Chapter 3 Management PDF

What is an organization’s purpose or reason for existence? Is it simply to make money or is it to satisfy a need in society that is not being adequately met by others? What will be the indicators of success? How will the organization seek to fulfill its purpose? Answering these questions is a journe...

What is an organization’s purpose or reason for existence? Is it simply to make money or is it to satisfy a need in society that is not being adequately met by others? What will be the indicators of success? How will the organization seek to fulfill its purpose? Answering these questions is a journey to identify the “Right Work” to be done by an organization. That journey starts by the organization developing a Vision Statement that states its purpose for existence. Once the Vision Statement is developed the organization can craft a Mission Statement that describes the products and services it will provide in an effort to pursue the Vision and why constituents (customers, employees, sup-pliers, etc.) should be interested in supporting the organization. With clearly articu-lated Vision and Mission statements the organization can then set long term Goals that define success for the organization. With Goals identified the organization then needs to develop the Strategies and Plans it will use to achieve those Goals. Collec-tively – Vision, Mission, Goals, Strategies, and Plans comprise the elements required for the organization to define the “Right Work” to be done. It’s important to understand that this journey is not always sequential in a series of successive steps but often iterative such that as each step is developed, an organization can circle back to a previous step and modify or completely change a prior element. This will often happen as the organization grows and learns from its successes (or failures) or as it encounters resistance from competitors or disrup-tive events in its environment or industry. Thus, identifying the “Right Work” is a continuous journey for the organization. The diagram below depicts the five elements organizations often develop to iden-tify the “Right Work” to be done. While not every organization may use this exact same terminology or approach, conceptually each of these elements are important for identifying the “Right Work”. In this chapter we will describe and discuss each of these five elements for iden-tifying the “Right Work”. Later chapters will describe how this “Right Work” gets “Done Well”! he Vision describes an organization’s purpose for existence. Boston Consulting Group describes it this way: “At its core, a company’s purpose is why it exists and what need it fulfills in society. When defined narrowly, purpose is embodied only in the products a company sells to the customers it serves. That is Purpose 1.0. Purpose 2.0 takes an expansive view of a company’s assets and resources, how it uses them to address broader societal needs...” The focus is not on making a profit or satisfying shareholders expectations, it is about providing services that serve an important need in society. Vision State-ments should be aspirational describing a purpose that is understandable, desir-able, and compelling The Mission describes the products and services an organization will provide, identi-fies the constituents it intends to serve, and provides the reasons why those constitu-ents should support the organization. The Mission is more descriptive than the Vision and elaborates on how the orga-nization will pursue its Vision. NOTE: There is a lack of consensus on what constitutes a good Vision or Mis-sion statement. This is evident when view-ing the variety of formats and approaches used by organizations. There does seem to be agreement that the main purpose of these statements is to communicate to the constituents of the organization the general purpose of the organization, who it intends to serve, and how it intends to do that. The value of preparing these documents is to provide clarity about these key descriptors of an organization. If the Vision and Mission are too broad, then the organization may lack focus. If the Vision and Mission are too narrow, then the organization may be unduly constrained in pursuing opportunities. If the Vision and Mission are ambiguous and unclear, the organization may struggle to understand what it should be doing, why it should be doing those things, how they should be done, and who they are supposed to be serving. Understanding these shortcomings of poorly prepared Vision and Mission statements helps to better understand what a well-prepared Vision and Mission statement should provide for the organization What does success look like for an organization? Goals identify the outcomes that an organization is trying to achieve. Achievement of the goals should be a reliable indicator that the organiza-tion is successful. “for-profit” organizations typi-cally have two primary types of goals: financial and Operational. Financial Goals typically consist of some of the following: Return on Capital Employed (ROCE) - level of profit earned relative to the capital invested to generate that profit. Sales or revenue earned Profit (percent or amount) net cash flow amount Days Sales Outstanding (DSO) or Days receivables outstanding (accounts receivable balance divided by the daily average