being called for by proactive institutional investors and lobby
groups, some of whom feel that board comfort levels and rewards are sometimes higher than
performance justifies.
A board evaluation exercise presents some difficulties:
The aims of the review must be clarified. In Britain individual review of directors is
thought to be inappropriate because the board operates as a team rather than a
collection of individuals, but there are signs that this view may have to change as the
USA and Japan are both moving more towards identifying core competencies for
directors and individual performance reviews for directors.
How will the findings of the review be used? There is little point in conducting a review
if the findings are to be ignored; so there has to be agreement on the way in which any
findings are implemented.
Who will have access to the findings? Typically, the results of a board review are
confidential to the directors and their advisers as the report is intended as a vehicle for
development for the board. However, if a decision is made to release the report
outside the organisation, listing rules may require its release to all shareholders.
How will the review be carried out? In some cases a formal evaluation of the board is
conducted by outside experts. Some evaluations are carried out by the audit
committee of the board and sometimes an informal process involving seeking individual
directors' opinions (often anonymously) is used.

Managing Outsourced Operations
Outsourcing has been increasingly used by many organisations in recent years as a means
of reducing costs and concentrating resources on core functions and operations. Basically,
this means contracting with an external organisation for the provision of particular services
which would, if not outsourced, have to be provided directly by the organisation.
The main functions which are outsourced tend to be facilities management (premises
maintenance, cleaning, grounds maintenance, etc.), office and computer services (such as
reprographics, telephone systems, post, etc.) and certain support services such as payroll,
personnel and even accounting. In theory, virtually any service is capable of being
outsourced, although there are acknowledged advantages and disadvantages to the process
which may dictate that certain services or functions are best handled from within the
organisation, even if they do not represent a core operation.
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The main means of control over the performance of the service or function is through the
contract agreement with the service provider. However, before we examine the requirements
of this, we should briefly review the main benefits and problems of outsourcing.
(a) Advantages and Disadvantages of Outsourcing
The main advantages for the organisation arise from the savings made by not providing
the service or function itself.
Outsourcing can be an effective form of cost control. The contract will specify the
price to be paid for the service, which is then fixed. Even if the cost of providing
the service increases, it will be borne by the contractor unless there is a
renegotiation of the price. Even if the price is renegotiable, budgeting is easier as
there is usually a period fixed for each price application.
Outsourcing can often prove cheaper as the contractor is able to apply
economies of scale (which should be passed on, at least in part) to the company.
The contractor can employ appropriate numbers of staff with specific expertise
which will be shared with clients. The organisation benefits from this expertise
without having to employ its own staff.
Particularly for small organisations, there can be a saving in staff, management
time and expertise in employing a contractor to fulfil the requirement. This is
particularly true for facilities management.

The disadvantages tend to arise from the loss of at least a degree of control over the
service or function.
Although in theory any service function can be outsourced, there are some
functions which are so integrated within the core business of the organisation that
they are too important to be outsourced. Typical examples might include legal
work or information management.
Once an organisation has outsourced a particular function, it is quite difficult to
reverse the decision. Care is essential to ensure that the decision to outsource a
function is made for the right reasons with appropriate information to hand.
The use of a contractor does not lend itself to awareness of the costs of providing
the service to managers. This can sometimes lead to wastage by service users.
The strategic objectives of the contractor will clearly be different to those of the
company. In some cases this might lead to conflict, not least in respect of the
standards of performance. Disputes with an outsource contractor may well end
up in court action, as you cannot discipline an outside contractor.

(b) Contractual Considerations
There are no hard and fast rules about the contractual arrangements between a
company and the supplier of the service being outsourced. It is one of the advantages
of outsourcing that the method adopted can be as flexible as the organisation requires.
However, from a management point of view, the main issues to establish are:

What service is to be provided including the standards of performance to be
applied.
The exact responsibilities of the contractor and contracting organisation.
How might the contract be ended.
The most common contractual arrangement is for the supplier to enter into a contract to
supply the service either for an indefinite period or for a fixed period. In both cases
there should be a facility for the contract to be terminated upon notice and care should
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be taken to ensure that the notice period reflects both the sensitivity of the service
being provided and the length of time that would be required to replace the contractor.
Within this arrangement, there are a number of possible variations according to the
needs of the organisation.
The arrangement can be for labour/management only with equipment or
consumables purchased by the organisation, or for the complete service
including any equipment or consumables. It may also be for the management of
the service with expertise provided by the contractor, but labour and materials
provided by the organisation.
Consideration must be given to the ownership of any data or information which
arises through the outsourced service or is supplied to the contractor. In the
event of the contract being terminated, who 'owns' that information?
Responsibility for anything that goes wrong should, ideally, be passed to the
contractor through the contract. For example, if a cleaning contractor damages
electrical cabling in a networked office, who assumes liability?
Who will be responsible for the safety and welfare of contractors' staff?
How will the performance of the contractor be monitored and what standards are
to be met?
How will the practical day to day activities be managed? For example, if a
problem arises, to whom should it be reported?
The contract has to address responsibility for compliance with regulations or
legislation. For example, where a contractor handles data on behalf of the
organisation, the contract must address the responsibility for complying with the
Data Protection Act, such as subject access requests, if applicable.

(c) Selecting a Contractor
As with the purchase of any asset or service, care should be taken when selecting a
suitable contractor to provide an outsourced service. Here we give a list of issues
which might be taken into consideration. No doubt you can think of many more,
depending on the nature of the service to be outsourced or the requirements of the
organisation:
Costs between contractors (and an in-house operation) must be compared on a
like-for-like basis. This can often be difficult when tenders are prepared on
different bases. Sending out instructions for tendering so that tenders are
prepared on the same basis (and therefore can be compared) can alleviate this
problem. It does not always follow that the cheapest quote represents the best
value.
Are the contractors able to fulfil the brief they have been given to the standard
required by your company?
Is the contractor financially stable?
What other work does the contractor perform? Who are its clients and is there a
risk of conflicts of interest arising?
What references are available?
If the contractor's staff are to have access to sensitive locations (in terms of
access to cash, information, stocks, etc.), what steps does the contractor take to
ensure the reliability of those staff? Does the contractor accept responsibility for
the actions of its employees?

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(c) Outsourcing in Public Services
Since the 1980s most public services, where they have not been fully privatised, have
been encouraged or forced by governments to outsource parts of their operations. This
has been particularly true of local authorities, who from 1989 were required to put
certain activities out to tender, including street cleaning, grounds maintenance,
catering, sports and leisure management, community care, vehicle maintenance and
repair, refuse collection and housing stock management. The rationale behind this
requirement was a form of cost control, and the need to challenge entrenched practices
in the interests of greater efficiency. These aims were often achieved in practice, but
the pitfalls in outsourcing outlined above were particularly apparent when they resulted
in failures in high-profile services where the public have high expectations of quality
and consistency.
From 1997, therefore, the previous regime of compulsory competitive tendering
(CCT) of public services was replaced by a more sensitive system of best value,
whereby local authorities must ensure that bidders for service provision are able to
meet certain quality thresholds and performance targets. Local authorities have to
develop mechanisms which will enable them to establish 'a corporate view of what they
wish to achieve and how, working in partnership with the community, this can lead to
continuous improvement'.
Best value, therefore, goes further than CCT in that it requires local authorities to
establish annual performance plans which identify what services are required and what
organisation (i.e. not just the local authority) is best placed to provide that service. This
must all be carried out in consultation with local service users. Control mechanisms
and performance targets must be established and the results published. Those local
authorities which do not meet certain pre-agreed targets will then have to improve their
performance by the next review.
Thus, local authorities are required to reconsider the services they offer and who is
best able to deliver them, all in conjunction with service users. The aim is to strengthen
the concept of accountability and emphasise the need for quality of service, not just
service at the cheapest possible cost.
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197
Study Unit 7
Organisational Change and Development
Contents
Introduction
A. The Dynamics of Change
The Driving Forces for Change
Resistance to Change
The Process of Change
Planning Change
The Three Areas of Designed Change
Organisational Analysis (OA)
The Pace and Timing of Change
Pilot Projects
Change Strategies
Overcoming Resistance to Change
Kotter and Schlesingers Model of Change
Lewins Three-Step Model of Change
Top-Down and Bottom-Up Strategies
Change Agents
Psychological Factors in the Acceptance of Change
Business Process Re-engineering (BPR)
The Role of Managers
Providing Leadership
Managing Conflict
Culture and Change
Role and Task Cultures
Managing Cultural Change
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B.
C.
D.
E.
(Continued over)
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198 Organisational Change and Development
F. Organisational Development
The Organisational Development Process
Organisational Development and Management Development
OD and the Learning Organisation
Organisational Outcomes of OD
Enabling Innovation
Barriers to Organisational Development
Use of External Consultants
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Organisational Change and Development 199
INTRODUCTION
Organisations are dynamic enterprises that are constantly changing to be able to cope with
changing external and/or internal environments. Managing change is difficult irrespective of
whether that change is minor or major. The principles and processes are similar whether
applied to the redesign of the working practices of one section or the restructuring of the
entire organisation.
The process starts with the recognition of a need to change, resulting from understanding the
implications of changes in the external and/or internal environments. Pressure comes from
these environments for the organisation to adopt a new position. The organisational
response to recognition that change is required will be to define that new position in terms of
new goals, strategies and objectives, and finally new activities and methods of operation.
This involves specifying:

New working practices, in respect of the existing output or to accommodate new
outputs; and/or
New management structures, involving changes to the way in which authority and
responsibility are distributed throughout the organisation; and/or
New standards for the way in which people do their jobs, in terms of both operational
activities and management decision-making.
In theory, it is managements prerogative to introduce and impose the new position.
However, this would require complete compliance from the workforce affected and this is
highly unlikely. People are, in general, resistant to change where they do not see it as
offering greater satisfaction, particularly where there is any uncertainty about the outcome.
For change to be effective, the people affected must accept the new position before they will
amend their working practices and behaviours to that required.
To achieve this, management needs strategies for change which will effectively move the
organisation from the present position to the desired new position. There is a range of such
strategies, which involve overcoming resistance to change through a process of involvement
and participation among those affected, such that they share the goals of the new position.
This consideration of change implies an ad-hoc approach to the identification of pressures
for, and the definition of, new positions and to the management of the transition to that
position. However, in recognition of the need for continual change in response to a turbulent
environment and the fact that there will never be satisfaction with the current position,
organisations have attempted to build in some degree of permanent flexibility to
accommodate that change. Organisational development is a process whereby certain
change strategies are institutionalised into the management of the organisation to allow
change to occur, so providing the means to identify and respond to environmental pressures
and adapt organisational practices and behaviour on a continual basis.
This Unit starts by considering the dynamics of change in organisations through the concept
of Lewins force field analysis which focuses attention on the pressures for change
emanating from the environment and the forces in the organisation which act against that
change. We shall then go on to review the way in which the new, desired position is
specified and the need for planning the movement from the old to the new positions,
including the key roles of managers and the culture of the organisation. The next area of
study examines the strategies through which this movement may be effected. Finally, we
consider the concept of organisational development by reference to the processes involved
and the management and organisational implications.
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A. THE DYNAMICS OF CHANGE
A good point to start is Lewins force field analysis developed in the late 1940s. Simply put,
this states that all organisations are subject to competing forces in respect of change:
driving forces compelling change, which arise mainly from the external environment
of the organisation (both general and specific), but also from the internal environment
in terms of performance results and aspects of the organisations resources; and
restraining forces, which seek to resist change and maintain the status quo, and
here we can identify such features as organisational inertia, vested interests of groups
and the fears of individuals, etc.

Lewin maintained that the present state of any situation is an equilibrium between the forces
for change and the forces resisting change. This represents the status quo.
This position may be shown diagrammatically as follows, with the strength of the forces
represented by the length and thickness of the arrows.
Figure 7.1: Force field analysis
S
T
A
T
U
S
Q
U
O
Driving
forces
Restraining
forces
To change the status quo to the desired condition, it is therefore necessary to increase the
driving forces, to decrease the restraining forces, or to do both. Although managers tend to
think in terms of increasing the driving forces, such increases, according to Lewin, are likely
to provoke a corresponding increase in the resistance forces. Hence, movement towards the
desired state is achieved more easily by reducing the resisting forces, rather than by
increasing the driving forces. In other words, the best way to get the change accepted is to
identify those things/persons which are resisting and look for ways of satisfying their needs,
etc.
The pressures for change may be so strong that continued resistance threatens the very
existence of the organisation itself. Where the driving forces are strong, accentuating them
may be an effective strategy for overcoming resistance.
The identification of all the forces, their strengths and how they may be modified provides a
diagnostic tool which can help in developing the key actions which need to be taken in order
to solve the problem of introducing the change.
The Driving Forces for Change
The impetus for change comes about as a result of a change in strategy. As we have seen
earlier in the course, strategy is determined by organisational goals and policies, and
changes in these are likely to be a reflection of pressures originating in the environment of
the organisation, both external and internal.
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The extent to which these pressures act as driving forces for strategic change will be a
function of two forces within the decision-making structures of the organisation:

the strength of the threat posed to the existing goals and strategy and/or the strength of
the opportunities presented for furthering the existing goals.
how these are recognised by decision-makers: the threats and opportunities need
firstly to be recognised, but also, crucially, they need power backing within the decision-
making structure such that they are converted into driving forces.
Thus, understanding the pressures requires effective environmental analysis and action
within the decision-making structures to effect a change in strategy.
(a) Pressures from the External Environment
The external environment encompasses both the general external environment which
we can examine through the PEST analysis seen in Unit 2 and the specific
environment of the market within which the organisation operates.
Political/legal pressures
These arise from changes in the direction of government policies which affect
the way in which regulations are interpreted (for example in relation to planning
permission), the pattern of public expenditure and the economic climate and the
expression of these changes in legislation.
Legislative changes have a considerable direct impact on organisations.
Examples include employment law, health and safety requirements, data
protection legislation, and environmental measures such as European Union
packaging and recycling directives.
Economic pressures
These arise from changes in the economies of the countries in which the
organisations operate. In the past this might only have constituted the home
economy but, as business becomes increasingly globalised, organisations are
more affected by economic happenings around the world. In 2008, for example,
risky lending by US banks to domestic customers led to a worldwide credit crisis.
To an extent, economic changes interact with political changes, in that
governments determine national economic policy such as interest rates and taxes
which have an effect on economic activity affecting businesses.
Social/demographic pressures
These arise from changes in such factors as birth and mortality rates, social
tastes and fashions, and public attitudes. For example, the UK has an ageing
working population as the birth rate declined sharply after the 1950s. Such
changes have affected product and marketing decisions, so that many
businesses are now targeting the affluent over-50s.
Changes in social tastes are often quite subtle and not immediately discernible
but do have an impact on businesses. Public attitudes towards green issues and
ethics in business have also impacted on organisations. Also, attitudes towards
the treatment of different sections of the population; particularly women, ethnic
minorities and disabled people, have radically changed since the early 1990s. All
of this has been reflected in employment law, policies, internal relationships and
even the use of materials for packaging products.
Technological pressures
This has been the area in which most change has taken place since the 1970s:
change which has exerted tremendous pressure on working methods and
products. Continual innovations in communications and information technology
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provide the means to improve efficiency and open up new approaches to the
conduct of business: for example, the elimination of the personal secretary for
most managers, who instead have personal work stations, laptops and portable
telecommunications. The changes in communications technology, which have
included email, intranets and the World Wide Web, have changed the ways in
which business is done, opening up worldwide markets and increasing the speed
of communication.
These changes often seem to be the most difficult to adjust to because of the
speed of change and the potentially revolutionary and radical effects the new
technologies can have on jobs, skill requirements, and keeping up with
competitors.
Market pressures
These arise principally from customer demands and the competitive environment.
Organisations must react to these pressures and maintain at least some foothold
in their markets, or they will cease to exist.
Customer pressures reflect the way in which the publics expectations of both
products and the way in which they interact with the organisation are changing.
Thus, there has been a move in many areas of commerce and the public services
for the voice of the consumer to be recognised and products to meet their needs,
rather than acceptance of what the organisation may feel are appropriate
products. This development of consumer power has been particularly felt in the
service sector, but may also be seen in terms of the quality and price of all
products that customers are prepared to accept.
The actions of competitors are also a significant force, since organisations have
to compete with other organisations offering the same or substitute products.
Thus, competitive advantage becomes a priority and where one competitor has
established such an advantage, all others in the market must adopt similar
actions or innovate to develop their own.
The market environment has been characterised by intense competition in recent
years and this increasingly being felt on a global scale.
(b) Pressures from the Internal Environment
Assessment of the way in which the organisation is currently operating as evidenced
by performance in respect of existing objectives will exert its own pressures in the
form of the identification of strengths and weakness. Change will be required to build
on strengths and resolve weaknesses. In addition, though, there are other forces at
play in the organisation which may drive the organisation to change. These are in
respect of the demands of employees and the forces of innovation.
Performance
The extent to which an organisation is currently achieving its objectives will
naturally be a driver for change. This is most clearly felt in respect of under-
performance, indicating that the current operational strategies and plans are not
effective in delivering the required results and, therefore, that some change is
needed either in respect of the strategy and objectives or, if these are sound, in
the way in which operations are designed to achieve them. Note too, though,
that over-performance may also be significant, in that it shows particular
strengths which it may be possible to apply in other areas to achieve similar
results.
Successful performance is often related to critical success factors, which relate
objectives to the key areas of competition. For most organisations, achieving
their critical success factors will need constant review of their organisational
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capabilities, and at least incremental changes to ensure that they are remain
compatible with the business strategy.
According to Bennett, the most common critical success factors, and those areas
in which performance needs to be studied most closely, include the following.
(i)
(ii)
(iii)
(iv)
(v)
(vi)

Fast and reliable delivery
Product quality and customer care
The ease with which a product can be modified, has appealing features,
fulfils a clear need and has multiple uses
The rate of expansion of the market and whether it is concentrated in
accessible areas
Brand images and the location of products in their life cycles
Low-cost installation, maintenance and repair of equipment
(vii) Technical advice
Employee demands
The employees of an organisation are an important stakeholder group and their
interests, and particularly the way in which they may be expressed and promoted,
represent significant pressure which needs to be responded to. The interests of
employees are often thought of purely in financial terms, through demands for
increases in pay, but there are also strong demands for changes in working
conditions and activities which are seen as basic to their satisfaction. The
commitment and motivation of staff may well be seen as critical success factors
in themselves, and attention needs to be paid to these pressures.
Innovation
Innovation is defined as the development of new ideas or products which have an
impact on the operational procedures and practices of the organisation and its
outputs. These may develop inside the organisation itself, perhaps in a research
and development division; but they most often occur outside the organisation and
are taken up by it through the identification of new applications to the
organisations own circumstances.
This is slightly different to the reaction to competitive pressures; it refers to the
capability of the organisation to develop its own innovations which will provide
competitive advantage. Not all such innovation comes from deliberate searching
for new products, but may arise naturally from the actions and concerns of staff in
identifying possibilities.
Any or all of the above pressures may be a driving force for organisational change.
However, we must also note the way in which the strategic reaction to them may itself
bring about clearly identifiable drivers. These may be seen in the form of strategic
imperatives which underpin the direction of the organisation: the organisational drivers
we identified in the first Unit of the course. Chief among these is the imperative of
quality, where the introduction and maintenance of quality as an organisational driver
implies substantial change to the input, operational and output requirements of an
organisation.
It is common for organisations to react to pressures emanating from the environment.
However, the problem with reactive management is that the organisation is always behind
the game, trying to catch up with events elsewhere. What is more effective is for
organisations to constantly scan their environments in order to try to anticipate and predict
change so as to be more proactive and hence more in control of events.
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Resistance to Change
The restraining forces essentially derive from the internal environment of the organisation,
although there may be some resistance to change within the external market, particularly in
respect of customers and suppliers being reluctant to accept new practices and products
where these do not fit with their expectations and existing patterns of behaviour.
(a) Obstacles to Change
The obstacles to change are twofold:
Organisational inertia
This particularly strong in bureaucracies where the scale of operations and
interrelationships make radical change very difficult, but it may be overcome by
rational planning and managerial will.
People and cultural barriers
All change in organisations affects the people who work in them, both on an
individual and group level, and people are resist change very strongly. This
resistance has three key sources:
(i) the challenge it represents to the core attitudes, beliefs and established
patterns of behaviour which we can characterise as the culture of the
organisation;
the challenge it represents to the existing power relationships within the
organisation and thus to the vested interests of individuals and groups in
their control over what goes on; and
the fears of individuals, arising from insecurity over the uncertainties of a
future in which existing jobs, procedures and practices are threatened.
(ii)
(iii)
(b) Constraints on Change
The extent to which these potential barriers to change act as restraining forces will be
determined by the following factors.