sales) Days of inventory on hand (Average balance of inventory divided by the average daily cost of sales) or inventory turnover (Cost of sales divided by the average inventory balance) nOTE: Some of these accounting/financial terms may not be familiar to you. They are examples of the types of financial goals that organizations would typically have. These terms will be covered in more detail in an introductory accounting or finance course. Operational Goals typically consist of some of the following: Market share vs competitors number of returning customers for a given time period number of new customers for a given time period Service levels (delivering the correct product or service within a given time) Customer satisfaction levels (based on survey/feedback data) Production levels (# of units produced to standard within a given time period) Error or Defect levels (number or percent of non-conforming units or errors) here are more goals that can be set by organizations to describe success, but this list provides examples of the typical types of goals many organizations use. not-for-profit organizations may use different goals, for example, they may have goals for the number of constituents served in a given period of time, or for annual fundraising targets that help to enable their activities. Once goals have been established it is important for organizations to track their progress against their goals and to periodically update the goals as necessary to bet-ter reflect realistic targets for success. Chapter 10, Performance Management, will further discuss how organizations routinely measure and improve performance against goals. How will the organization achieve its goals? In a constantly changing envi-ronment and facing capable competi-tors, achieving goals can be a difficult challenge! Strategy is the actions managers take to achieve the organization’s goals. for a business, Strategy is how an organization intends to outperform its rivals. Core Strategy options are: LG 3-3 Differentiation Strategy — distinguishing products/services from competitors in a way that makes offerings more attractive to customers than rival products/services Low-Cost Strategy — developing the least expensive ways, vs competitors, to produce and deliver products/services. This strategy allows the business to earn a higher profit margin than competitors or to price its products/services at a lower price than competitors in order to gain a larger market share Combination Strategy — selects a few differentiation features for its product/ services but is able to provide these with a lower cost structure than rivals while enjoying the benefits described above for the Low-Cost strategy Focus Strategy — targets a market segment that the business is able to serve more effectively than rivals who focus on serving the needs of a broader market. focus strategies typically target a geographic (location), demographic (age, income level, occupation, etc.), or specialized product/service segment of the market (for example, big and tall clothing). Which strategy a business should choose depends on many factors including an analysis of the external environment as well as analysis of the internal strengths and weaknesses of the business as compared to competitors and world class standards. The goal is to use the organization’s resources and capabilities to develop/acquire a distinctive competency that provides a competitive advantage that will be difficult for competitors to copy and compete against. Distinctive Competencies allow the organization to effectively differentiate its products from competitors in order to create superior value for customers and/or are the ability of the organization to achieve cost leadership in the industry (to have the lowest cost structure). Thus, a strategy is selected that allows an organization to develop, protect/ enhance, and fully leverage distinctive competencies in order to create a competi-tive advantage, leading to superior performance and achievement of the organiza-tion’s goals. The following illustration depicts this Strategy Model. LG 3-2 Strategy Development Process: How then does a business develop its strategy? What are the steps it will take to come up with the best strategy? There are five steps in the strategy development and implementation process: Step 1: Develop/Review/Update the Vision, Mission, and Goals of the organization Step 2: Conduct an external analysis of the business environment and the industry in which the business competes Step 3: Conduct an internal analysis of products/services and capabilities vs competitors and world class standards Step 4: Based on the outcomes of steps 1-3, evaluate and select the best strategy for achieving the goals of the organization Step 5: Implement the strategy Let’s briefly describe each of these steps in more detail: Step 1: Develop/Review/Update the Vision, Mission, and Goals of the organization Previously in this chapter (Topics 3.1,3.2, & 3.3) we described each of these elements (Vision, Mission, Goals) that are key for Identifying the “Right Work” to be done by the organization. The process an organization uses to develop these elements can vary, from a CEO developing them unilaterally and handing them down to the organization, to having a committee propose them to the CEO and other senior