The degree of satisfaction with the existing position of the organisation, in terms
of culture, power relationships and the satisfaction of individual needs.
The degree to which the proposed alternatives are seen as more or less
desirable and/or feasible.
The extent to which these are felt by strategic decision-makers, either by the
individuals themselves or in respect of the power and influence they may be able
to exert (for example, in relation to employees withdrawing their labour or
customers not buying the products).
Much of the focus of the management of change is on overcoming resistance, so an
understanding of the operation of these restraining forces is clearly critical to the
success of the process. We shall now look at each of them.
Culture as a constraint
As discussed in Unit 3, an organisation tends to build a paradigm for itself which
is a way of seeing itself which encapsulates the values and beliefs of its
stakeholders. This has the effect of limiting what may, or may not, be readily
changed in terms of strategy. Once established, the paradigm tends to be self-
perpetuating, since members of the organisation are reluctant to change their
core beliefs or routines.
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The paradigm is preserved within what Johnson has described as a cultural web
of the organisations actions, in terms of:
(i)
(ii)
(iii)
(iv)
(v)
Stories of its past events, often exaggerated into myths and legends.
Its rituals and routines, e.g. methods for being promoted, etc. are related to
the way we do things around here.
Symbols of status: reserved car parking spaces, the key to the executive
washroom, etc.
Control systems: head office inspections, for example.
The organisational structure: hierarchical, bureaucratic, informal, etc.
All of these add up to the way in which an organisation may appear, and the way
it sees itself.
Thus managers faced with the prospect of having to implement strategic change
tend to look to accommodate it within existing beliefs and the accepted ways of
doing things. One of the commonest reasons given for resisting change of any
kind is that We have always done it this way, and it is this attitude which acts as
the restraining force.
The object of change itself may also clash directly with fundamental beliefs in the
organisational or national culture. Thus, for example, the introduction of more
market-orientated goals in public service organisations may be opposed on
political grounds, or the introduction of Sunday trading may be met with
resistance on religious grounds.
Vested interests in the status quo
These may be seen in relation to both the formal and informal organisation where
proposed changes represent a potential loss of the power to influence
organisational direction and/or the behaviour of people. We tend to think of this
in relation to the middle and lower management levels, and to the role of
employee representatives; but it may also be a restraining factor at the senior,
strategic level in the organisation.
Perhaps the first thing that is shown by studying resistance to change is that it is
not found exclusively at one level or within one area of an organisation. It is
common to think of the general workforce as being more obstructive in this
respect than managers, but this is probably because there are more of them, and
therefore more examples to quote. Just as familiar as the conservative worker is
the middle manager who resists organisational change, the managing director
who ignores the advice of his subordinates about better working methods (this
can happen particularly in small companies), and the board which refuses to
change policies even when current ones are clearly inadequate.
Among the groups which resist change are those who consider themselves
guardians of the organisation: employees of long standing who know its
importance to their family and their area and who do not want, for example, to
see a new MD ruining it.
Fears of individuals
Specific reasons for individuals resisting change can be identified by reference to
Maslows analysis of needs as the motivating force for behaviour. You should be
familiar with this important concept and the way in which people are deemed to
have multiple needs which are arranged in the form of a hierarchy as follows:
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Figure 7.2: Maslows hierarchy of needs
Self-
actualisation
Self-esteem
Belonging and Acceptance
Safety and Security
Physiological
The model asserts that, when a particular level of need is adequately satisfied, it
ceases to dominate and influence behaviour. The next level of need then
becomes the important motivating factor.
(i)
(ii)
The most basic human needs, such as hunger, thirst and sex, must be
satisfied first.
Once satisfied, people turn their attention to safety and security needs,
such as providing shelter to protect themselves from the elements or other
dangers.
The next level relates to satisfying social needs, such as belonging to and
being accepted by a social or work group.
As soon as these needs have been met, they are replaced with a need for
self-esteem, such as the desire for high status within a peer group.
The ultimate need resides at the top of the hierarchy: the need for self-
actualisation, which refers to the need for a person to fulfil his or her
potential.
(iii)
(iv)
(v)
Any change in the circumstances of the individual may alter the needs that are
being met and thus cause lower levels of need to come to dominate behaviour.
This has considerable implications for organisational change in terms of the effect
upon the individual.
When faced with change, individuals will see the change as either an opportunity
or a threat to achieving their needs.
(i) At its worst, the proposed change may threaten the security of an
individuals job or the maintenance of existing levels of income. Even
though there are safety nets in society generally, though state benefits and
redundancy pay, and often within the organisation through protected levels
of pay, this may be felt to threaten the familys physiological and security
needs. The very uncertainty over the future that change necessarily
involves will contribute to this.
The proposed change may also involve disturbance to the individuals
working group and relationships, particularly when organisations are
(ii)
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restructured. This may have an effect on the individuals belonging and
acceptance needs, as a new set of social relationships will have to be
formed.
(iii) Changes to working practices will almost inevitably involve the acquisition
of new skills and an individuals sense of self-esteem may be threatened by
the fear of not being able to cope with learning the necessary skills. In
addition, it is possible that new structures will displace traditional pecking
orders, affecting the individuals status with the organisation and role and
recognition within his/her social groups. Finally, personal resentment may
be felt at the implied criticism that existing methods are inadequate.
At the level of self-actualisation, there is the fear that the new conditions will
represent less opportunity for personal fulfilment through the challenges of
the job, as well as a lack of control over the future, causing resentment over
lack of participation in planning and implementing changes which affect the
individual personally
(iv)
What may be regarded as a threat for one person may be an opportunity for
another. While one person may be struggling to satisfy their physiological and
security needs because of their family circumstances and background, it may be
that a work colleague does not see these as a problem and is more concerned
with their self-esteem and self-actualisation. This presents a complex process for
the manager who is trying to manage the changes. Each individual is likely to
see the change in different terms and react to it in different ways, and must
therefore be managed differently.
B. THE PROCESS OF CHANGE
The problem for many organisations is not that they need to change, but that they do not see
any need for change. This is especially true for organisations which have been successful in
the past and cannot see why they should change what they see as a winning formula with
which everyone has become safe and comfortable. Gardner says of this phenomenon that:
Most organisations have developed a functional blindness to their own defects.
They are not suffering because they cannot solve their problems, but because
they cannot see their problems.
And Galbraith, the famous economist, comments that:
Faced with the choice between changing ones mind and proving that there is no
need to do so, everybody gets busy on the proof.
Thus one of the most typical initial effects on organisations of the need for change is to deny
that it is necessary.
However, sooner or later the organisation has to react to the changes in the business
environment and make internal changes. This will almost always necessitate changes to
administrative systems, structures and procedures.
This recognition of the need for change is the first step in a process which has a number of
key features.
Planning Change
Change presents a threat to the status quo and powerful forces will exist in any organisation
to resist the implications of this. Management needs, therefore, to treat change in the same
way as other decisions and adopt a systematic approach to considering all its aspects before
implementing the agreed strategy in a planned manner.
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(a) Identify the Required Changes
Organisational change is a response to new goals or strategies, themselves arising as
a response to changes in the environment. This will give the direction to change, but
that general direction needs to be made specific through three stages.
Re-specification of objectives to provide the basis for planning. This will involve
setting timescales within which the changes are required to be completed, such
that the new goals and strategies may be fulfilled.
Careful analysis of the current position and identification of the factors/elements
which are no longer appropriate in meeting the objectives. This may be in terms
of activities, methods of decision-making or in the behaviours of staff.
Specification of the new position: the outcomes of change in relation to those
aspects of the current position which are no longer appropriate. This will involve
drawing up detailed plans for revised operational activities and management
structures, and establishing exact requirements in terms of behaviours.

(b) Identify and Involve Those Affected
Organisations are made up of people and, as we have seen, change will affect them in
many different ways. It is generally agreed that staff have the right to know of changes
which will affect their working lives at the earliest opportunity at which it is feasible to do
so. This may be constrained by issues of confidentiality and sensitivity, and concern
over what form resistance may take. However, staff will have to know in the end and it
is more than likely that the informal channels of communication (the grapevine) will
carry elements of the news anyway.
It is, therefore, beneficial in the long run for management to establish open
communication with those affected, keeping them informed and seeking their ideas and
suggestions for strategy and implementation. In this respect, this stage may run
parallel to the first stage and certainly continues through those that follow.
(c) Identify and Select the Best Overall Strategy
Management needs to consider the best way of implementing the changes: the means
by which the operational outcomes identified may be brought about. Initially, this will
involve agreeing strategies which will overcome any resistance to change. There are a
number of models and approaches available to draw on in developing the overall
parameters for a plan of implementation. We shall consider these in the next section of
this Unit.
(d) Draw Up and Implement Detailed Plans
Within the agreed strategy, the exact means by which the change to the new position is
to be achieved must be established. This will involve decisions on the length of the
changeover period and the programmes necessary to train staff in the required
activities and behaviours. Control of this process is essential since the credibility of
management may be affected by the way in which plans are implemented.
The financial costs need also to be addressed. Change can be expensive, but is rarely
an area in which savings may be made, since such savings are likely to be outweighed
by the costs of not implementing change effectively, both financially and in terms of
goodwill among staff and external stakeholders.
(e) Review and Evaluation
As in any process there should be a review stage in which effectiveness is evaluated.
There are two aspects to this:
The effectiveness of the new position in achieving the required objectives.
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The effectiveness of the process itself in enabling a smooth transition with
minimal disruption to operations and the morale of staff.
The rational model of the change process is similar to the overall approach to planning that
we discussed earlier in the course and, as such may be criticised on the same basis: that it
does not reflect the reality of incremental change and the emergence of change strategies,
rather than their deliberate planning. However, it provides a useful structure to understand
the different elements involved in the process and is also, perhaps, a more valid description
of what actually happens (at least at the operational level) than was the case with strategic
planning.
The Three Areas of Designed Change
We noted above that organisational change will impact in three areas: activities, structure
and people.
(a) Modifying Activities
This is concerned with operational practices, procedures and tasks: for example, the
way in which invoicing is carried out may have been identified as needing to be
changed due to problems with late delivery or non-receipt under the current
arrangements.
On the face of it, changing activities would seem to be relatively straightforward:
identify how the new system is going to work and then train the staff in its use, before
implementing it. However, systems do not exist on their own. They form a part of
larger systems and themselves are often broken down into sub-systems. The impact of
a change in one system needs to be assessed in respect of all the other systems with
which it interacts. This includes the inputs required and the implications of potentially
different outputs. In respect of a new procedure for invoicing, the inputs will include the
ways in which sales information is expressed and received, as well as the staff
capabilities. Changing working methods, perhaps through computer processing, may
result in new ways in which invoices are produced and these have to be acceptable to
customers as well as providing information in a form which is compatible with
accounting and credit control procedures.
It is usual for specialist analysts to be used for examining existing practices and
proposing new methods of operation. They need to work with users of the existing
system who will have valuable detailed knowledge and experience. Consultation in this
way also actively involves users in the change process, so that they may come to own
the new system, feeling that it is their change taking place. Where systems are, or will
be, computerised and most modifications of activities are now technology-driven
the analyst will require detailed technical skills and the ability to communicate the
technology to the users.
Once the new activities are agreed and properly specified, the process of
implementation usually follows a set path:

testing of the system to iron out any problems (bugs);
agreeing on a date for implementation and the method of changeover with all the
personnel who will be involved in it;
full training of users in how to operate the new procedures;
provision of information about the implementation of the system, and its
implications where necessary, to all those outside the immediate section who will
be affected by the change;
thorough documentation of the new processes and procedures as a reference;
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provision of detailed support (usually by the analyst) in the initial stages of
implementation, together with recovery procedures and back-ups to restore the
old system or procedures in the event of any failure.
(b) Modifying Decision-Making Structures
Structure invariably follows strategy. New goals and strategies for the organisation, or
particular parts of it, may well lead to a need to alter the current structure of
responsibilities and authority: for example, in relation to the degree of centralisation
and autonomy within the decision-making process, or the grouping of jobs into
particular specialist divisions.
Whilst structural change may not necessarily affect tasks or technology, and may
therefore appear more straightforward and less costly than changes to activities, it has
far-reaching implications in respect of individuals and the organisations culture. When
introducing such changes, care must be taken that all individuals affected are
consulted, and that areas of responsibility are strictly and clearly defined. A positive
attitude toward such changes must be adopted, and senior management must be
committed to the successful introduction of the revised structure.
There are very few managers, or individuals, who will be happy to accept that, as a
result of boundary changes, their responsibilities are to be reduced. Any change to job
responsibility or boundaries will usually meet resistance by the person losing
responsibility, and this needs to be handled very sensitively. The imposition of
additional responsibility can also cause problems where an individual is not able to
handle the extra authority or to operate effectively within the new boundaries. On the
positive side, some individuals may thrive on the new areas of authority and decision-
making, and as long as they are capable of handling the responsibilities competently
then this is a beneficial outcome of the change.
A key consideration when restructuring is simply the specification of new
responsibilities, boundaries and lines of authority is the implications for individuals
currently working within the existing structure. For example, where control of a payroll
section is moved from the finance department to the personnel department, the effect
on the payroll manager, who could well be a fully or partly qualified accountant, would
be to have his or her career progression effectively stopped. From the companys point
of view, though, such a change might be a logical move as payroll and personnel have
to duplicate a large amount of data kept on employees.
The management structure can be viewed as one system within the organisation and,
as such, any changes are likely to impact elsewhere, on other systems within the
organisation and also externally. External impacts are not under the control of the
organisation and so, for example, a valued customer may be less than sympathetic as
the changes may cause complications with his existing lines of communication.
(c) Modifying Behaviours
This is the most difficult aspect of change, but is often central to it. Any attempt to
change the way in which staff conduct themselves in the carrying out of their duties and
responsibilities implies that their previous behaviour was, in some way, unacceptable.
This is almost guaranteed to generate resentment and resistance unless handled with
the utmost sensitivity.
It is essential that staff understand the basis of change where it may require a change
in behaviour and that they accept the need for that change. They also need to
understand clearly what is required of them. If this does not happen, they are likely to
become highly resistant to the changes and also become demotivated and less
committed to the organisations goals.
There are two fundamental processes involved in this.
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Consultation
The drivers for change need to be discussed with staff and agreement reached
on both the need for change and the general direction of that change should take
place. This will provide the commitment on which the second process is based.
Training
When individuals are required to change their patterns of behaviour, training must
be a priority.
Training has been defined as the process by which the unknown is explained to
the unaware. Training should also inspire confidence, as confidence leads to
satisfaction and productivity. There are a wide variety of different types of
programme available to develop new attitudes and behaviours, using role play
techniques, group exercises, and individual mentoring.
Although training will involve two measurable costs the cost of the programme
itself and the loss of the employees production capacity during the training period
gains which are not so measurable will be made as a result of the employee
being able to carry out the new functions of the system a lot faster and with
greater confidence.
Organisational Analysis (OA)
OA is a well established approach to developing organisational and management structures
in line with strategic changes in objectives and operations, technology, and size. It employs
a systematic approach to the specification of the new position, involving four stages:

the assignment of responsibility for OA to a senior manager or management team
(without involving outside facilitators);
the collection and analysis of information on the present functioning of the organisation:
performance details, staffing records, management and authority structures, key jobs,
etc.;
the development of alternative organisation plans appropriate to the changed
objectives and/or conditions;
implementation of the most effective organisation structure, and monitoring its
operation so that modifications may be made if necessary.
the use of questionnaires and interviews to establish the functions of managers,
assistants, supervisors, noting the responsibilities and the amount of delegation which
is taking place (often a very revealing exercise in itself, showing the considerable
difference in pressure between one management post and another);
drawing together all the job descriptions of those involved in the running of the
organisation/area;
the use of organisation charts to show the lines of authority and how the various
positions relate to each other;
drawing all the above information together into an organisational manual, which relates
the present structure to the objectives of the organisation.

There are four major methods through which the present functioning is investigated:

The major advantage of OA is that it focuses senior management attention on the
specification of the changes required and challenges the often innate conservatism found at
the top of organisations. As a result of this, OA also:
facilitates a comprehensive review of management functions against objectives to be
carried out;
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consciously matches authority, accountability and functional relationships to both
objectives and management needs;
provides a formal statement of management structures which is easily recognisable to
employees.
On the other hand, there are a number of weaknesses to OA as a technique for
implementing change:
the concentration on formal management structures ignores the important informal
organisation of work groups, leaders, interpersonal relationships and communication,
thus possibly limiting its impact;
the definition of a new organisation manual runs the risk of creating a new rigid
management and organisation structure to replace the old one, and the search for such
a definitive structure may not allow more flexible organic structures to be considered;
OA undertaken by existing management may result in old ideas, prejudices and vested
interests being carried forward into new plans, and inhibit the development of fresh
ideas and approaches to organisation;
OA does not overtly address the issue of organisational culture, which is likely to limit
its long-term effectiveness;
there is a danger that change emanating from OA will be imposed on lower levels of
management with little understanding of its basis.

Thus, whilst organisational analysis may be an appropriate method of specifying the changes
required in the area of management structures, it does not offer a process whereby those
changes may be put into effect.
The Pace and Timing of Change
Change may sometimes be forced upon organisations by a sudden change of
circumstances, but in most circumstances there is some control over the pace at which
change occurs. As far as a general approach to introducing change goes, there are two
basic possibilities:

The earthquake approach, where changes are made in the shortest possible period.
The spread approach, where change is staged and each new function/process is
allowed to settle in before the next one is introduced, thus spreading the whole change
over a relatively long period.
The earthquake approach is quite common, usually coinciding with the appointment of a new
manager, a merger of two companies, or a move to a new site. The main advantages of this
approach are that it minimises uncertainty about the future and enables all the problems
inherent in change to be addressed together. Also, when carefully managed, it can create a
dynamic and exciting environment, provided that the organisational culture for innovation and
dynamism is already present. If this is not the case, this approach can easily destroy
harmonious and productive relationships. Rapid changes are often perceived as threatening
and, although the timescale may leave little room for the build-up of resistance, in the longer
term resentment and suspicion may lead to future problems.
In contrast, the spread or incremental approach minimises the change at each stage and this
is likely to be more manageable. In addition, for most people, this incremental approach is
more likely to win support more quickly by allowing time for communication, questions and
reassurance. However, time may allow resistance to build up and barriers may need to be
overcome at each stage. The ability to use this approach will depend upon the nature of the
change being implemented; some types of change cannot be approached in this way.
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Timing is just as important as speed. Actions need to be taken at a time appropriate to both
the challenge facing the organisation and the acceptability of the outcomes to those affected.
The outcomes of the change need to be seen as appropriate to the challenge in order to
maintain credibility, and this will require a period of reflection to devise such outcomes.
There are often hidden challenges associated with change. It would be rare for all the effects
of a change to be predicted with 100% accuracy, and in most cases a period after a change
is required for adjustment and consolidation so that minor difficulties can be addressed. The
bigger the scope of the proposed change, the greater the risk of unpredicted difficulties.
Thus, in considering issues of time associated with change, the whole process must be
considered, not simply the change event itself.
Pilot Projects
This approach to the process is based on gaining acceptance through experience over a
period of time, taking advantage of the concepts of both participation and slow pace.
Pilot projects involve the introduction of change on an experimental basis and for a defined
period, on the understanding that the experience will be evaluated at the end of the period.
Subsequently, permanent changes may be made if the project was successful, incorporating
any amendments which become apparent in the review process.
The advantages of this method are:

It solves unforeseen snags.
It reassures less confident people that the scheme works before they are committed to
it.
Anticipated problems may not arise.
It is unwise if employees are to participate in the final decision.
The time of tension and uncertainty is prolonged.
It usually involves closer supervision.
Employees may sabotage the trial.
What worked in the trial may not work when the plan is extended.
The disadvantages are:
C. CHANGE STRATEGIES
Imposed change, is unlikely to be successful except in conditions where the change
imperative is so strong that that, unless the restraining forces are immediately overcome, the
very existence of the organisation will be threatened. Imposing change will represent a direct
challenge to the restraining forces and, as such, is likely to strengthen them. Change
strategies tend to focus on overcoming the forces of resistance and identifying the key levers
for gaining acceptance of the desired new state.
Overcoming Resistance to Change
Resistance will be overcome when it is accepted that the new position after the changes will
satisfy the needs of those interests, groups and individuals who feel threatened by the
change. The achievement of this acceptance is, therefore, the driving force for strategies of
change.
In order to accept change, people have to fully understand the requirements of the new
position the new objectives and their organisational implications in terms of both what it
means in respect of new activities, relationships and behaviours, and how those new
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activities, relationships and behaviours can result in the satisfaction of their needs. The key
to this process lies in involvement. People need to feel that their interests are a valued
element in the change process and that there is an opportunity to have those interests heard
at all stages in the process of change.
Although change is generated by senior management, successful change comes through a
participative approach. Listening to peoples concerns and acting upon them, and providing
the support, advice and assistance to enable people to cope with the change, will all help to
ensure motivation and acceptance.
It is important that participation is genuine and not (as Moss-Kanter described it) something
the top orders the middle to do from the bottom. For participation to be successful, there has
to be genuine support from all levels and a prevailing culture of participation. Donald
Kirkpatrick, in How to Manage Change Effectively, stressed the importance of a two-way
communication process, i.e. listening to feedback from people, not just telling them about the
proposed change.
An argument against participation is that it is a long, slow process and adds enormously to
the timescale. It needs flexibility in the plan and a willingness to change original ideas. To
make a major change usually seems to take about 18 months. However, it has been argued
that people will take this time to adjust to change anyway. If you change fast, without
consultation, you will go through 18 months of frustration, conflict, low productivity,
absenteeism, etc. When participation has been introduced into the decision-making
processes of the organisation in this way, it is difficult to revert to autocracy without causing a
great deal of confusion and frustration among staff.
Kotter and Schlesingers Model of Change
Kotter and Schlesinger suggested a model of managing change that related managerial
strategies to the source of the resistance to the change.
Kotter and Schlesinger suggest that a contingency approach should be adapted to every
change management situation: that is to say, there is no one way of managing every change,
but the manager has to select an appropriate way of acting which fits the particular situation.
For each source of resistance, an appropriate strategy for change and management style
should be selected.
The basic elements of the model are as follows.
Reasons for Resisting
Change
Parochial self-interest
Misunderstanding and
lack of trust
Different assessments
Strategies for
Change
Negotiate
Educate
Participate
Appropriate
Management Style
Collaborative
Directive or consultative
(time?)
Consultative,
collaborative, or
delegative
Combination of directive
and supportive
Low tolerance to change Force and support
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Four basic reasons are advanced as to why people resist change.
Parochial self-interest
This is the fear of people that they will lose something that they value, such as power,
status, money, etc. Kotter and Schlesinger suggest that the way of lessening such
resistance is to negotiate something in return; this is when a strategy of buying out the
old practices is often used. The style here has to be to involve and collaborate with the
other parties in making a deal.
Misunderstanding and lack of trust
This is when the people affected do not understand the real reasons and benefits of the
change and mistrust the management who are introducing the change. They often do
not believe what the management says, and instead think there are secret ulterior
motives. This may be because the management have access to different information
than the people affected.
This scenario is common in organisations which have traditionally been organised on
antagonistic industrial relations lines and have developed an us and them culture.
Nowadays, most organisations try to engender a harmonious spirit which sees
everyone as having a common interest, but for organisations which have a long history
of conflict this is not something which is easily changed. Kotter and Schlesinger
suggest that the best strategy in this situation is to educate and communicate with the
people affected so as to increase their understanding of the need for changes and
increase their trust that the management is acting in the organisations interests. Such
strategies normally involve mass written and oral communications in letters,
newspapers, meetings, courses and presentations.
Of course, even after increasing their understanding of the situation, some people may
still believe that the change is not in their personal interests, so this strategy may have
to be combined with negotiation or another alternative. However, the consultative
strategy assumes that there is time for the education and communication processes to
take place and for attitudes to change. Where this is not the case and management
see the need to change as urgent, a more directive approach may have to be taken
where the change is simply imposed for the survival of the organisation.
Different assessments
These arise where both the originators of the change and those affected have the
same information, but see its significance in different ways and make different personal
assessments of it. Some may therefore see it as advantageous to change, while
others may see it negatively.
Kotter and Schlesinger suggest that where different assessments arise, the parties
should come together to discuss their differences and understand the others position
better, in order that a solution can be arrived at by compromise and respect for the
others position. The appropriate management style in this scenario would be
consultative or collaborative, or even possibly delegative by leaving those with the
disagreement to work out a solution for themselves. Kotter and Schlesinger are
perhaps over-optimistic about the chances of success here. Where attitudes are fixed
and long-held, they are notoriously difficult to change.
Low tolerance for change
This is where those affected by the change do not adapt to change well by the very
nature of their personality, or feel that they cannot cope with the changes that will affect
them. An example might be the introduction of a new technology. There will be some
people who feel that they will be unable to learn the new skills, or that they will never
understand it, particularly if they have worked on a manual system for many years. In
fact research has shown that many such people can adapt to the new technology
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provided that their fears can be proved to be unfounded. The only way to do this, say
Kotter and Schlesinger, is to force them into the new situation so that they realise for
themselves that they can cope and there was really nothing to worry about. This
strategy looks high-risk a kind of sink or swim approach, but Kotter and Schlesinger
state that it will only be successful if those affected are appropriately supported by the
management. This might take the form of counselling, coaching, further training, or
time to learn and adjust. To take the sink or swim analogy further, it might mean
pushing someone into the deep end but providing flotation aids or an experienced
swimmer alongside them! Management style in this strategy should be a combination
of directive and supportive.
This model can be very useful for identifying the different types of resistance to change and
helping us to understand that different sources of resistance require different strategies and
management styles; but in practice people often resist change for a combination of the
reasons indicated by Kotter and Schlesinger, and therefore a combination of strategies may
be needed.
Lewins Three-Step Model of Change
Lewin worked on assessing the extent to which organisational change might be resisted by
members, as we saw earlier when considering force field analysis. His work on group
dynamics has resulted in what is known as Lewins Three-Step model, which is frequently
used in change programmes.
Introducing a programme of change into an organisation tends to arouse expectations in
those involved; and so a subsequent failure to come up with the goods can lead to a state
worse than it was before the innovation, because of these hopes and expectations not being
realised. Therefore Lewin considered that attention should not simply be focused on the
change itself, but should address what happens both before and after.
The three steps of the process are unfreezing, changing and refreezing.
Step 1: Unfreezing
The first step is to create the motivation for change in the workforce. This part of the
process is often neglected and is associated with breaking old patterns of behaviour
the existing culture so that new patterns can be established. People should know
why they are required to change and be committed to it (or at least understand the
need for change) before they can be expected to implement change.
To unfreeze the resistance to change, managers must increase the tension and
dissatisfaction with the present, and enhance the desirability and feasibility of the
alternative. This stage is therefore associated with the communication process, and
should incorporate such matters as

The reason for the change
The benefits to the organisation likely to accrue from the change
Who is involved
The benefits to individuals from the change.
Step 2: Changing
Change is concerned with identifying what the new behaviour/process/procedure is or
should be, and encouraging individuals and groups to adopt the new behaviour etc. It
involves the development of new responses by staff, based on the new information
being made available to them, and moving them towards the new culture as necessary
to fit the strategic requirements of the organisation.
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Step 3: Refreezing
This final stage encompasses consolidation or reinforcement to integrate the changes
made and stabilise the new culture in order to prevent people slipping back into the old
one. Ideally, reinforcement should be positive in the form of praise or reward for
adapting to the new circumstances; but occasionally negative reinforcement, such as
sanctions applied to those who fail to comply, may be imposed.
Some of the ways of reinforcement include:

Setting up employee suggestion schemes.
Giving staff a greater input into the decision-making process.
Implementing schemes which reward good effort, such as staff member of the
month.
Creating team spirit through company identification schemes such as logos,
advertising T-shirts etc.
Producing company newsletters.
Making managers more visible, for example by open door policies.
The process as a whole is achieved through leadership, communication, education and
training. The hearts and minds of employees can only be won over by good leadership and
training. Effective training can be used to create a major change in the attitude of
employees, which must then be made permanent by creating the necessary structures,
procedures and incentives to support the new culture.
Lewins model has been developed by Edgar Schein through the integration of the latters
perception of the response to change as involving seven stages. This is known as the three
conditions change model, as shown below.
Condition
Unfreezing
1.
2.
3.
4.
Inactivity
Denial
Frustration
Acceptance
Characteristic
Awareness of the need to change
Benefits of change accepted
Existing attitudes thaw out
Readiness to learn, change, etc.
Experimentation/implementation of:
New behaviours
New systems
New processes
Re-freezing
6.
7.
Application (finishes)
Integration
New ways to become comfortable
Benefits of change observed
Rewards are instrumental in re-
freezing
Paradigm changes
Movement to Change
5.
6.
Testing
Application (beginning)
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Top-Down and Bottom-Up Strategies
The focus of Luptons work is the needs of the people affected by change. The individual is
not only an instrument to be organised, but also a decision-maker: someone who submits to
organisational demands, someone who reacts emotionally to them and other social stimuli,
and a rational being who decides about things.
He argued that workers at the lower levels in an organisation were more resistant to change
than were their managers, because their opportunities for decision-making were more
restricted and this encouraged them to develop a common culture in order to cope with a
working environment over which they had little control. Allowing these workers to exercise
more autonomy can act as a remover of this resistance to change.
With respect to change being introduced by a top-down strategy, Lupton acknowledged that,
since top management is responsible for what happens to an organisation, it is part of their
role to impose change. He made the point that even the human relations school of
McGregor, Blake and Likert saw the need for managers to be skilled in getting subordinates
to commit themselves to the organisations goals.
Lupton argued, however, that the theory of top-down management is inadequate and that it
denies the organisation the total skills of those closest to the job. He suggested a way
forward to release these skills by means of the consultative process. Ultimately a new
working structure, with its own culture, would evolve to replace the old culture which was
based on us and them attitudes. The framework for this was identified as the socio-
technical system framework.
Support for the view that change can be implemented from the bottom up as well as the top
down is supplied by Pugh, who argues that managers who are themselves prepared to
change are likely to consider ideas initiated at the shopfloor level. Carrying out a survey of
subordinates ideas for improvement has often surprised managers, because of the quality of
proposals made. One of the rules Pugh suggests as a means of successfully implementing
change is to initiate it through informal discussion, in order to obtain feedback and encourage
participation.
Change Agents
In chemistry, the speed of a chemical reaction can be increased by the use of a change
agent or catalyst. Such a catalyst increases the rate of the chemical reaction but is itself not
used up during the reaction. It is used over and over again to speed up the conversion of
reactants to products. Different reactions need different catalysts.
In a similar way, organisations can speed up and facilitate the change process by the use of
change agents. These may be classified into three groups.
New blood or new ideas: the development of new ways of thinking and new
approaches by introducing forces for innovation into the organisation. This can be
achieved through promotion or retraining of staff (and training is likely to be an
important element of any change programme), by bringing in people from outside, by
recruitment into key roles or by the use of external consultants. Change agents can
also be the formation of task groups made up of existing staff (with or without external
advisers), quality circles, etc. The practice of downsizing reducing staffing numbers
can also have this effect in that new opportunities are opened up and new power
relationships develop.
We consider the role of individuals external or internal to the organisation brought
in deliberately to stimulate change later in this Unit, in the context of organisational
development.
Structural or systems change: the reorganisation of existing functions, processes
and procedures. This has been a preferred technique by central government in respect
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of certain parts of the public sector, notably in the reorganisations of the health service
and of local government. Increasingly, decentralisation and outsourcing are being seen
by management as the keys to change in the pursuit of effectiveness, involving a
breaking down of existing decision-making processes and power relationships. This is
the approach taken by business process engineering, as discussed below.
Resource allocation: the application of financial constraints (usually) or pump priming
to effect a reorientation of focus in particular operational areas. Again, this has been a
feature of central government action, not only in the general constraints on public
expenditure but also in the areas of developing spending, either on broad service areas
(for example, law and order) or in particular parts (such as youth training).
Psychological Factors in the Acceptance of Change
Do some people find it easier to accept change than others? If so, what sort of people?
If we understand the traits of people in respect of their response to change it may be possible
to predict the outcomes of change on them. Denis Pym carried out seven detailed research
studies into how people at all levels in an organisation respond to change. The identification
of certain traits among both workers and managers in respect of how well they adapted to
change suggests that strategies should concentrate on certain types of people as levers for
change and direct attention to other types as the focus of resistance.
The two types of personality traits identified were:
A set of responses typical of individuals who coped with and performed successfully in
periods of organisational change, in relation to four characteristics: orientation to their
environment (personal and work), sentiments towards decision-making and action,
work aspirations and leisure interests.
A set of responses typical of managers who coped with and performed successfully in
periods of organisational change, in relation to four other characteristics: view of the
location of expertise (technical skills), view of the approach to and dimensions of
leadership, relationships with subordinates and superiors, and approach to decision-
making.

Pym found that, in general, people who had mechanistic views and rigid personalities tend to
react to change in one of two ways. They cling to old habits/procedures more strongly,
and/or promote like-minded people and close ranks to make innovations fail; and/or they
grasp any innovation as a magic answer.
The responses are summarised in the tables below
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Individual characteristics associated with more or less successful
performance in organisation change
Less Successful
Towards equilibrium
Deficiency motivated,
concerned with safety and
security
Preoccupied with means
Belief in a one best way
Regularity/order, financial
security, prestige/status
Limited and conventional
Sentiments
Work aspirations
Open to more than one course
of action
Freedom to be responsible,
concern for achievement,
interesting work
More diverse and less
conventional
Individual
Characteristic
Orientation
More Successful
Towards growth
Enthusiastic for change, new
experiences, risk-taking
Greater attention to end
Leisure interests
Managerial characteristics associated with more or less successful
performance in organisation change
Less Successful
Boss is expert on
subordinates job
Efficiency and human relations
are separate features of
behaviour
Directive and authoritative
Managerial
Characteristic
View of technical
skills
View of dimensions
of leadership
Relations with
subordinates
Relations with
superiors
Decision-making
More Successful
Boss no longer expects to be,
nor is regarded as, the expert
Efficiency and human relations
are merged
Submissive
Decisions are of a serial kind,
i.e. based upon assumptions
that previously successful
solutions can be applied to
new problems
Equality in relations with
others, authority according to
contribution
Less dependence on
experience and more on
evaluation of the evidence
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Business Process Re-engineering (BPR)
(a) Principles of BPR
BPR is a management technique which became popular in the 1990s following the
publication of a seminal work by the American author Michael Hammer. BPR built on
earlier ideas on designing work, such as production engineering and work study, and
looked to find the leanest, most efficient way of organising any work activity or process.
Re-engineering, according to Hammer and Champy, may be defined as:
...the fundamental rethinking and radical redesign of businesses to achieve
dramatic improvements in critical, complementary measures of
performance such as cost, quality, service and speed.
BPR is based on the radical redesign of work and all processes to satisfy customer
requirements. The key word here is radical. While other approaches aim to achieve
continuous improvements through gradual incremental changes from what we have
now, BPR starts with a blank piece of paper and asks: If we were going to design this
organisation from scratch, with the sole aim of satisfying our customer, what would it
look like? This questions all existing assumptions in the organisation about
organisational structure and the nature of jobs, and says that if an activity does not
clearly add value to a process it must be eliminated.
Thus, BPR involves re-inventing the enterprise. It requires managers to dismiss many
of the ways in which things have been done in the past. Hammer and Champy, in their
book Re-engineering the Corporation state that in order to implement BPR in an
organisation, managers must:

Abandon existing ideas of how the corporation should be managed;
Abandon well-established organisational/operating principles and procedures;
Create new organisational/operating principles and procedures.
Many modern management writers contend that managers are too focused on their
own specialisms within the business process. This obscures their perceptions of the
processes required to add value to inputs and turn out products and services which
entirely satisfy the customer. In order to apply BPR techniques, managers have to be
persuaded to prioritise their thinking around core business purposes rather than the
actions required of the fragmented parts of the organisation, such as departments,
divisions and sections.
BPR is achieved by applying a number of key principles:
Simple processes: BPR is best implemented if processes can be kept as simple
as possible. In order to meet customer demands, businesses have unwittingly
built complex structures and there is a need to reverse this. Processes should be
organised around outputs, rather than tasks.
Combining tasks: fragmented tasks should be combined, linking parallel
activities instead of integrating the results. This results in functions which were
formerly the responsibility of several individuals or teams falling to a single
individual or team. The introduction of customer service teams is a classic
application of this.
Empowerment: decision taking should take place lower down in the organisation
structure, where the work is performed. This enables customers to elicit faster
responses and quicker decisions. In organisations where centralised control is
necessary, the application of information technology can often facilitate control
whilst moving the apparent decision (in the eyes of the customer) to the point of
sale.