executives for approval and adoption. Regardless of how they are developed, most organization seek to build understanding, consensus, and support for the Vision, Mission, and Goals among the organization’s key constituents (shareholders, customers, employees, etc.). The reason for performing this Step 1 is that if an organization does not know what it is trying to achieve, then any strategy is as good as another since it is unclear what the strategy is intended to help the organization accomplish. Step 2: Conduct an external analysis of the business environment and industry in which the business competes. There are several tools that organizations can use to assist with an external analysis. These tools include: LG 3-4 Porter’s Five Forces – an analysis tool that looks at how the following factors influence profitability in an industry: ◆ Intensity of Rivalry ◆ Bargaining Power of Buyers ◆ Bargaining Power of Suppliers ◆ Threat of new Entrants ◆ Threat of Substitute products/service The stronger these forces, the more downward pressure there is on indus-try profitability making the industry less attractive for new entrants and for weakly positioned current participants. Industry Life Cycle Analysis – this tool looks at typical stages of the evolution of industries. The stages include: ◆ Embryonic – when a distinctively new product/service begins the formation of a new industry ◆ Growth – when the new product/service begins to be broadly accepted by customers as indicated by accelerating growth of the industry ◆ Shakeout – when industry growth begins to flatten and even start to decline with several industry participants opting to exit or merge/be acquired by their competitors. Mature – when industry growth begins to slow and the number of new entrants becomes fewer ◆ Decline – when growth is negative with only a few participants remaining in the industry Macroenvironmental Analysis – this tool evaluates a variety of factors that broadly affect all industries. Each factor is assessed to determine whether it is an opportunity, threat, both, or neither. The factors commonly evaluated include: ◆ Macroeconomic Factors – including overall economic growth, inflation, foreign currency exchange rates, etc. ◆ Global Trends – the extent to which global markets are attractive for potential expansion or for sourcing factors of production, resources, technology, or know-how. See Chapter 6, Global Management, for a more comprehensive discussion of this factor. ◆ Technology – evaluation of the impact of the evolution of technology on the industry and its participants ◆ Demographics – evaluation of how trends/changes in demographics (for example the aging population, increased number of college graduates, consolidation of the population in urban vs suburban or rural areas) are likely to impact the industry ◆ Social Values – evaluation of how belief systems (religious beliefs, general views of right or wrong, general concerns about other social issues such as climate change, etc.) currently affect the industry and how trends in these beliefs may impact the industry in the future. ◆ Political/Legal Factors – evaluation of how governments impact the industry through regulations or other factors (e.g., political instability or anti-business or pro-business views that affect policies such as tax reform). Also, evaluation of how the legal system protects the rights (e.g., contractual, intellectual property, physical property, etc.) of industry participants via laws and law enforcement. These three tools (Porter’s five forces, Life Cycle, and Macroenvironmental Analysis) assist organizations in conducting an analysis of the external envi-ronment. The net result is the identification and prioritization of the oppor-tunities and threats that could impact the industry and the organization. Step 3: Conduct an internal analysis of products/services and capabilities vs com-petitors and world class standards Internal analysis evaluates the following attributes of the organization’s products/services and the following capabilities of the organization in relation to its competitors and world class standards: LG 3-5 Product/Service Quality – How would the organization’s customers rate the relative performance and value of the organization’s products/ services as compared to its major competitors? How well does the organizations products/services perform against world class standards? Efficiency – How efficient is the organization in utilizing its resources compared to competition and world-class standards? How does the organization’s overall cost structure compare to competitors? Innovation – How successful is the organization in developing new products and improved processes as compared to competition and world class standards? Customer Responsiveness – How well does the organization understand customer requirements and how well does it fulfill those requirements compared to competition and world class standards? Distinctive Competencies – What are the Distinctive Competencies of the organization that help it to have a competitive advantage? What are the Distinctive Competencies of key competitors? How vulnerable are the organization’s Distinctive Competencies to competitive imitation or obsolescence? How well can the organization neutralize the competitor’s Distinctive Competencies? Step 4: Based on the outcomes of steps 1-3, evaluate and select the best strategy for achieving the goals of the organization The first part of choosing strategy is to select which of the four Core Strategy options makes the most sense for the organization based on the external and internal analy-sis completed in Steps 2 & 3. Remember, the options we discussed earlier are Dif-ferentiation, Low-Cost leadership, Combination, or Focus. This Strategy choice should build on the Distinctive Competencies and the Core Competencies of the organization. Distinctive Competencies allow the organization to effectively differentiate its products from competitors in order to create superior value for customers and/or are the ability of the organization to achieve cost leadership in the industry (to have the lowest cost structure). Core Competencies are the things that an organization can do well. The difference between Distinctive Competencies and Core Competencies is that a Distinctive Competency is something that the organization does “uniquely” well that results in a competitive advantage whereas Core Competencies are things that the organization does well but other organizations can also do well thus, Core Competencies do not necessarily create a defensible competitive advantage that would be difficult for a competitor to imitate or neutralize. If the organization does not have sufficient Distinctive Competencies and Core Competencies to provide a competitive advantage it should consider investing in the resources, and developing the capabilities, necessary to build such competencies as part of its strategy devel-opment process. If the organization’s Distinctive Competencies are vulnerable to being neutralized by competitors, then the organization should consider how to bet-ter protect those competencies or how to develop new Distinctive Competencies. Other actions an organization can consider in support of its core strategy are to:  Acquire competitors to improve market position and to reduce industry rivalry Acquire other organizations that have Distinctive and/or Core Competencies, resources, and/or capabilities that could be leveraged by the organization form partnerships or joint ventures that are beneficial to the organization forward integrate (become a distributor of its products) or backward integrate (become a supplier of the components of its products) Develop new products/services that leverage existing Competencies Leverage existing Competencies to enter entirely new markets Develop capabilities, and focus improvement efforts, to become more efficient, more innovative, and/or more responsive to customers In some cases, there may be no apparent beneficial actions that can help the orga-nization to outperform its competitors. In this case the organization may need to consider more drastic options such as entering a completely different industry with better opportunities, or consider divesting the business, harvesting the business (generating the most amount of cash possible without increasing the level of invest-ment), liquidating the business (sell off the assets and pay off any creditors leaving the remainder to the investors), or declaring bankruptcy (let the bankruptcy court settle with the organization’s creditors and investors). Step 5: Implement the strategy A question often asked is which is more important: Having a great strategy or imple-menting it effectively? The simple answer is that both are essential! A great strat-egy without effective implementation will not be successful. Likewise, successfully implementing a poorly conceived strategy will have no impact on business results. How do organizations effectively implement their strategies? There are three key elements to effective strategy implementation: LG 3-6 1. Organization Structure 2. Monitoring and Control 3. Culture Let’s examine how each of these elements is important to effective strategy implementation. 1. Organization Structure – Organizational structure includes designing meaningful jobs and developing an optimal organizational model. Jobs design is creating jobs that align with the organization’s strategy, attract and retain the required talent, and effectively deliver the results required to meet the organization’s goals. The organizational model is the grouping of jobs, and the delegation of authority, in a way that supports the strategy and effectively integrates and coordinates the work to be done. 2. Monitoring and Control – Monitoring and control is the creation of a system that periodically reviews progress in implementing strategies, achieving goals, and providing feedback and guidance for remaining on course or for taking corrective action if goals are not being met. This Monitoring and Control system also provides motivation and incentives to employees for delivering the key tasks necessary to execute the strategy successfully and to achieve the goals. 