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Natural order: processes should follow a natural order. Re-engineering can
improve outputs by:
(i)
(ii)
Convergence, identifying tasks that can be carried out simultaneously;
Reduced time frames in the process, to eliminate the prospects of
obsolescence or inconsistency between the start and end points of the
process.
Multiple versions: there may be more than one version of the same process, as
in the operation of the triage system in hospitals which breaks cases down into
straightforward, medium-hard and difficult.
Location: work should be moved across conventional boundaries, instead taking
place wherever it makes most sense. Traditional back office routines for life
assurance underwriting, for example, can be performed by the adviser working
with a laptop PC in the clients home. Technology-driven just-in-time (JIT)
systems enable ordering and payment processes to be integrated.
Streamlining checking and control can be done without lowering standards by,
for example, applying management by exception and the Pareto principle (the
80/20 rule).
Reduction of external contact points enables the total data and information
collected to need less reconciliation and therefore fewer resources. IT systems
can accelerate this markedly.
Case managers are appointed to be responsible for the holistic relationship with
the customer, providing a single point of contact. They can then instigate all
necessary tasks and trouble-shoot appropriately.

(b) Implications of BPR for Organisational Structure
BPR can have dramatic implications for the shape of an organisational structure.
The breaking down of departmental boundaries and replacement of departments
by creating flexible work teams which will perform functions that cross
traditional departmental lines. For example, the outcome of a process analysis
may be that one team is formed to secure orders, produce goods, invoice and
deliver them and record payment for the goods, instead of the tasks being
performed separately in different locations within the organisation. So a re-
engineered organisation lacks rigid departmental structure.
The replacement of departments by flexible teams has implications for the
number of layers of management required. Some layers of middle management
may be stripped out a process known as delayering with the result being a
flatter organisational structure.
The size of the organisation is likely to be reduced by concentrating on core
activities a process known as downsizing. One approach to this is the
stripping out of non-core personnel with the functions being outsourced.

This approach found much favour in the early 1990s with many Western managements
who were striving to reduce costs in the face of threats from cheaper overseas
markets. For a time, like many other management fashions and fads, BPR was all the
rage, and consultancy firms were engaged to undertake major reviews of entire
organisations. By the end of the 1990s, however, BPR had lost much of its earlier
popularity, mainly due to the unsophisticated way in which it was often implemented,
ignoring the human effects of change. To workforces it became a pseudonym for
redundancy as, quite understandably, employees feared for their jobs; to the people
who were left in the organisation after BPR the result was job overload and stress. The
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new processes often left organisations not only lean but anorexic, and unable to deliver
their products and services effectively.
(c) Is BPR Effective?
At its best, BPR is reported to have achieved huge and sudden improvements in
businesses. Examples include:

The Ford Motor Company being able to reduce the number of staff in the
accounts payable department by 75% without any loss of service.
At Rank Xerox a UK revenue growth of 20% was produced after redesigning the
business. In 1989 order delivery time fell from an average of 33 days to 6 days.
At the IBM Credit Corporation a 90% reduction in cycle times was achieved and
productivity improved by 100%.
However, Hammer found that between 50% and 70% of re-engineering efforts were not
successful in achieving the desired breakthrough. Research shows that failure was
typically attributable to a number of common reasons:
BPR is seen as downsizing, and is therefore resisted by managers, the workforce
and trade unions. These are the people whose co-operation is vital for change to
be effective, as they know not only how things really work in the organisation
(rather than what the organisation chart and policies and procedures say should
happen), but can also see the inefficiencies in the organisation. Faced with the
prospect of losing their jobs, or those of their friends and workmates, they
withhold information and co-operation from those charged with implementing
BPR.
Ironically, it often failed because management dare not be radical enough and
are trapped by assumptions (what Johnson and Scholes call the organisation
paradigm) about what must be. BPR is therefore seen as restructuring, i.e. a
redesign of the existing organisation structure, rather than a radical re-
examination of everything the organisation does.
BPR is also sometimes seen as representing automation, which purely provides
new mechanisms for performing old processes.

Hammers view remains that BPR is not flawed in itself, but its failure is caused by
people who do not know what they are doing and who do not pursue it in the right way.
However, the problem is an old one and is rooted in the Taylorist approach to
management, which postulates that there is one best way of doing everything in an
organisation. BPR, like Taylorism before it, fails to take sufficient account of the social,
political and cultural factors which limit the application of cold, hard logic.
D. THE ROLE OF MANAGERS
We live, according to Charles Handy, in an age of uncertainty, and managing that uncertainty
therefore becomes a key part of any managers role.
It is important to recognise that the manager has a number of different hats to wear when
considering the issue of change. The manager:

may be directly involved in deciding that change is necessary and what that change
should be.
will have a role in planning and implementing change strategies.
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will be responsible for the people aspects of change, minimising the problems,
smoothing the transition towards change and helping staff prepare for and cope with
change.
Change will also impact on the manager him- or herself. Managers are subject to the
personal fears and uncertainties which lead to resistance to change and their own needs
must be recognised and addressed by their own managers.
We have already seen from Pyms research that the personal characteristics of managers
may play a big part in their ability to successfully implement change. We have also noted the
potential of individual managers to act as change agents, and will consider this role later in
this Unit. There are two further aspects to consider here:

The role of the manager in providing the vision and leadership within his or her group to
support change.
The management of conflict which may occur as part of the change process.
Providing Leadership
Change is not something that can be imposed, except in exceptional circumstances, and we
have seen that successful change comes through a process of involvement and participation
such that staff feel their needs and interests are being appropriately addressed. When
combined with the organisations own requirements for achieving efficiency and effectiveness
in the new position, this emphasises the need for managers to provide leadership which is
characterised by both strong task and relationship orientations.
As you will remember from your studies of leadership, task orientation refers to the degree of
emphasis given to the organisations goals through getting the job done, decision-making,
work organisation and control, etc., whereas relationship orientation refers to the degree of
concern for group and individual goals expressed by the leader through interaction with
members of the group. Giving equal emphasis to each would see the manager seeking to
accomplish change by a committed staff, where workers and the organisations goals are the
same.
Concern for the task will be expressed through a vision of the outcomes of change for
the efficient and effective functioning of the organisation, and a focus on the
imperatives of change and the development of effective strategies for achieving new
objectives.
Concern for the group and individual goals of staff will be expressed through
involvement and participation in the process by which those strategies are developed
and the incorporation into them of the needs of staff, in respect of both the outcomes
and the process.

Managing Conflict
(a) Reactions to Change
There are four main types of reaction to change:
Acceptance: acceptance of change does not necessarily have to be
enthusiastic, but it does recognise that the change proposed is going to take
place and the individual agrees to or accepts his or her role in the process.
Indifference: where change does not directly affect an individual, indifference
may be the result. The individual appears apathetic and lacking in interest in the
proposals.
Passive resistance: here the individual does not co-operate and may refuse to
learn the new technology or ways of working and deliberately stick to the old work
patterns. Sometimes passive resistance can be hard to identify, but on

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examination the individual may be continuing with behaviour that reinforces the
old ways of working. Typical examples might include procrastination, for
example, where an individual is unhappy with accepting increased
responsibilities.
Active resistance: common examples of active resistance include absenteeism,
strikes, sabotage or deliberate errors. Such active resistance does not have to
be malicious in nature but will reflect a deliberate attempt to avoid or reverse the
proposed change.
(b) Uses of Conflict
In any change situation, a negative reaction will generate conflict. Our traditional view
of conflict is that it is something bad; something to be avoided and the result of
management failure. There is, however, an alternative view: that conflict is inevitable in
organisations and may even help the process of change.
The view that conflict can actually help an organisation comes from the idea that it
brings out into the open the need of the organisation to change and the issues
involved. Handys work provides a basis on which to address this. He differentiates
between disagreements which may be constructive (what he calls argument and
competition) and those which are destructive in nature (conflict):
Argument is where differences are resolved by discussion. For argument to be
effective, the arguing group must have a challenging task and be able to work as
a team, and the issues under discussion must concentrate on available
information. Those taking part must be able to do so in an environment of trust
and openness.
Competition is the healthiest form of conflict as it can be used to set standards,
motivate people and reward high achievers.
Conflict, on the other hand, can be destructive in nature as it diverts attention
away from the task, can encourage defensive behaviour and result in the
breakdown of the group.

(c) Strategies for Making Conflict Beneficial
Handy suggests two types of strategy for turning conflict into competition or argument:
Environmental strategies create conditions in which the group is better able to
interact. Examples of environmental strategies might include:
(i)
(ii)
(iii)
(iv)
(v)

(i)
(ii)
(iii)
(iv)
agreeing shared objectives
establishing a group culture
providing feedback on progress
establishing an appropriate structure
providing appropriate communication channels.
establishing rules and procedures for debate
separating the conflicting parties
appointing an arbitrator to settle disputes
using confrontation to sort out differences.
Regulation strategies are associated with controlling conflict, and might include:
Critics of Handys approach argue that regulation strategies legitimise and perpetuate
conflict by incorporating such strategies into the organisations processes and
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procedures. A more proactive approach, by adopting environmental strategies, is often
favoured.
(d) Negotiation
When conflict is of the damaging type, one potential strategy for dealing with it is to
negotiate a more favourable state of affairs. Negotiation is a process whereby two or
more parties, who have different objectives, seek to resolve their differences by
argument and persuasion with the aim of achieving a mutually acceptable solution. As
negotiation involves the conflicting parties, it is often a better way of moving forward
then simply imposing a solution.
There are three stages to the process of negotiation.
The pre-negotiation stage, when a meeting is set and an agenda agreed. At this
stage, the parties will each determine for themselves what would represent an
ideal outcome, an expected outcome and the minimum acceptable outcome.
The negotiation stage itself, when the parties put their case and argue against the
case of the other side. Elements of common ground should be sought here, and
the parties should be prepared to compromise or concede minor points.
After an agreement has been reached, a programme for implementation should
be established. At this stage it may be necessary for the negotiators to sell the
agreement to those who have not been directly involved in the negotiations.

The assumption that parties to a negotiation are on an equal footing is not always the
case. There are also factors outside the negotiation process which can affect its
outcome and of which parties to the process have to be aware:
Negotiations between different levels in an organisations hierarchy will be
affected by the relative position within the hierarchy of the participants. Junior
staff may be less confident because of their relative subordinate position when
negotiating with senior managers. To counteract this, junior managers may rely
on relative expertise in a subject or alliances outside the immediate negotiation
process to strengthen their case.
The quality of the outcome may be affected by factors such as interpersonal skills
or poor working relationships. Poor communicators are at a disadvantage,
whatever the strength of their argument, and some individuals may view the
negotiation process as a means of settling personal grudges.
Trade unions still have an important part to play in workplace negotiations,
particularly where change is involved. A formal negotiating process established
by trade union formalities can reduce the need for lengthy pre-negotiation
discussions, as a framework is likely to be established for such matters as the
setting of the agenda, who is to take part, chairing the meetings, etc.
Negotiations with trade unions are strongly influenced by precedents. Generally,
trade union agreements are binding until a set future date or until new
agreements are reached.

A proactive approach to conflict may be adopted, whereby potential areas for conflict are
identified as part of the change strategy and steps taken to manage those areas, by
targeting individuals and/or groups to ensure their commitment to change. This process can
involve targets both inside and outside the organisation. For example, some organisations
deliberately cultivate good relations with major customers when planning change by ensuring
they are kept well informed of the changes proposed and the likely benefits that will accrue
from them.
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E. CULTURE AND CHANGE
In managing change much attention is devoted to the three areas we considered already:
activities, structure and behaviour. However, all of these are closely related to the concept of
an organisations culture and so any changes which are sought will either have to be effected
within the constraints of the existing culture, or seek to change that culture.
Role and Task Cultures
One of the central problems here is the nature of the bureaucratic form of organisation. The
rigidity of the structures and role culture make radical change very difficult, and limit flexible
responses to changing requirements. For example, centralised power and decision-making
are too removed from the point of impact of decision; the tall organisational structures mean
inefficient and often poor communication; the dominance of rules and procedures constrain
action to established practice; clear delineation of discretion and responsibility limit broader-
based responses (at individual and departmental levels); reward patterns discourage
initiative and risk-taking; and short-term horizons constrain planning and innovation.
This type of organisational form works very well in circumstances of relative stability, but has
great problems coping in periods of change. Accordingly, attention is increasingly being
focused on the development of forms and cultures more appropriate to the turbulent
environment of modern society. In particular, more flexible and responsive structures and
cultures are seen as both a means of effecting change and of ensuring a more adaptive
internal environment for the future.
The model for the more adaptive and responsive organisational form is generally held to be
that of Japanese organisations. These are typified by flatter structures, more participative
decision-making and collective involvement, as well as a longer-term view which must be the
envy of many Western organisations.
The writings of Handy have also been highly influential in the pursuit of increasing flexibility.
His main concern is with role cultures and the need to move towards more flexible federal
role or task cultures as a means of coping with change. Central to this are two aspects
commonly found in Japanese organisations:
Leadership as an enabling role, rather than a directing role. This means going beyond
the issuing of orders and instructions to the development and sharing of vision as to
what the organisation is about and what, therefore, the roles of individuals are.
The dominance of persuasion and consent, rather than imposition and compliance, so
reducing the traditional them and us tensions of management by accentuating the role
of groups and the manager as co-ordinator of group action.

A constant feature of change strategies is the need to break down rigid organisational
structures and introduce more flexible forms. The degree to which such forms are successful
is, however, dependent on the change of culture and orientation which goes with them.
Managing Cultural Change
Changing an organisations culture is a notoriously difficult thing to do. Culture is difficult to
define and even more difficult to break down into parts which can be changed. Furthermore,
an organisations culture is reflected in its recruitment policies, so that individuals who
conform to the old culture will have been recruited in the past, perpetuating and
strengthening the very cultural aspects which subsequently have to change. Most research
has shown that it can take between three and eight years to change an organisations
culture.
Establishing new patterns of behaviour and norms demands a consistent approach which
addresses the following areas:
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Top managements active involvement and commitment
Managers must be seen to adopt the new patterns of behaviour, not just directing
others to do so
There must be positive support for new behaviours, preferably including recognition
(perhaps through an appraisal system) and/or rewards for adopting new patterns of
behaviour
Recruitment and selection procedures and policies may require reviewing to ensure
that individuals who will conform to the new patterns of behaviour are recruited
The new behaviours must be clearly communicated to existing employees and to new
employees via an induction programme
Training is almost always required.

These requirements suggest the need for a pattern of change which is not simply focused on
a response to a particular change event, but one which takes an overarching view to the
capacity of the organisational culture to accommodate change in any circumstances. This
approach may be affected through the process of organisational development.
F. ORGANISATIONAL DEVELOPMENT
Organisational development (OD) is a generic term covering a wide range of intervention
strategies designed to promote organisational health and adaptability to change. OD aims to
create the conditions of organisational functioning that will enable the organisation to develop
naturally and harmoniously. This is a long-term process, which makes it difficult to evaluate
its success in bringing about specific improvements in performance.
There are five operational objectives of the OD process:

to develop a flexible, self-renewing system that can organise in a number of different
ways depending on the tasks at hand;
to create or improve feedback mechanisms which continuously monitor the external
and internal environments in respect of the need for change;
to encourage high collaboration and low competition among interdependent parts of the
organisation;
to create conditions in which conflict among members is brought out into the open and
managed rather than covered up;
to reach the point where decision-making is based on the authority of knowledge rather
than organisational position.
OD is based on the belief that lasting change cannot be imposed. It must come from a
general acceptance of problems and the need to adopt different approaches. Two basic
premises derive from this:
that the organisational culture must be altered to one that promotes trust, helpfulness
and co-operation with others. Only then can questions of the proper content of jobs,
flexibility of labour, allocation of responsibility and authority, distribution of resources
and organisational structures be resolved amicably;
that there should be a participative culture based on the medium of groups rather than
individuals. Therefore great emphasis is placed t on group problem-solving and the
development of effective teamwork.

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The Organisational Development Process
Unlike many other management techniques, OD does not comprise a series of stages, but is
rather an all-embracing process of action research. This involves the collection and
analysis of information about the organisation its problems and present functioning
(structures, culture, communication, etc.) as a basis for identifying the need for change and
implementing that change. As important as this process is the way in which it takes place,
through groups.
The process of action research has four elements:
data collection: assembling information about what is going on in the organisation,
including performance indices, the formal and informal organisation, employee
perceptions of functioning and their orientation to the organisation, etc.
problem diagnosis: from the information collected, identifying problems in performance
and organisational functioning and analysing their underlying causes;
feedback: the sharing, discussion and further refinement of information about
performance, functioning and problems, which will help to develop wider understanding
and acceptance of the present situation and the need for change;
action: generating solutions to problems and developing more appropriate behaviours,
interactions and commitment to support change.

These four elements can merge into one integrated process through the technique of team or
group development. OD invariably involves a conscious process of action research within
teams or groups, based on the work group. Preferably the OD team will include all members
of the work group, but this may make it unwieldy and smaller groups may be necessary.
However, if the latter is the case, a means of involving excluded members into the
discussions and development of action must be found if the outcome is not to be imposed on
them.
There are a number of approaches to team or group development including:

problem-solving, where the focus is on the generation of solutions to specific problems;
workshops, where the focus is on the application of teamwork processes;
sensitivity training (T groups), where the focus is on members understanding
themselves and the way they relate to the team.
All these approaches have both a content and a process orientation: they allow the group to
generate useful new practices or methods of working, and at the same time develop mutual
understanding and support.
Organisational Development and Management Development
These two processes are often confused, but are essentially separate. Management
development is essentially focused on resolving problems, rather on developing the
organisational capacity to absorb change without it developing into a problem. That said,
programmes of management development may be established as part of the organisational
development process, in order to embed the individual managerial competences which are
needed as part of the process.
The following table contrasts the focus of the two approaches.
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Distinction between organisational development and management development
Management Development
Target
Typical goals
Symptoms
addressed
Individual manager or group of
managers
Developing a managers full
potential
Poor performance by manager.
Lack of ready-made managers in
succession plans.
Need to train new managers
Planned programme of
development through, for
example, external courses and
suitable on-site experience
Courses, training managers,
coaching on-site, secondment to
other companies, reading
The manager being developed.
Personnel and training executives.
Managers immediate supervisor.
Organisation Development
System or subsystem of
organisation
Increasing effectiveness of
work group/organisation
Ineffective performance of
organisation in response to
change imperatives.
Lack of flexibility in organisation
and management.
Problem-solving for work
groups
Strategy
Process of
intervention or
activities
Key initiators
and managers
of effort
Team-building, confrontation
meetings, survey feedback,
intergroup interfaces
Top management.
Personnel and training
executives.
OD practitioners (including
external consultants)
Establishment of feedback
system to ascertain objectives
being met
OD requires willingness to take
risks.
Changes might antagonise
workers
Evaluation Regular appraisal interviews
between manager and his/her
superior
Transfer of learning.
Organisation must have right
climate for applying new
knowledge.
Manager must retain his/her
motivation
Problems and
criticisms
OD and the Learning Organisation
For organisations to adapt successfully in the turbulent environments of the modern day, they
have to recognise and accept the need to change. Pressure for change is not enough in
itself, nor is the recognition of that pressure. A clear perception of the necessity of
responding to the pressure is needed. Once that is in place, attention can be paid to the
possibilities for effecting change.
The concept of the learning organisation is based on the need for organisations to develop a
capacity to do this, i.e. to learn from the environment and from operational problems so that
they are able to recognise the change imperatives and how they may be responded to.
Thus, rather than simply responding to problems or failures by corrective action in respect of
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existing operational practices and procedures, the learning organisation will consider the
context which is leading to such problems and failures. It will question the operating
practices and procedures, and explore the policy, cultural, attitudinal, etc. constraints which
underlie them. Only if this is done, will there be a lasting improvement in performance.
We can see that organisational development aims to establish these conditions and is,
therefore, an essential process within the establishment of the learning organisation.
We can further develop the links between the two concepts by reference to the application of
learning theory within OD.
Research into Japanese industry has suggested that its success was based less on the
communication of information and knowledge, and more on the use of that information and
knowledge to generate ideas and embed new ways of thinking and behaviour. The process
of using knowledge and information to create new ideas and concepts is sometimes referred
to as a learning cycle.
The classic model of this process is that defined by psychologist David Kolb, as illustrated by
Figure 7.3.
Figure 7.3: Kolbs experiential learning cycle
Concrete experience
Applying/testing the
implications of concepts
in new situations
Observation and
reflection
Formation of abstract concepts
and generalisations
The elements of the learning cycle are as follows.
Experience
Concrete experience is the basis of the cycle. We use experiences that we have had
in the past, or take experiences which are new to us, in order to further our learning.
These experiences may be structured and planned, or may be accidental, in that they
happen to us in the course of our work or our everyday living. They may be
experiences which happen to us on our own, or involving others.
Reflection
Having been through an experience, the next stage of the cycle is about examining it in
order to be able to identify what actually happened, what we became aware of, and
how we felt about it. It is at this stage, also, that we begin to make an attempt to
understand what the experience might mean for us, in terms of its significance, whether
it was good or bad, if the experience seems to be something which tends to happen to
us frequently, and what this means in terms of our learning to deal with it.
Sometimes you will be able to go through this stage by thinking things through,
consciously or unconsciously, on your own. At other times, you may find it helpful to
talk your ideas over with another person.
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Conceptualisation
Having made the experience coherent through reflection, we then go into the phase of
conceptualisation. Here we generalise from the individual experience to start to look at
how it can be used in other ways: in terms, perhaps, of principles and trends. Can any
of the ideas which emerge be applied to similar situations? What common behaviour
patterns might we begin to see emerging?
Application
We are now ready to test out our analysis of the experience by applying the ideas and
principles identified. Application is active experimentation by modifying our behaviour
after making decisions about how this might best be done and, then, in a sense,
beginning the learning cycle again, by putting ourselves in the position of experiencing
a situation afresh.
This cyclical process needs to be completed in full for effective learning to take place. If, for
example, one is tempted to jump from stage two to stage four without fully analysing and
conceptualising the experience, it is unlikely that any new behaviour will be effective or
helpful. There will be no true understanding of why things happened as they did, and no
sense will be made of the data which the experience generated.
The learning cycle is a concept upon which modern adult training is based. In particular it
provides a model for professional development. It is therefore just a small step to translate
this idea into organisational development, i.e. taking knowledge and information available
within the organisation as a whole and using it to develop new concepts and ideas which the
organisation as a whole uses. There are clear implications for managing the process of
encouraging the exchange of knowledge and information amongst management and staff,
and for developing the ability to transform knowledge and information into actual behaviour.
It is highly dependent upon group behaviours, rather than the efforts of the individual, and
implies a co-ordinating role on the part of management.
Organisational Outcomes of OD
What are the characteristics of an organisation with a well-developed process of OD? Again
we can draw parallels with the concept of the learning organisation.
Whilst there are different views on what constitutes the outcomes which organisational
development seeks to embed, there are a number of generally accepted features. The
organisation should be

open and reflective, looking outward to the environment and its potential impact rather
than inward to the constraints;
accepting of the uncertainty of a changing environment, rather than attempting to
ignore it or mould it back to the certainties of the past; and recognising that errors and
failures are an inevitable result of that uncertainty;
willing to explore different approaches and accept the risks of failure;
avoiding the imposition of rigid pre-determined goals and objectives, recognising that
there needs to be flexibility in response.
Characteristics of the Learning Organisation
Pedler, Burgoyne and Boydell identify the following characteristics in their vision of a
learning organisation:
Learning approach to strategy
The organisational development process (or strategic process) must be designed
as a learning process. There must be opportunities for experimentation, and

(a)
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feedback mechanisms must be built in. An environment where mistakes are
valued rather than criticised is a clear requirement.
Learning climate
The function of management must change to that of supporting rather than
controlling or leading, and encouraging the direct involvement of all workers
through a more participative style of management. For example, if there is a
problem with the distribution process, those most knowledgeable about that
process are likely to be those actually operating it. By actively seeking and
encouraging participation from those people, and providing support to them,
problems can be quickly and accurately identified and solved.
Self-development
Training and development have a high priority, as they increase the flow of
information and ideas and develop the skills which can make use of them. In
Motorola, for example, senior executives take part in a scheme which involves
mentoring younger managers, particularly in less developed areas of the world.
In effect, the senior managers are being used as role models to educate young
managers and pass on their experience and knowledge to the next generation of
managers.
Inter-company learning
Inter-company learning involves looking at best practice within the industry
generally and adopting and developing techniques and systems for use within
ones own organisation. For example, Motorola discovered as part of a study in
South Africa that one organisation was able to explore difficult ideas and
concepts with the workforce through the use of theatre and drama. This concept
was developed and used to good effect in the Philippines, where it had been
difficult to encourage workers to offer constructive criticism (as the culture of the
Philippines promotes a deferential attitude towards those senior or older). By
using theatre and drama, workers were encouraged to exchange their views
outside the normal working environment, in a place where workers felt they could
talk freely.
Informatting
Pedler, Burgoyne and Boydell use this term to describe the use of information as
a resource rather than a control mechanism.
Enabling structures
This concept views organisational structures as temporary rather than fixed, able
to change and respond to changed conditions and exploit opportunities.
Environmental scanning
Monitoring opportunities within the environment is not just the role of a specialist
department but encouraged throughout the organisation. Thus if one department
deals with a particular internal or external customer, any opportunity to develop
that opportunity elsewhere within the organisation is identified and passed on to
the appropriate department. For example, a service engineer might learn from a
service visit that a customer is seeking to replace equipment which the
organisation is able to supply. The service engineer should be encouraged to
pass this on to the relevant sales department of the organisation, which is in a
position to act upon the information.
This idea is also based upon the concept of the internal customer, which is
commonly found in customer service environments. Pedler et al refer to this as
internal exchange. The idea is that each department (or even individual) views
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other departments/individuals as customers whose needs must be identified and
satisfied.
Participative policy making
You may be more familiar with this idea under the heading of stakeholder
influence. In effect, all those with an interest in the organisation (the term
interest being widely defined) should have a right to participate in the policy
setting of the organisation.
Reward flexibility
In a learning organisation there is a flexible and open approach to reward
systems. Changing the rewards offered to participants (workers), and making the
rationale behind the reward system open, shift the balance of power within the
organisation away from salary as an indicator of power.
Senge, who has been one of the principal architects of the concept of the learning
organisation, identifies five disciplines that underpin organisational development.
Systems thinking
This is the ability to see particular problems as part of a wider whole, and to
devise solutions to them which are appropriate.
Mental models
These are ingrained assumptions which determine what individuals think. They
may be incorporated into mission statements or slogans. As an example, Honda
used the slogan lets gamble to motivate designers in the 1970s. The slogan
implies that experimentation and innovation are welcomed.
Personal learning and growth
Individuals should be encouraged to acquire new skills and knowledge, in order
to encourage such acquisition on an organisational scale. Personal development
plans, performance appraisals and access to training are ways of encouraging
personal learning.
Shared vision
A common goal is essential to organisational learning, but should not be so rigid
as to stifle innovation or creativity.
Team learning
Group dynamics can impede learning. Teams should be trained to learn as
teams rather than groups of individuals.
The same themes are picked out again by Motorolas experience of implementing
organisation development processes. They concluded that they had to encourage and
institutionalise the following key features.
A systematic problem-solving approach, by adopting a scientific method of
diagnosing and resolving problems. This means that problems are addressed by
looking for solutions, testing out potential strategies, refining results and using
evidence rather than intuition or guesswork to assess results.
Experimentation, by looking for innovative approaches to problem-solving. The
use of theatre to deal with business problems is an example of how an
experiment encouraged an innovative approach.
Learning from past experiences, by conducting post-incident reviews and
encouraging reflection, not as a means of allocating blame or bouquets, but with
the intention of identifying the success or failure factors from which to learn.

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Learning from others, by looking at best practice and using benchmarking, and
by exploring learning opportunities offered by customers, suppliers, etc.
Disseminating knowledge throughout the organisation, through education
and training programmes, and a shared approach to information.
All of these factors suggest a fundamental change in the way in which the organisation
is structured, its culture and its processes. Those organisations who have made a
success of it have found that they had to devote considerable time, effort and money
towards achieving its ideals; all of which, in the early stages at least, might be viewed
as diverting attention away from the main objectives of the company.
Enabling Innovation
For organisations to survive in todays increasingly turbulent and fast-moving markets, they
need to constantly innovate and find new ways of beating the competition. For this to
happen, they must have creative and flexible people and the organisational culture must be
founded on a belief in controlled risk-taking, experimentation, and learning.
To be innovative, organisations need to develop their structure, culture and technology.
Functional structures often lead to thinking in drainpipes and to departmentalised
thinking and behaviour. Empire-building is common. Divisional structures lead to
more identification with customer requirements, products or geographical area, but may
fail to see the potential in ideas because of their limited focus. Matrix or team
structures are more likely to result in synergistic working and the cross-functional
dissemination of ideas.
In terms of culture, there needs to be support, encouragement and incentives for
creativity. If these are absent from an organisations culture, its people are likely to
keep ideas to themselves or, at worst, take them elsewhere: to a competitor, or to start
their own business in competition. There also needs to be a learning attitude to failure,
rather than looking to shoot the person who has failed. If organisations constantly
look for scapegoats for failures or mistakes, this will invariably lead to people not
bothering to try anything new and simply keeping their head down and maintaining
current activity. Similarly, innovators rather than maintainers need to be seen to be
valued, i.e. promoted or financially rewarded.
Organisations need to use their intranets or IT systems collaboratively to design and
develop new ideas, knowledge and their application. The process of sharing
information is one of the bases of openness sought through OD.

Barriers to Organisational Development
OD is an attempt to build, in a proactive way, recognition of and respond to the driving forces
for change into the culture and structures of the organisation. However, the processes
involved and the instigation of the changes inherent as a result are not without their problems
in traditional bureaucratic organisations. There are a number of factors which act to
constrain organisational development:
Lack of management direction and vision: lack of clarity in goals and objectives,
resistance to change within the ideology of top r management, and often failure of
management will or support to push through change.
Structural factors: these are principally the poor communication inherent in tall
organisational structures with many levels of management, and the excessive
departmentalism which act to inhibit the flow and dissemination of ideas, information
and knowledge (both upwards and downwards).

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Professional factors: the dominance of established and accepted professional
patterns and lack of credence given to challenges to the professional view may be a
significant barrier to opening up the organisation to new ideas and approaches.
Cultural factors: whilst many organisations are beginning to recognise the benefit of a
team-based approach, it is still common to find a role or power culture within them.
Even in an apparent multi-task environment, people may still describe their role in
terms of what they do rather than the functions they fulfil. A fundamental shift in
emphasis is required before we can truly claim to be open to the concept of shared
information for the benefit of all within the organisation. The defensive style of
bureaucracies, which rewards success and punishes failure, inhibits risk-taking and
leading to problems being hidden.
Short-termism: in many organisations there is a consuming concern with costs and
budgetary savings due to financial constraints. Circumstances such as limited
resources tend to be divisive as they encourage team members to fight for their own
resources rather than consider the needs of the organisation as a whole. In addition,
the predominant reactive basis to handling change leads to a cycle of crisis
management which can be difficult to break.
Insensitivity to slow change: we often fail to recognise slow changes in the
environment. It is much easier to recognise and react to sudden changes than it is to
recognise slow ones, yet it is often creeping change which poses a greater threat or
challenge to the organisation. OD should, in theory at least, encourage a proactive
approach to change, so that slow shifts in the environment are dealt with positively. In
reality, though, change management is often rooted in reaction to past events rather
than looking forwards to future opportunities.

Use of External Consultants
There are many circumstances in which organisations look outside their own internal
resources in order to help maintain or develop their operations and/or functioning. One of the
main reasons for this is the need for a different perspective on their work, either one that has
a specific orientation not found in the organisation or one that is unaffected by the present
organisational culture. External consultants are often brought in to offer this perspective,
allied to specialist skills and experience in dealing with change situations, as a change agent.
External consultants are people from outside the organisation and not on the payroll of the
enterprise for which they are working. Internal consultants come from a different part of the
same organisation: some organisations have specialist staff dealing with organisational
development, although managers and staff who have experienced change elsewhere in the
organisation may also be used.
The use of external consultants may form part of an ongoing organisational development
process or may be a one-off event, associated with the approach we have seen in
organisational analysis. In either circumstance the role of the external party will be the same,
as will the processes applied.
(a) Control and Constraints
Bringing in external consultants involves a contractual relationship requiring the
consultant to undertake certain activities or achieve certain ends on behalf of the
organisation. However, the nature of the consultants role in respect of implementing
change makes it difficult to specify exactly what is expected to be achieved: indeed, the
very purpose of employing a consultant for this end is to facilitate the organisation
moving in an unknown direction.
It is crucially important that the nature of the client-contractor relationship is clear at the
outset. The terms of reference of the consultant need to define the extent of the project
for example, the whole organisation, the marketing department, purchasing systems,
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etc. and of the consultants authority. There are also likely to be constraints which the
consultant will have to work within, such as the sanctity of certain organisational
structures (the need for some form of committee system or formal consultation
procedures with staff) and timescales, etc. The terms of reference also need to be
agreed by both management and staff in order to ensure effective co-operation from
the outset.
It is also important to develop understanding and gain the commitment of staff who will
come into contact with the consultant, so as to avoid the problems of resistance.
External change agents have an advantage in this respect since, as long as they are
not seen as management puppets, they are likely to get better access to the different
attitudes, interests and objectives of employees than is the case with internal agents.
This last point reinforces one of the key aspects of using consultants. They offer the
opportunity of objective advice and guidance. This stands a greater chance of being
accepted by all concerned, as they are not part of any vested interest or power group
over others within the organisation. It is important, therefore, that management itself
accepts and protects the objectivity and independence of consultants within the agreed
terms of reference, and does not try to influence the outcome.
(b) Role of Consultants
The consultants role in OD is somewhat different from other consultant roles, as
Schein explains:
The job of the process consultant is to help the organisation to solve its own problems
by making it aware of organisational processes, of the consequences of these
processes, and of the mechanisms by which they may be changed. The ultimate
concern of the process consultant is the organisations capacity to do for itself what he
has done for it. Where the standard consultant is more concerned with passing on his
knowledge, the process consultant is concerned about passing on his skills and
values.
The aim, then, is not for the consultant personally to solve the problems, but to enable
the organisation to learn how to solve them itself.
(c) Process
The procedure for the work of consultants is quite standardised. There is usually a
three-stage process:
Diagnosis: this focuses particular attention on the shared beliefs, values and
norms of organisational members that may be interfering with maximum
effectiveness. The consultant and others who are helping with the process
typically use multiple means of gathering data, from both individuals and groups.
Intervention: change strategies are designed and implemented by groups
working with the consultant. The accent will upon enabling the group to identify
and assess the necessary changes and developing strategies for how they may
be achieved.
Evaluation: there will invariably be a review element in which the effects of the
change intervention are monitored and evaluated, with appropriate modifications
made if necessary.

(d) Skills and Values
External consultants need to possess certain skills and values for deployment in this
process, with the aim of developing those same qualities in the organisation itself. This
provides the capacity for the organisation to internalise the values and continue the
process of change under its own direction. This is crucial to organisational
development.
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Goals
(i) Sensitivity to changes in key personnel, top management and market
conditions, and to the way in which these impact on the goals of the project
in hand.
Clarity in specifying goals, in defining the achievable.
Flexibility in responding to changes without the control of the project
manager.
Team-building abilities, to bring together key stakeholders and establish
effective working groups, and to define and delegate respective
responsibilities clearly.
Networking skills in establishing and maintaining appropriate contacts
within and outside the organisation.
Tolerance of ambiguity, to be able to function comfortably, patiently and
effectively in an uncertain environment.
Communication skills, to transmit effectively to colleagues and subordinates
the need for changes in project goals and in individual tasks and
responsibilities.
Interpersonal skills, across the range, including selection, listening,
collecting appropriate information, identifying the concerns of others and
managing meetings.
Personal enthusiasm, in expressing plans and ideas.
Stimulating motivation and commitment in others involved.
Selling plans and ideas to others, by creating a desirable and challenging
vision of the future.
Negotiating with key players for resources, or for changes in procedures,
and to resolve conflict.
Political awareness in identifying potential coalitions and balancing
conflicting goals and perceptions.
Influencing skills, to gain commitment to the project from potential sceptics
and resisters.
Helicopter perspective, to stand back from the immediate and take a
broader view of priorities.
(ii)
(iii)
Roles
(i)
(ii)
(iii)
Communication
(i)
(ii)
(iii)
(iv)

(i)
(ii)

Negotiation
Managing Up
(i)
(ii)
(iii)
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239
Study Unit 8
Responsibility and Stakeholders
Contents
Introduction
A. Stakeholder Interests
Shareholders
Customers
Suppliers
Competitors
Employees
Society
Legal Responsibilities
Legal Responsibilities Towards Owners
Law Affecting the Operation of Markets
Employment Law
The Law and Environmental Protection
Human Rights Legislation
Responsibilities to Staff
Structuring Employer/Employee Relations
Promotion of Fair and Equitable Treatment
Corporate Social Responsibility
Perspectives on Corporate Social Responsibility
Strategies for Implementing Social Responsibility
Management Ethics
Principles of Ethical Behaviour
Influences on Ethical Behaviour
Codes of Conduct and Practice
Whistle-Blowing
The Role of Professionals in the Organisation
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C.
D.
E.
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240 Responsibility and Stakeholders
INTRODUCTION
We have considered the stakeholder concept several times during this course and in this last
Unit we draw together the strands in considering the way which organisations respond to the
interests of stakeholder groups. We shall be particularly concerned with legal and social
responsibility, and with the concept of managerial ethics.
Different stakeholder groups will have varying decrees of power and influence on an
organisation. The extent to which they are able to get the organisation to respond to their
interests, at least in part, and have them represented in organisational goals and strategy will
be a reflection of the exercise of that power and influence.
We have seen that there are many types of stakeholder in all types of organisation:
shareholders, employees, customers, the general public, suppliers, and government.
Government is a major stakeholder in public-sector organisations, and also for voluntary
organisations if they rely on government grants; but government's policies and pressures
affect the private sector also. But government is also an organisation, in relation to which
many other organisations are stakeholders. Just as government will seek to influence other
sectors by legislation, incentives and exhortation, so organisations will seek to influence
government by lobbying and political pressure. In private organisations the key stakeholders
are the owners (the shareholders in the case of limited companies), and in the public sector
ownership is ultimately rests with the voters. Likewise most sorts of voluntary organisations
are owned by their members.
However, both owners and the organisations which they own have to act within the law
they have legal responsibilities. The government, then, with the power to make or repeal
laws, is able to exert considerable direct influence on the functioning of organisation. The
ability to influence the law, though, may also be a powerful way for some stakeholder groups
to have their interests met. This may be by direct lobbying of government for changes in
legislation, links with political parties or through action in the courts.
Pressure can also be brought to bear on an organisation for its goals to reflect the interests
of other stakeholder groups, by disrupting the functioning of the organisation: in effect,
preventing the owners' own interests being fulfilled. This may be through employees
withdrawing their labour or by direct action by external campaign groups (e.g. animal rights
activists). The extent of the threat that is posed to the organisation will determine the extent
to which the organisation will respond.
Yet other stakeholder groups can exert power through the market. Most notably this applies
to customers (who themselves may be influenced by pressure groups and interest groups
operating in society), but may also include suppliers and competitors. Again, the extent to
which the action of these groups may threaten the organisation mainly financially
determines the way the organisation responds. Note that this pressure does not exist in the
same way in the public sector, where the interests of service user and other groups are
pursued in the political arena.
All organisations have to respond to these types of pressure and incorporate at least some
element of the interests of these groups into their goals, and, hence, their policies, strategies,
objectives and operational plans. In doing so, they are accepting responsibility for meeting
those interests and are, ultimately, accountable to the same groups for their performance in
respect of that responsibility. If the groups are not satisfied with the response, they have the
power to increase the threat.
However, organisations take on responsibilities in other ways too. These are in areas where
there is no compulsion and no direct pressure to respond to. Rather, they are rooted in the
norms of society about how an organisation which is part of that society and interacts with it
in many different ways should act. This applies to the whole of the organisational system:
the way it gets its inputs of resources, the way in which it conducts its activities and the
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Responsibility and Stakeholders 241
outputs it supplies. Increasingly, organisations are responding to these norms what might
be said to be the morals of society and incorporating them into the goals, policies and
strategies that they adopt.
There are three main aspects to the responsibilities that they may take on in this way.
Social responsibility, which is concerned with how the organisation behaves
(collectively and individually) in its interaction with society at large, not just its
customers. The issue here is the extent that the organisation accepts that it should not
override the general moral norms of society in the pursuit of its own interests.
Responsibilities towards staff: how the organisation behaves in terms of the
interactions between staff (both collectively and individually). The responsibility here is
that the organisation should treat all staff equitably and with respect, and not
discriminate in the way which certain groups and/or individuals are permitted to
behave.
Management ethics: the behaviour of those individuals in the organisation who have
the power to make decisions. The responsibility here is more absolute. It is the duty of
individual managers not to pursue their own interests (or the interests of others) where
these are not the interests of the organisation and its shareholders, or where these
offend against the general moral norms of society.

This Unit starts by considering the interests of stakeholder groups and how the organisation
responds to them, before going on to look at the role of the law in regulating the behaviour of
organisations in respect of those groups. We then consider in more detail the responsibilities
of organisations towards staff, the concept of social responsibility and the way in which
organisations respond to it and, finally, the concept of management ethics and its practical
implications.
A. STAKEHOLDER INTERESTS
The idea behind the stakeholder concept is that there are certain groups which have specific
interests in an organisation. These interests differ from one group to another, and sometimes
the interests of different groups may conflict with one another.
How organisations react to these interests and absorb at least aspects of them into their
goals and strategies involves an assessment of the power and influence of the various
stakeholder groups, as well as the response of organisations to the moral climate in which
they operate.
Shareholders
Shareholders are the owners of a company. Their only real involvement in the organisation
will be at the Annual General Meeting, when they are called upon to approve, by a vote, the
overall direction of the organisation and the senior management team responsible for
achieving that direction. The power to influence the outcome of voting is likely to be held by
large institutional investors like pension funds, trade unions or insurance companies, who are
in turn responsible to their members. These groups will be represented at the shareholders'
meetings by professional fund managers. Individual investors are likely to be only a small
minority of the shareholders and will rarely be in a position to dictate policy through voting;
though sometimes, usually when a company is in crisis, they may join in a voluntary group to
defend their interests.
Shareholders' interests are quite clear. They expect to receive a return on their investment of
funds in the organisation. There are two aspects to this.
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They expect the organisation to make profits which will be distributed to the
shareholders in the form of dividends, usually paid annually.
They expect the value of the organisation to grow, thus making the value of their
investment, as measured by the share price, increase. This is known as capital
appreciation.
Ideally, shareholders would like to see both aspects of their expectations realised, but they
are likely to be prepared to forgo one in preference to the other. They may accept a short-
term reduction in dividend, or even no dividend at all, provided that capital appreciation is
maintained and there is the prospect of future dividends.
Shareholders will want to be assured that the direction of the organisation, as determined by
the board of directors, will result in the realisation of these interests. If not, they have the
power to remove the board, or individual members of it, and replace it by managers who will
develop appropriate strategies to enable their interests to be met. Ultimately, this power may
be backed up by the threat of disinvesting in the firm selling their shares which, if
repeated by enough shareholders may undermine its financial basis and make its future
existence less secure.
This would seem to imply that shareholders are interested solely in the bottom line and,
whilst this may be true to an extent, they do have other significant interests principally that
the enterprise which they own should operate within the law and that it behaves 'responsibly'
in its dealings with other stakeholders. Where their primary interest of a return on their
investment is being met, they are likely to approve moves for the organisation's direction to
meet the interests of other stakeholder groups. They may, though, be less likely to see these
as important if their primary interest is under threat: indeed, in some situations, the
requirement to act within the law may even be compromised. Further, if it can be
demonstrated that returns may be significantly increased or decreased by either ignoring or
acceding to these other interests, they are likely to approve actions accordingly.
It is important to realise that, whatever the claims of other groups, shareholders have the
ultimate power over the organisation's direction, i.e. the establishment of its goals and the
determination of the strategy to achieve them. To the extent that other stakeholder groups
have an interest, it will be measured against the interests of shareholders in the first instance.
Indeed, there is a strong school of thought that organisations should simply obey the law in
the pursuit of their primary goal of meeting shareholder interests doing no more and no less
than is legally required and that anything which goes beyond that is wasting resources
which could be better employed in developing the organisation.
Customers
Customers are interested in getting good quality goods and services at the right price (to
them) in the right place (for them). However, conflict may occur between customer
expectations and the price, quality and location of sale in respect of the products that the
organisation wishes to provide, given the prime objective of generating profits and growth to
meet shareholder interests.
In the past, the power of the producer to dictate the terms of the resolving this conflict was
summed up by the Latin phrase caveat emptor 'let the buyer beware' which was at the
heart of contract law. There have been three developments which have substantially altered
this situation and tilted the balance of power such that producers are now generally seen as
owing a 'duty of care' towards their customers.
(a) Legislation
Since the late 1960s successive governments have legislated to control the
relationship between organisations and customers in a wide variety of areas: quality
standards (the product being fit for the purpose) and trade descriptions, the terms of
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the sale and guarantees, the application of credit agreements, health and safety
issues, advertising, etc. These place legal requirements on organisations in respect of
the way they trade and treat customers' interests.
(b) Consumerism
The 1960s saw a rise in concern about consumer issues in general and the
development of campaign groups in respect of some of the most glaring behaviour of
some organisations in exploiting customers. This concern culminated in the legislation
which started during that period. Since then the concept of customers' rights to a 'fair
deal' in its interaction with organisations has become embedded in the political and
social environment of commerce and the public services. Much of the legislation is
accompanied by codes of conduct which organisations are expected to adhere to in
their interactions with customers. As well as the overarching Office of Fair Trading,
other official bodies have been appointed to look after the users of state-owned or
near-monopoly enterprises: for example, in respect of the gas, electricity and water
industries. There are also hugely influential independent consumer groups like the
Consumers' Association, who publish a range of 'Which?' magazines devoted to
assessing consumer products. These have considerably increased customers'
knowledge and understanding of products and made them more discerning in their
behaviour.
Organisations have to respond to these expressions of customer interests because, in
the long term, their prime objectives may be achieved only when the enterprise is able
to satisfy the needs of sufficient customers to generate adequate sales revenue.
Therefore, an organisation is vulnerable to customers' decisions not to purchase its
products, so must provide, to an acceptable degree, what the customer wants.
(c) Competition
For consumerism to work effectively, customers must have a choice of products to
satisfy their needs. Competition tends to preserve the objective of customer
satisfaction in firms to a far greater degree than would otherwise be the case. Markets
today are characterised by far greater choice and much more intense competition than
in the past, largely due to the prevalence of substitute products and brands.
Where there is no effective choice, monopoly conditions exist and the balance of power
rests with the organisation. There are, though, now very few true monopolies and
those that do exist, including the public services, are generally closely regulated by
appointed or elected bodies acting in the consumers' interest.
There may be a trade-off between shareholders' and customers' interests, if the former
are prepared to forgo short-term returns when satisfying the latter promises continuity
of sales and an assured future for the company. A common criticism, however, is that
institutional investors are too concerned with achieving short-term results which will
keep up a company's share price, at the expense of long-term investment and growth.
The consistent success of the retailer John Lewis has been attributed to not having to
worry about shareholders' short-term interests, as it is owned by its employees who
have a very direct interest in its long-term flourishing.
Suppliers
The relationship of interests between an organisation and its suppliers can be seen as very
similar to that between the organisation and its customers, but reversed.
Suppliers have an interest in ongoing and mutually beneficial business relationships, and
they expect to be paid on time. This means that they will be generally supportive of the
organisations they deal with and are likely to temper their own need to satisfy their
shareholders' objectives in return for maintaining their business customers in the face of
competition.
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Note that suppliers can exert great power over the organisation cutting off sources of funds
in the case of banks or causing a breakdown in the supply chain if their interests are not met
so the organisation needs to respond to those interests in a positive way. (But equally
organisations can exercise great influence over their suppliers, if they are the latter's main or
only customer: for example, the large supermarket chains constantly pressure suppliers to
cut costs and prices.)
Competitors
It may seem strange for competitors to be seen as a stakeholder in the organisation, but
there is a strong sense in which all organisations have an interest in the markets in which
they operate. They will all want to ensure that there is fair competition and that all
businesses operating in a sector are behaving according to the rules: either explicitly set out
in legislation, or implicitly agreed in the form of competitive ethics.
Employees
The employees of an organisation from senior management to the lowest level operative
clearly have a number of interests in the organisation for which they work.
On one level, these interests derive from the various personal and group goals which may be
pursued through employment, such as the satisfaction of needs in accordance with Maslow's
hierarchy. These are likely to be articulated in the form of demands for increased levels of
remuneration and for better conditions of employment. The level of these demands will be
generally related to the profitability of the enterprise: in effect, wanting a share of the profits
to be returned to those who have been instrumental in producing them. This brings the
interests of employees into direct conflict with those of the shareholders.
On another level, employees' interests may be seen as the assertion of certain rights deriving
from what is seen to be acceptable in the way in which employees are treated within society:
that they should be treated fairly and equitably and not suffer from the indiscriminate use of
an employer's power. The demand for a share of the profits may be seen in this way, but it
goes further than this.
There is an in-built imbalance of power within organisations. Employers, in effect
management using the authority vested in it by the owners, have the power to dismiss an
employee or to instruct him or her to undertake whatever activities it sees fit. This imbalance
has been partly addressed by the enactment of legislation which curtails the powers of
management in certain situations, and the development of employment law may be seen as
one way in which employees' interests, in general, may be advanced. However, outside of
those situations, the imbalance persists and employees will seek to have their interests met
through employers adopting voluntary policies and procedures which curtail the freedoms of
management as part of their organisational goals and strategies.
Employees have the power to further their interests through pressure on the organisation to
accede to their demands by taking industrial action. This may take various forms, including
the ultimate power of withdrawing their labour, albeit at great cost to themselves.
Organisations will generally take on board these interests where it is in their own interests to
do so. This may be as a result of:
the threat posed by industrial action the need to avert disruption and continue
operations which will deliver the results necessary to meet the interests of the
shareholders; and/or
the need to maintain and develop a well motivated and satisfied labour force which will
be effective in delivering those same results; and/or
the problems posed in the recruitment of effective staff where, in a competitive labour
market, key interests are being better met in other organisations.

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However, organisations do not simply respond to the interest of staff in terms of their own
interests. There will often be a desire to be seen as a 'good employer' purely for the moral
satisfaction which this engenders.
Society
Organisations exist within and interact with society in many varied ways. They take inputs
from the social and physical world labour and natural resources and place their outputs
back into the same spheres. Their activities in transforming into inputs into those outputs
take place within the web of beliefs, values and standards of behaviour which characterise
the culture of society. All these aspects of the organisational system have outcomes which
go beyond purely the interaction of the organisation with its own market. Increasingly, as
culture has developed in societies throughout the world, it has come to be accepted that
organisations should adhere to the prevailing cultural norms and take responsibility for these
outcomes.
As far as it can be expressed, society's interest in respect of organisations can be taken to
be that they conduct their activities in accordance with beliefs, values and standards of
behaviour expected of individuals as citizens. That means that they should meet their legal
and 'moral' responsibilities to society.
Exactly what constitute 'moral' responsibilities is open to debate. To some extent this is
defined by pressure and interest groups who are able to capture the attention of political
parties and the news media and thus promote their views. They in turn will often test
whether these views are representative of the public at large by means of opinion polls and
focus groups, etc. However, there are a significant number of general areas in which it can
be said with some certainty that society expects organisations to act in certain ways.
To contribute to the economic well-being of the society: for example, through the
payment of taxes, the provision of employment, the development of wealth, etc. These
may be seen as providing a return on society's investment in, and helping to fund, the
public infrastructure of institutions and physical support which organisations use, such
as the education, legislative, transport and public health systems.
To play a part in the communities within which they interact at local, regional, national
or even international level: for example, through participation in public decision-making
bodies, by supporting cultural activities, providing opportunities for students and
trainees to further their education and training, etc. In such roles, the organisation is
expected to play the part of a good citizen, not acting exclusively in its own interest,
although there is a general acknowledgement that this will be a motivating force.
To treat employees fairly and equitably: for example through paying fair wages and not
exploiting the needs of people for paid work, or not discriminating between different
groups, etc.
To use natural resources in a responsible manner, only taking what they need and
ensuring that their outputs are not damaging to the physical environment. This may be
seen in the pressure for environmentally conscious policies and actions: for example,
the conservation of resources and habitats, or the prevention of pollution.
To act in ways which, of themselves, do not alter the culture of society beyond limits
which society may find acceptable. This is the most difficult area, dealing as it does
with what societies find culturally unacceptable or even offensive: for example, in
relation to changes in the eating habits and standards of foods available in society, the
portrayal of sexual imagery in advertising or as a product, or the threat to national
cultures through the standardisation associated with globalisation. This is a constantly
shifting area, but one that can clearly be seen as of interest to society.

To some extent all these areas of concern have been reflected in legislation, so imposing a
legal responsibility on organisations. Beyond this, however, there is no compulsion on
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organisations to respond to the interests of society. In general, society does not have any
particular powers to influence the organisation, except in so far as its reputation in respect of
these moral responsibilities either good or bad (not meeting them or, worse, acting contrary
to them) may come to affect the organisation's customer base.
Organisations are, therefore, faced with a dilemma. To meet these responsibilities will
detract from the primary objective of meeting shareholders' interests, but not to meet them
offends against the norms of society of which both shareholders and management are a part.
This issue remains an ongoing debate within societies, and we shall consider some of the
ways in which it is resolved later in the Unit.
B. LEGAL RESPONSIBILITIES
Organisations are subject to the law in the same way as ordinary citizens and must act at all
times within it. If they do not, they risk prosecution under criminal legislation or action in the
courts by aggrieved individuals or groups under civil law. The penalties can be severe,
depending upon the offence, including fines and financial recompense, forfeiture of assets or
even, in certain situations, imprisonment of particular individuals.
UK law can be classified into two main categories, and derives from two main sources.
Criminal law covers activities regarded as wrongs against society (embodied in the Crown),
and which society seeks to punish. Examples relevant to business include theft, fraud, and
misleading descriptions of goods. Civil law concerns relations between individuals (or legal
entities, such as companies), rather than between an individual and society. When one
individual wrongs another the remedy is not punishment but a money payment (called
damages), or a legal order to right the wrong. Branches of civil law relating to business
include the law of contract and employment law. Those who commit criminal wrongs are
prosecuted by the authorities, while those committing civil wrongs (the legal term is torts) are
sued by the person they have harmed. Some actions can give rise to both criminal and civil
actions: a firm committing a nuisance may be prosecuted by the local authority, and may also
be sued by its neighbours.
The two main sources of law are common law, derived from tradition, and statute law, laws
passed by Parliament. Both have to be interpreted by the courts, and the decisions of the
higher courts, expressed in case law, are binding on lower courts considering similar cases
in future, under the principle of precedent. Parliament has supreme authority to make new
laws and discontinue old ones; but its discretion now has some limits through the application
of the European Convention on Human Rights, with which UK legislation must comply.
Note that Parliament has not seen the need to enact legislation in respect of all the areas of
potential conflict between organisations and stakeholders. Alternative approaches have
been adopted to regulate certain areas, particularly through the establishment of regulatory
bodies with the power, enforceable through the courts in some circumstances, to require
certain types of organisation to modify their actions and adhere to particular rules of conduct
(as, for example, in relation to the financial services sector). The specification of codes of
conduct or practice has also been favoured in some areas. These provide guidelines for
organisations as to what constitutes acceptable behaviour and may be established by the
Government (in which case they will flesh out the practical implications of the law) or by
regulatory bodies. These codes, whilst not having the force of law in themselves, may be
used by the courts in interpreting what is considered acceptable conduct, and so are likely to
be adhered to by organisations.
The European Union has an increasing role relating to the activities of organisations. The
EU does not enact laws as such, except in so far as certain activities are specifically
prohibited under the Treaties of Rome, Maastricht, Amsterdam and Lisbon which set out the
fundamental principles of the Union. However, it does issues directives which the separate
member states are required to incorporate into their own legislation, usually within a
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particular timeframe. The EU has been the main source of law in respect of environmental
protection and human rights.
Legal Responsibilities Towards Owners
In the private sector, the relationship between the organisation and its owners (shareholders
in the case of companies and the partners in the case of partnerships) is governed by various
Companies and Partnership Acts.
Their effect is to formalise the arrangements for ownership, to regulate the way in which
returns on the owners' investment are made and to ensure appropriate disclosure of
information about the conduct of the organisation to the owners.
There are, therefore, specific rules and regulations concerning the following.
The content of annual financial statements (and here we can also see the role of codes
of practice in the requirements to adhere to certain accounting concepts and
conventions in the presentation of financial information).
The holding of meetings with shareholders: principally an annual general meeting
which all shareholders have a right to attend, but also provisions for other meetings of
shareholders to be called in certain circumstances, such as a specified number or
proportion of shareholders demanding such a meeting.

In the public sector, organisations operate within a framework of legal controls which define
their membership and the way in which those members are elected or appointed and exactly
what they are empowered to do. Central to this is the doctrine of ultra vires which limits
public bodies to doing only those things which they are specifically empowered to do. The
courts have the power to review decisions, on appropriate application, to test whether their
actions fall within this limitation. This has involved the courts at times in refining or clarifying
the definitions of the powers and duties of public organisations contained in Acts of
Parliament.
Law Affecting the Operation of Markets
This is the area which regulates the trading relationships between organisations and their
customers and suppliers, and the way in which competition may be conducted.
(a) Contracts
In order to function in the wider economy, organisations have to make agreements with
each other: for example, to ensure the supply of raw materials or the delivery of
finished goods on time. Such agreements are covered by the law of contract, which
is part of common law. The law of contract developed from the rules of merchants
dealing with each other in the Middle Ages, but also applies to agreements between
organisations and individuals and between private individuals.
The parties agree on certain points and these become the terms of the contract. The
more important of these terms are known as conditions, the less important are
referred to as warranties.
A breach of contract is deemed to have taken place if one party fails to comply with the
terms. The most serious breach is of conditions, which entitles the injured party to
rescind the contract and bring an action for damages. A breach of warranty only
entitles the injured party to bring an action for damages.
The law of contract enables organisations and individuals to enter into agreements with
reasonable assurance that others will behave in such a way as to honour their side of
the bargain.
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(b) Consumer Protection
The relations between organisations and consumers were rooted in common law,
which enable consumers injured by faulty goods or the negligence of suppliers to
obtain damages in compensation. There have been a large number of statutes passed
in the last thirty or so years to extend that protection, including the following:
Sales: the Sale of Goods Act 1979, as amended by the Sale and Supply of
Goods Act 1994, governs contracts of sale. The Act requires goods to be of
satisfactory quality and fit for the purpose. So, if you order two dozen pens and
they don't write, you can ask for a refund because the goods aren't of satisfactory
quality, i.e. they don't do what you would reasonably expect them to do.
Quality: the quality of goods or services supplied to consumers is also regulated
by the Consumer Safety Act 1978. This Act provides that unsafe goods can be
prohibited from sale to the public (such as flammable nightdresses and
dangerous toys).
Credit: the Consumer Credit Act 1974 regulates small credit arrangements.
Those who carry on the business of granting consumers credit must be licensed
to do so. An important aspect of this legislation is its control over the way that
credit is advertised. Advertisements must be accurate and show the true rate of
interest being charged for the credit offered. The Act set up the Office and
Director General of Fair Trading to enforce the regulations.

(c) Competition
The Restrictive Trade Practices Act 1956 protects consumers from exploitation through
monopoly arrangements between firms, or the cornering of a market by a firm, or from
other restrictive practices which limit proper competition. Thus consumers are
protected even from the largest, most powerful organisations.
The EU also affects legislation in this area; the original Treaty of Rome forbids restrictive
trade policies and monopolies which would be against the public interest. The EU is
particularly alert to the dangers of unfair pricing, restrictions on production, distribution and
technological development. To some extent, however, there is a countervailing influence in
the need of some European industries to be organised into large units which can compete
with those of the USA or Japan.
Employment Law
Employment legislation has been enacted over the years to ensure equally fair employment
treatment for all workers by all employers. In the absence of legally enforceable employment
conditions, employers would be free to exploit their employees. Protection of the interests of
employees is, therefore, at the heart of employment law.
The basis of the legal relationship of an organisation and its employees is that of a contract
(a voluntary agreement into which employer and employee freely enter under the terms of
common law). Both sides have a duty to behave reasonably and responsibly: employers
should issue reasonable instructions and employees should give faithful and honest service.
Common law has, however, been considerably extended by statute law and there are now a
very large number of separate pieces of legislation which make up this field. It is not our
intention to go into detail about any of them here, but we shall note the major areas in which
legislation has been enacted.
Disputes under employment law are generally dealt with at employment tribunals. These
tribunals were set up to enable easier and cheaper access to the law for individual workers
than would be available through the courts.
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(a) Contracts of employment
These are the basis of the agreement between an employee and employer as to the
terms and conditions under which the employee is employed. Essentially the contract
will state the way in which, in return for specified forms of remuneration, holidays, etc.,
the employee undertakes to work for an employer during specified hours and exercise
specified duties and responsibilities.
(b) Workers' rights
Legislation provides for a large number of rights on the part of employees, including the
following. .

Rights in respect of the payment of wages and salaries, including the payment of
a minimum wage as determined by the government.
The right not to be dismissed unfairly or wrongly
Entitlement to a minimum period of paid leave for the purposes of holidays, in
addition to public holidays
Entitlement to paid leave for women during maternity and the right to
reinstatement after the birth of a child, and entitlements to time off for parents
following the birth.
Entitlements in respect of the way in which loss of employment through
redundancy is handled, including the right to particular periods of notice and the
receipt of certain levels of redundancy pay in compensation for the length of
service.
The right to join a trade union of the worker's choice (and also not to be
compelled to do so).

(c) Discrimination
There are specific laws against any form of discrimination at work on the grounds of
sex or marital status, colour, race, nationality or national or ethnic origins, disability and
sexual orientation. These relate to pay, recruitment and selection, the provision of
opportunities for training, development and advancement through promotion, and
access to the benefits of and facilities at work.
Discrimination can be indirect as well as direct, so the law applies not just to the
actions which employers do take, but also to the actions they omit taking. It also
forbids the specification of unnecessary conditions which certain groups are not able,
or are unlikely, to meet.
In the case of disability, organisations are required to take reasonable steps to adjust
the working environment to enable disabled people to have equal opportunities for
employment, which may mean the physical alteration of premises and the re-
arrangement of jobs.
(d) Health and Safety

The main legislation here is the Health and Safety at Work Act 1974. Its
objectives are as follows:
Securing the health, safety and welfare of people at work
Protecting others against risks to health or safety owing to activities of persons at
work
Controlling the use, storage and acquisition of explosive, highly inflammable or
dangerous substances
Controlling certain emissions into the atmosphere
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A Health and Safety Commission and Health and Safety Executive responsible to
specified Ministers (usually the Secretary of State for Employment) were established to
administer the Act.
The legislation was drafted to enable new regulations to be introduced as and when
required, and provisions in respect of specific dangers and problems are constantly
being added. This is an area where there have also been a number of European Union
directives.
The Law and Environmental Protection
Regulation of activities which impact on the environment was, in the past, mainly enforced
through public health acts of parliament. The increased concern about environmental
protection and the perceived failure of the existing common and statutory law has resulted in
the introduction of complex statutory controls aimed at reducing pollution and protecting the
environment.
The main UK law on this issue is the Environmental Protection Act 1990(generally
abbreviated to EPA), although most of the initiatives in this area have come from the EU.
This body of law and regulation is focused on three main areas:

land use and planning control;
industrial air and water pollution control;
waste management and control.
Control is exercised through governmental bodies and specialist agencies, principally the
Environment Agency through the granting of licences to carry out certain activities under
strict conditions which are designed to prevent pollution.
Organisations breaking the law in this field face extremely heavy fines, clean-up costs and, in
some circumstances, the imprisonment of individuals deemed responsible. The obligations
placed on organisations are, therefore, considerable.
(a) Definitions and Key Concepts
A fundamental question which arises when considering how environmental law affects
the operations of organisations is what is actually meant by the term 'environment'.
This is not always an easy question to answer, as the term is used in a number of
different senses. The field of environmental law is essentially concerned with the way
in which the physical environment is affected by the activities of individuals and
organisations, public authorities and organisations in the industrial and commercial
world.
The EPA defines environment as 'consisting of all or any of the following media,
namely, the air, water and land'. Arguably, though, this still leaves room for doubt
does it, for example, allow for harm to human senses, animals and wildlife, and how
does it relate to protection of cultural and historic buildings? In fact, these aspects are
specifically recognised in the application of the Act and in other legislation to particular
areas of concern.
In relation to other key concepts, similar difficulties emerge, but we can use the
legislation as the basis of understanding.
Pollution
This key term means pollution of the environment due to the release (into any
environmental medium) from any process of substances which are capable of
causing harm to man or any other living organisms supported by the
environment. The 'substances' covered include noise, heat, vibrations or any
other kind of energy, as well as physical substances. Harm is taken to mean
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harm to the health of living organisms or other interference with the ecological
systems of which they form part. In the case of people, this includes offence
caused to any of an individual's senses or to his/her property.
Polluter pays
This is one of the two central principles of environmental protection. It is taken to
mean that those causing pollution by or from their activities should pay for the
administration of the pollution control system to prevent such damage and for the
consequences of the pollution for which they are responsible. Examples of such
payments are charges for licences, compensation for environmental harm and
possibly associated clean-up costs.
Precautionary principle
This is the second central principle. It is taken to mean that, though there may be
no conclusive evidence as to the effect of the particular activity or substance,
then the environment should be of prime concern and the activity or release of
the substance should not take place if there are good grounds for thinking it may
be harmful. It is not necessary, therefore, to wait for conclusive proof before
prevention takes place: rather, the environment should be given the benefit of the
doubt.
This principle is linked to the concept of prevention is better than cure and,
therefore, steps should be taken to prevent or minimise the harmful effects before
a polluting process begins. The systems for land planning and licensing in
relation to all kinds of industrial activity are based on this concept imposing
pollution controls and other requirements before allowing organisations to carry
out the activity.
(b) Alternative Approaches to Enforcement
Apart from the imposition of legislative controls and regulations to protect the
environment, with their attendant costs and problems of enforcement, there are also a
variety of other approaches which have been used or are being proposed. These are
of particular interest in respect of the general movement to deregulate controls (or, as it
is sometimes known, 'regulatory reinvention'). This may be seen as a questioning of
how far the traditional, legislative approach can enforce the regulation of organisational
activities in general, not just in relation to environmental protection.
Such approaches may be characterised as either preventative, continuing/ongoing, or
action after the event. They include the following.

Voluntary regulation, often involving agreements between the statutory
regulators, organisations, and individuals.
Market systems based on self-regulation within industries and little interference
from the state.
Economic instruments, especially taxation. Examples include the landfill tax and
petrol taxation, the proposed new climate change energy tax and the possibility of
road pricing.
Financial encouragement through the provision of grants and fiscal incentives or
tax reductions, such as lower taxation on 'cleaner' cars and grants to develop
cleaner or more energy-efficient production plant and techniques.
The use of persuasion, encouragement and the force of public opinion to
pressurise companies to adopt environmentally-conscious policies and practices.
The increasing interest of the banks and insurance companies in environmental
questions, especially in relation to any possible investment risk or liability arising

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from their clients' actions. Thus, loans or investments may only be made if the
bank is happy that the client is sufficiently alert to, and can prevent or limit,
environmental problems which may cause a fall in share prices or affect loan
repayments. Equally, the insurance companies are now taking a much closer
interest in what their clients are doing as the basis of assessing the risk of loss
(many companies have found their cover limited or withdrawn if they are carrying
out some form of potentially polluting activity without adequate safeguards, thus
making them vulnerable to huge losses if things do go wrong).
The provision of more environmental information as a means of increasing public
awareness of what companies are doing. This is seen by the UK government
and the EU as a crucial control and a method of making business more
accountable. It also enables the citizen or others affected to be more able to
access evidence of pollution, or of potentially polluting activities, in order to bring
action in civil or criminal law themselves.
Human Rights Legislation
The European Convention on Human Rights and Fundamental Freedoms (ECHR) was
established in the 1950s to try and ensure that the abuse of civil and human rights which had
occurred in Europe during the First and Second World Wars would never happen again. It
was created by the Council of Europe and involved the establishment of a Court of Human
Rights and a monitoring and enforcement body called the Commission of Human Rights,
although this has now been abolished and incorporated into the work of the Court. The idea
was that citizens and other states may complain to the Court if a citizen's state breached any
of the basic rights contained in the Convention.
The kinds of rights which are to be found in the ECHR include:

the right to life;
freedom of speech;
freedom of association;
the right to a fair and impartial trial; and
the right not to be tortured.
The Human Rights Act has been introduced into UK law and the anticipated potential impact
of this legislation has not been as forecasted. This is mainly because most of the areas
within this HRA are already part of other legislative measures within the UK before its
introduction. All government departments, including local authorities have to comply with the
HRA and set standards within it to ensure its implementation.
C. RESPONSIBILITIES TO STAFF
The responsibilities of an organisation to its employees are both legal and moral. There are
laws and regulations governing the employment of people in organisations, but good
management goes beyond these and recognises that the provision of employment and good
working conditions is a moral obligation in a civilised society.
We have seen the way in which legislation has been developed to regulate employer-
employee relations and provide employees with certain rights. Here we shall briefly consider
two aspects of the way in which organisations discharge their 'moral' responsibility to respect
the rights of employees as contributors to the organisation and as citizens.
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Structuring Employer/Employee Relations
We can represent the degree of employer or employee influence on the decision-making
processes of organisations as a continuum, ranging from authoritarian managerial control at
one extreme to worker control at the other.
Figure 8.1: Continuum of management/worker control
Degree of managerial control
Managerial
prerogative
Consultation Collective
bargaining
Worker
directors
Employee
control
The five points along the continuum represent possible concepts of the employee-employer
relationship which may be applicable at various times and in various circumstances. We
shall briefly review each of these, with particular reference to the most equal relationship, that
of collective bargaining.
(a) Managerial Prerogative
This is commonly referred to as the 'right to manage'. It relates to those areas of
corporate and workplace decision-making in which management considers itself to
have an exclusive right to make unilateral decisions. These include such matters the
hiring and firing of employees, promotion, discipline, staffing levels, production control,
overtime and other job-related issues.
The right to manage is seldom absolute. Trade unions will seek to constrain the ability
of management to exercise unilateral control, and even where unions are ineffective,
informal customs and practices may restrict managerial decision-making.
Nevertheless, there still remains an assumption that managers do have the right to
assert their prerogative to make the final decision, even after consultation or collective
bargaining have run their course.
It may be more appropriate to refer to the 'power' rather than the 'right' to manage,
since in practice, management's ability to exercise control depends more on their
relative power in relation to employees, rather than on any legal foundation.
(b) Consultation
This is often, referred to as 'joint consultation', particularly when the process is
formalised in the organisation. Consultation may be defined as a method of involving
employees in discussion and consideration of relevant matters which affect or concern
them, thereby allowing employees to influence the proposals before the final
management decision is taken. It is, therefore, a two-way communication process in
which management consults employees and/or their representatives about matters of
common interest. Its aims are:

to give employees a voice in decisions which affect them;
to make use of their ideas and experience in the efficient running of the
organisation; and
to try to eliminate unnecessary conflict by providing management and employees
with the opportunity to understand each other's views and objectives.
The essence of joint consultation is that while management 'consults' employees, it
reserves to itself the right to make the final decision. This is in contrast to negotiation
(as in collective bargaining) where the parties may also explain, discuss and comment,
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but will eventually reach agreement in the form of a joint decision. So at the end of the
day, consultation is also about retaining managerial prerogatives.
(c) Collective Bargaining
Collective bargaining is a form of joint decision-making most often seen in the arena of
industrial relations, but also increasingly common within organisations which have
adopted participative decision-making structures.
The essence of this approach is the acknowledgement that decisions which impact on
staff need to be made with their agreement. There will also be two views of the
decision that of management and that of staff, each representing their own interests
and these should be considered together in coming to a final determination of the
issue. Agreements will reached by discussion and negotiation, with the final decision
being based on majority voting.
(d) Worker Directors
Worker directors are employee representatives on the board of directors. These are
common in many countries, although less so in Britain, although there were (relatively
unsuccessful) experiments in the some nationalised industries, such as the former Post
Office and British Steel. They represent an attempt to draw in the interests of
employees to the strategic decision-making process at corporate level.
(e) Employee Control
This refers to the extent to which employees and/or their unions have direct power and,
therefore, control over the immediate environment in which they work.
There are often circumstances, commonly the result of 'custom and practice', where
this can be seen. For example, employees/unions can control levels of output, staffing
numbers, distribution of overtime, etc. and many unions (and professional bodies)
control entry to occupations at different levels and the definitions of occupational
boundaries.
Most methods of employee control are usually referred to as 'restrictive practices'.
From the workers' point of view, however, they can be seen as rational and legitimate
attempts to protect earnings and jobs.
Promotion of Fair and Equitable Treatment
Most organisations have responded to the requirements of legislation and the general
interests of employees by adopting policies about the fair and equitable treatment of staff.
These have also been translated into procedures which regulate the behaviour of staff both
from the perspective of relationships and interactions between managers and staff and
between and among individuals and groups in the workplace.
The role of policies and procedures in this area is to provide orderly, consistent and known
methods for making decisions which affect staff, for regulating working relationships, for
considering problems arising from such relations and for resolving differences. Policies
provide codes of practice which act as guidelines for the exercise of decision-making powers,
whereas procedures provide formal steps through which these policies may be implemented.
Procedures also ensure that matters which may at some point come before an external party
for adjudication or consideration, are dealt with and may be seen to be dealt with, through
appropriate documentation in a fair and objective way, and that all appropriate steps are
being taken to resolve the conflict.
Examples of areas in which such policies and procedures are developed and applied include
the following.
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Equal opportunities: the regulation of recruitment and selection processes and other
management decision-making areas to ensure that there is no discrimination between
employees on grounds of gender, race, disability, sexual orientation, religion and age.
Discipline: the regulation of the application of sanctions against employees for various
forms of misconduct to ensure that any punishment is appropriate to the offence and
that the employee concerned has the right of a hearing and appeal.
Grievances: the establishment of formal procedures to allow employees to voice
grievances about the way they feel they have been treated by managers or other staff,
and to have those grievances heard by management.
Harassment: the establishment of codes of conduct designed to prevent such actions
as sexual harassment, racism and bullying, often defining them as disciplinary
offences.

In addition to establishing policies and procedures, certain aspects of equal opportunities
require the organisation to take positive steps to enable the outcomes to be achieved. These
may be in respect of providing different foods on menus to cater for the needs of certain
religious groups, allowing for prayer breaks and providing rooms for that purpose, the
provision of non-standard means of communication to cater for the needs of hearing and
visually impaired people and the adaptation of the physical workplace so that physically
disabled people can perform effectively.
D. CORPORATE SOCIAL RESPONSIBILITY
We considered the interests of society earlier in the Unit, and here we examine the ways in
which an organisation may respond to those interests.
The term corporate social responsibility refers to the moral obligations placed on
organisations to act in ways which protect and improve the interests of the communities with
which they interact. This may be in respect of local, regional, national or international
communities, and relates both to social institutions and culture, and the physical
environment.
The essence of social responsibility is summed up in this quotation from the Watkinson
Report (1973):
'A company should behave like a good citizen in business. The law does not
(and cannot) contain or prescribe the whole duty of a citizen. A good citizen
takes account of the interests of others besides himself and tries to exercise an
informal and imaginative ethical judgment in deciding what he should or should
not do. This, it is suggested, is how companies should seek to behave.'
Although the above statement seems quite reasonable, there is considerable debate about
the extent to which organisations should respond and take on, to some extent, these kinds of
responsibility.
Perspectives on Corporate Social Responsibility
The debate about corporate social responsibility may be considered in terms of two extreme
positions: the arguments for and against. We shall consider the latter first, since this is
based on the prime objective of the organisation and the case for accepting social
responsibilities needs to refute that argument.
(a) The Case Against Accepting Responsibility
This takes as its basic premise that organisations exist to serve the interests of their
owners. In the case of private-sector companies, their purpose is to provide a return
on investment, which is realised through making profits and ensuring growth. The
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owners may be prepared to trade off some element of their expected return to meet the
interests of other stakeholder groups where that will further the ability of the
organisation to continue making profits and growing. However, there can be no further
obligations beyond that, save to act within the law. Any further actions which are
designed to serve the interests of other stakeholder groups, including those of society,
will use resources which could be devoted to developing profitability and growth.
The argument is not, though, based purely on self-interest. Organisations will always
acknowledge their legal responsibilities and act within the law. The law is enacted by
democratically elected governments who are open to representations from many
different interests in the process of determining policy on legislation. Thus, it can be
argued, the concerns of society are encompassed in the laws of that society. In acting
within the law, therefore, the organisation is fulfilling its societal obligations by
complying with those laws.
Further, exactly what is required of organisations in terms of their acting as 'good
citizens' is unclear. The management and shareholders are not equipped to make
such decisions themselves, and in the absence of any agreed alternative, the law can
be taken to represent what is required.
Finally, there is a strong case for asserting that the concept of 'morality' on which social
responsibility is based refers to the response of the individual to the conditions of
society and derives from such further concepts as conscience. Organisations, as
entities, cannot be said to have a collective conscience or morality. Rather the
obligation to acknowledge social responsibility rests with the individual shareholders
and managers of the organisation, who may use the rewards they receive from the
organisation as they see fit in developing the collective interests of society.
(b) The Case for Accepting Responsibility
The basic premise here is that organisations cannot be divorced from the communities
with which they interact. They receive inputs from their environment and expect to earn
profits from sales of their outputs into the community. They must, therefore, also
acknowledge the legitimate claims of those communities and the environment: claims
that they should not be damaged, and should indeed be helped help in their
development.
The interests of society cannot be expected to be completely covered by the law. At
the very least, there is a delay between common acceptance of a need for obligations
to be created and the enactment of those obligations in legislation. On the wider level,
there are many areas of concern in which it is not felt appropriate for governments to
intervene or for which they lack the necessary resources. In these areas, it is case of
voluntary action on the part of individuals or groups, and organisations have an
obligation to at least come to a view on whether they should support particular causes.
Government policy in certain areas establishes expectations of what organisations
should do, but stops short of compelling them to do it. Using the arguments previously
advanced, this is clearly an expression of the collective agreement of society and
should, therefore, be complied with.
The amount of resources allocated to fulfilling social responsibilities is unlikely to be so
great as to affect the prospects of the organisation and certainly not to significantly
affect the level of return which shareholders may receive.
Finally, meeting social obligations may be seen as a form of enlightened self-interest.
Under this argument, accepting social responsibilities may contribute to the
development of sales by enhancing the reputation of the organisation. Being seen as a
good citizen may make good business sense in a society where consumers are more
willing to support such organisations then others which do not have that reputation. It
may also enable the organisation to influence the conditions within which it operates:
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for example through participation in local or national decision-making bodies which
shape policy on, say, education and training. This, perhaps, is the most persuasive
argument in rebutting the opposite position.
Strategies for Implementing Social Responsibility
We can say that most organisations have accepted that they should, where resources permit,
acknowledge at least some degree of responsibility above and beyond the law in respect of
the concerns of society. Companies are, therefore, increasingly developing strategies to put
this into effect, and in parallel, also developing strategies to enhance their reputation and
using their socially responsible actions to build their image. Some of the main strategies for
implementing social responsibility are set out below.
(a) Environmentally-Conscious 'Green' Working Practices and Outputs
Putting concern about the environment into practice means adopting policy and
procedures that conserve and replenish resources, through such actions as:

Ethical purchasing policies: for example, only using furniture made from farmed
timber and not tropical hardwood.
Recycling waste products and using recycled products (especially paper and
cardboard).
Reducing the amount of physical resources used where they are not directly
connected to the production process, or necessary within that (e.g. avoiding
excessive packaging).
Energy conservation policies: for example, controlling lighting and heating levels,
only using particular fuels for motor vehicles and only providing expenses for the
use of public transport.

(b) Social Accounting and Social Audit
In order to assess how well an organisation is meeting its obligations to the society in
which it operates, it has been suggested that it should compile a social balance sheet.
This interesting idea reverses many of the points of classical accounting: for example,
in terms of profit and loss, taxes paid by the organisation are treated as revenue
(because they accrue to society) whereas fees and payments to the organisation are
treated as costs (because they are paid by society). Society is seen as evaluating
what it puts into the company and what it gets out of it.
Social audit draws attention to the fact that a firm's gain can sometimes be a loss to
society. For example, if a firm makes unwanted workers redundant, this may increase
productivity and profits for the firm, but it can become a cost to society as the state has
to pay unemployment benefits.
Critics of social accounting argue that many features of organisational and social
activities cannot be measured in precise monetary terms; or that some calculations are
so complex that it is difficult to reduce them to items in a social audit. Even supporters
of social accounting admit that techniques are not yet sufficiently developed to give
accurate reflections of the impact of an organisation's activities on the society in which
it operates.
However, this does not mean that efforts to assess the social performance of an
organisation should be abandoned. Organisations should present social reports which
give information on both the positive and negative effects of their activities on society at
large. All socially relevant areas should be included, e.g. contributions to education,
research, effects on the environment, employment policies, taxation, etc. Social
accounting could become a regular feature of organisation policy and reporting.
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Finally, remember that it is the firm itself which prepares its social balance sheet; it is
not always an impartial statement of affairs.
(c) Participation in Governmental Bodies
Many of the boards appointed to run public bodies at all levels in society from the
NHS at national level to the local hospital and school include provision for the
nomination of individuals from organisations with similar constituencies (i.e. operating
at the national level or within a particular local area). It is very common for senior
managers to serve on these bodies, bringing their experience and expertise into the
determination of policy and the operational performance of the public services.
(d) Support for Community Projects
Again we use the term community to refer to the constituency served by the
organisation: local, regional, national, international. Organisations support a wide
variety of non-profit-making projects, such as theatre groups, concerts, sporting events,
etc., which exist purely for information, education and/or entertainment purposes and
have little or no connection with their operational purposes. They may do this through
direct and ongoing sponsorship of events and groups or individuals, providing one-off
grants and providing their own services for nothing.
(e) Ethical Outsourcing
This refers to the way in which operations are outsourced and the commitments made,
and action taken, about the treatment of workers in outsourced operations.
Outsourcing is the process by which parts of the production process are performed, on
behalf of the organisation, by another organisation. Whilst this has considerable
advantages in terms of flexibility and cost savings for organisations, and may offer
advantages too for specialist service providers, it has led to exploitation of workers in
many situations. The clothing industry is rife with examples of this, where expensive
garments for big retailers are produced in 'sweat shops' in rundown parts of inner-cities
by badly paid and poorly treated women, often from minority ethnic groups. The
situation is mirrored by multinational companies which locate plants in countries where
advantage may be taken of cheap labour rates and lax conditions of employment which
would be unacceptable in their home countries.
E. MANAGEMENT ETHICS
Principles of Ethical Behaviour
What standards of behaviour should managers observe? Although there may be a high
degree of consensus in society as to what constitutes ethical behaviour (honesty, fairness,
financial probity, etc.) there are sometimes questions about how to apply these in practice,
particularly where ethical obligations may conflict with each other.
There are many ways of expressing what we understand by ethical behaviour. They are all
concerned with highlighting societal expectations about how organisations and individual
managers should act in their dealings with others.
We could take the central elements of this to be twofold:
(a) Always to Act Within the Law
The obligation to act legally may seem so obvious as to hardly be an issue of ethics at
all. There are, however, many grey areas. Is minimal compliance with the letter of the
law enough, e.g. in safety or equalities issues, or does an ethical approach imply more
proactive commitment? Is it unethical to pay bribes as the only means of securing an
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export order which will be in the interests of the firm's shareholders and workers? This
is now illegal under UK law, but is believed to be still practised.
Is it ethical to adopt offshore tax avoidance schemes which are not illegal, but which
can result in firms paying very low UK taxes and thus failing to meet the social
responsibilities discussed in the previous section? On the other hand, given the legal
requirement for companies to be run for the benefit of shareholders, would it be proper
for the mangers not to take advantages of opportunities for tax avoidance, which is in
the interests of shareholders?
There may be different interpretations of the law, and what is illegal may only be
determined in the courts after the event. The question of legality is often related to the
concept of what may be reasonably foreseeable as the consequences of actions.
Acting close to the margins of the law and anticipating that you will not break it, in spite
of any reasonably foreseeable risks, will be driven by the prospect of rewards accruing
usually in relation to securing contracts or achieving efficiency savings. These are,
therefore, conscious decisions by the organisation's management and involve difficult
assessments of their responsibilities, to shareholders and to others on whom the
decision may impact. The extent of the potential impacts may be key factor in the
decision.
(b) 'Do As You Would Be Done By'
The principle that you should treat others with respect, as you would expect to be
treated yourself, gives rise to a number of expectations of behaviour in respect of the
interactions between the managements of different organisations, between individual
managers and the organisation and between individual managers and their colleagues
and subordinates.
We can see a number of ways in which this general principle may condition behaviour
when related to the pursuit of one's own interests.
Not to deprive others of the true facts about a situation, to which they are entitled,
in order to pursue one's own interests or those of the organisation. This may be
to cover up misdeeds or mistakes, or the misrepresentation of the financial
position to shareholders (or to the government, for taxation reasons).
Not to use one's power to exploit others in the pursuit of one's own interests or
those of the organisation, or to use them for one's own gain. This includes
misrepresenting the views of others, such as in claiming the responsibility for
others' work or making misleading claims in order to obtain sales. It also applies
to cases of sexual harassment by managers of subordinates.

(c) Not to Pursue One's Own Interests at the Organisation's Activities
Managers must not take advantage of their position in an organisation, and the power
and information which may come from that, to further their own interests. This clearly
includes taking bribes and may extend to the acceptance of any personal favours
associated with, for example, dealings with particular suppliers. It also includes using
information which is confidential to the organisation to make personal gains. The most
obvious example of this would be speculation in shares (insider dealing), but the
unauthorised disclosure of information (for financial gain or otherwise) may also be
covered by this (we shall discuss 'whistle-blowing' below). Yet other examples may be
found in respect of the use of inside information to set up a rival business.
This obligation may also extend beyond the period of employment. Contracts of
employment may forbid key personnel not to work for rival companies for a period after
resigning, in order to protect the inside information which they possess. The fairness of
such contracts can be challenged in the courts. Considerable disquiet has been
expressed, however, about senior managers in the public services (and even
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politicians) forming close links with particular firms working in their service area and
then leaving to work for those firms.
There are also concerns that senior managers and directors may act in their own
interests rather than those of shareholders. Not only has the pay of top management
risen far faster than pay levels generally, but there are also allegations that the
prospect of large bonus payments tempts managers to take risks which bring them
immediate rewards but which may be against the organisation's longer-term interests.
As long as returns on investment are satisfactory, however, shareholders may take a
too relaxed towards managers' behaviour.
This brief review of some of the principles and issues involved in ethical behaviour is just one
approach to understanding the subject. There are many other interpretations, with the
emphasis on different aspects of behaviour and the pursuit of interests. You should be aware
of the range of issues which may arise and pose ethical dilemmas.
Influences on Ethical Behaviour
The forces driving towards unethical behaviour are clearly the pursuit of the organisation's
goals in particular, profitability and the individual's goals, which may be many and varied.
Three particular factors can be identified that increase the temptation to act unethically.
The level of competition: the more intense the competition, the greater the
pressure to act unethically in seeking a competitive advantage. This may also
increase the pressure to achieve high performance, which may cause managers
to 'take short cuts' to achieve financial targets or simply to misrepresent their
achievements.
The organisational culture: the more liberal the culture, and the more autonomy
of decision-making and action it allows, the greater the opportunity for acting in
one's own interests. Cultures which focus on outcomes rather than processes
can imply that the end justify the means. The purpose of the rule-bound
bureaucratic structures typically found in public service is to prevent officials from
having discretion to favour particular service users and so minimise he possibility
of corruption. In such autocratic and bureaucratic cultures, however, there may
be a tendency to cover up mistakes and obscure the truth of situations.
The degree of dependency between organisations and/or individuals: where one
party relies on the other for supplies or approvals (as in the case of regulatory
bodies), there is the potential for bribes and payoffs.

Codes of Conduct and Practice
To provide guidance on appropriate standards of conduct, where these are not prescribed by
law, many organisations have adopted codes of conduct or practice. These are quite
common in specific functional areas where they are often produced by professional bodies
representing the interests of members: for example, the Chartered Institute of Marketing
publishes guidance on ethical behaviour for marketing managers. They may also be
produced by trade associations representing the interests of commercial organisations in a
particular industrial sector. The Association of British Travel Agents (ABTA) has a code of
conduct covering the way in which holidays are sold, and protecting consumers in the event
of any malpractice by individual operators.
Whistle-Blowing
Whistle-blowing is a controversial practice which, whilst not entirely new, has become the
subject of much debate since the 1990s.
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Whistle-blowing may be defined as intervention by an employee to bring the wrongs (or
perceived wrongs) of the employer to the attention of the owners of the company, the
government, or the public at large.
Although most people agree on what is right or what is wrong, there are many different
attitudes to whistle-blowing, as to how far employees should speak out and be protected
from the consequences of so doing. The issue is clouded by the conflicting obligations
imposed on most workers by a duty of confidentiality imposed by the contract of employment
(as well as common law) and the wider ethical responsibility to the company and the public at
large.
So, should an employee keep quiet about a situation which he or she believes to be wrong,
or should his or her conscience take over and 'blow the whistle'? Let's take a look at the
case for each.
(a) The Case for Whistle-blowing:

(b)
Employees have a moral duty not just to their work and their immediate boss, but
to the company and society as a whole.
If a wrong is seen by a person, there may be other things happening which are
unacceptable: it might be the 'tip of the iceberg'.
If unacceptable behaviour is allowed to persist without redress, others will believe
they can get away with the same thing.
Many whistle-blowers act in the belief that the wrongdoer's colleagues will be
pleased to hear the information and will act on it.
Some consider that conscience is more important than job security: they will blow
the whistle irrespective of personal consequences.
Sometimes whistle-blowing is required by law, e.g. where health and safety at
work rules are being breached.
Some believe that the employee should concentrate on doing his job and that the
actions of others are nothing to do with him.
The situation may be misinterpreted: what may be seen as a breach of company
rules or policy may turn out to be perfectly legitimate.
The employee can over-rate the importance of the perceived misdemeanours of
others and cast himself in a bad light or even lose his job.
Some are reluctant to 'blow the whistle' due to a 'snitching' mentality: it is
considered bad to tell tales on others.
Sometimes the employee can be on dangerous legal ground by 'blowing the
whistle'. If information is given to someone outside the organisation, this can be
a breach of contract or even render the whistle-blower liable to criminal action. It
is common practice in many organisations for the terms and conditions of
employment to bind the employee to secrecy even after he leaves.
The Case against Whistle-Blowing:

Whether to 'blow the whistle' or not is usually a matter for individual judgment or
conscience. As all employees are different, they will react in different ways as well as
interpreting situations differently.
Sometimes the whistle-blowing can be done through a third party. For example, it is
sometimes found that a trade union representative can handle a difficult situation
without exposing the individual to recriminations. If anything, however, unions are
becoming more aware of the need to act as moral policemen. In late 1997, one such
organisation stated that it was going to compile a 'rogues' gallery' of employers and
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publicise their actions. Aimed primarily at identifying bad employment practices, this
initiative would appear to be an open door through which potential whistle-blowers can
move if they believe a case has to be answered.
(c) Public Interest Disclosure Act 1998
The Public Interest Disclosure Act 1998 is designed to give protection to individuals
who disclose information which is perceived to be in the public interest. McCartney
stated that the Act 'is intended to end the 'cover-up culture' that prevails in some
organisations, where workers fear victimisation if they tell their bosses of a major
problem.'
The Act lists a number of protected disclosures which qualify the individual making the
disclosure for protection under the Act. The disclosures can be summarised as:

That a criminal act has been, is being, or is likely to be committed.
That a person has failed, is failing or is likely to fail to comply with any legal
obligation.
That a miscarriage of justice has occurred, is occurring, or is likely to occur.
That the health and safety of any individual has been, is being, or is likely to be
endangered.
That the environment has been, is being, or is likely to be damaged.
That information tending to show that any matter falling within the items above
has been, is being, or is likely to be deliberately concealed.
Under the Act an individual who makes a protected disclosure has a right not to suffer
detriment by the employer's resulting action. An employee dismissed as a result of
making a protected disclosure then the employee can take a case to an employment
tribunal.
It is not only employees that the Act is designed to protect. Companies in the past
have paid the price of ignoring employees who tried to point out wrongdoings. The Act
has a deeper aim in encouraging businesses to behave ethically. In several previous
public enquiries into rail and maritime disasters causing loss of life it was shown that
staff had tried to warn of dangers but had not felt able to raise the matter internally.
Had they had the protection of the Act they might well have felt able to discuss the
safety matters with their organisations, and hence the disasters might not have
happened.
The Role of Professionals in the Organisation
Many organisations have a long and noble tradition of encouraging the development of
professional knowledge, skills and abilities in their workforce, and most functional areas
such as finance, personnel, engineering, etc. can be characterised by the existence of well-
respected professional bodies with high standards of training and qualification. Indeed, such
bodies can be highly influential in the development of government policy.
Professionalism can be seen as an important element in the consideration of management
ethics, since most professional bodies are rigorous about adherence to what they define as
acceptable standards of behaviour for a practitioner in that profession. Indeed, some
professions notably the legal and medical professions have the power to remove an
individual's licence to practice in extreme cases of malpractice. Thus, professional ethics
and standards may assume a dominant role in conditioning the behaviour of members of that
profession.
It can be persuasively argued that the process of training, involving absorbing the dominant
values of the profession, the closeness of professional contacts, and the centrality of the
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profession to all aspects of the function combine to create a situation where managers in
these areas see their profession as their principal point of reference, rather than the
management of the organisation. This may be reinforced by the importance of the profession
to career development.
The effect of this is that professionals may see loyalty to their profession as more important
than loyalty to the goals of the organisation for whom they work. This can be observed in the
frustration of management judgements in the name of professional integrity, the attempts of
professionals to dominate the process of strategic planning (or at least limit it to a
consideration of issues and solutions defined in acceptable terms) and the conflict between
departments pursuing their own professional goals with little concern for their effects on other
parts or goals of the organisation (a problem which corporate management is designed to
overcome).
Whilst the role and expertise of the professional must be acknowledged, there are many
areas of professional judgement which can be fruitfully opened up to scrutiny: for example,
accounting and financial management in terms of its serving the interests of the organisation
as against those of the accountant. Challenging the dominance of the professions, however,
is not easy, since the necessary information and its interpretation requires the specialist skills
of the professional.
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