3. Culture – Culture is the set of values, norms, beliefs, and attitudes shared by the members of the organization. for strategy to be effectively implemented the culture must be aligned and supportive of the strategies, and the plans to implement them. Each of these 3 elements, essential for effective strategy implementation, will be discussed more fully later in this textbook when we review how to get work “Done Well”. for now, it is important to know that to implement strategy effectively it is necessary to have effective Organizational Structure, a system for Monitoring and Controlling key activities essential for executing the strategy and achieving the goals, and a Culture that aligns with and supports the organization’s strategy and plans. Once an organization has a Vision, Mis-sion, Goals, and Strategy it is worthwhile to consider the specific steps necessary for implementing the strategy. While we have broadly described Organization Structure, Monitoring and Control, and Culture as key elements for executing strategy, another key element for supporting strategy imple-mentation is the development of plans. Plans outline the specific actions to be taken, the resources required, and the timeline for completion of various initiatives in support of the organization’s strategy for achieving its goals. There are several types of Plans an organization can develop: Strategic plans – Identifies the core strategy and the steps and key initiatives the organization will undertake to pursue that strategy. Business plans – Identifies the key goals for the organization, the steps, the key initiatives, the required resources, and the timeline the organization will undertake to pursue each goal. Marketing plans – Identifies the marketing related goals, key customers and customer segments, products, and services, and steps, key initiatives, required resources, and the timeline the organization will undertake to pursue the marketing goals. Operational plans – Identifies the operational goals and requirements for producing the organizations products and services and the steps, key initiatives, required resources, and timeline the organization will undertake to pursue the operational goals. Functional plans – Identifies the goals for each function in the organization and the steps, key initiatives, required resources, and the timeline that each function in the organization will undertake to pursue its goals. Financial plans – Identifies anticipated financial resource requirements for business units and functions within the organization for a given time period. Research & Development plans – Identifies various initiatives for growing the organization as well as maintaining its competitiveness for current products and services including the steps, key initiatives, required resources, and timeline for each research or development project Technology plans – Identifies key technology resources necessary to support products and services as well as the functional activities of the organization including the steps, key initiatives, required resources, and timeline for developing and maintaining each key technology. Human Resource plans – Identifies the key talent required by the organization to support the various strategies and plans along with identifying recruitment and selection programs; employee training and development programs; motivation, retention, and engagement programs; performance appraisal and review programs; succession planning programs; compensation and benefit programs; and employee relations programs. We could devote an entire chapter, and in some cases an entire book, to describe these plans in more detail and the ways to develop them. The above descriptions provide a general introduction to the various types of plans often used by organi-zations. What is important is that these plans should be aligned with the chosen strategy for the organization and be consistent with achieving the organiza-tion’s goals. Developing these types of plans are important for identifying in more detail the “Right Work” to be done and identifying the steps, initiatives/programs, resources, and timeline for getting it “Done Well!” few organizations approach Identifying the “Right Work” in a sequential, stepwise fashion nor do the strategies and plans they develop get executed exactly as writ-ten. While we just described a series of actions managers should take to identify the “Right Work”, in practice, these actions may not necessarily be done in an exact sequence. More often they are a series of iterative steps. This may seem like two steps forward and one step backwards but in practical terms it is necessary to adapt to changing circumstances. Thus, it is common for plans to be modified during the implementation process for several reasons including: new information, challenges that were encountered, competitor actions, limited resources, competing priorities, and/or unexpected events. As a result, some of the original plans developed by the organization may be modified, partially completed, or abandoned entirely. In other cases, completely new plans may be developed midway through implementation of the old plan. In addition, some key actions taken by the organization may not be based on any plans at all, but rather are simply spontaneous or unscripted actions. In some situations, an organization’s success may have nothing to do with how well it systematically identifies the “Right Work” or how well it gets that work done. Its success may be totally serendipitous based on random actions that turned out to be fortunate for the organization. Its success may be primarily due to the failure of its competitors to identify the “Right Work” or for those competitors to get the “Right Work, Done Well”. Its success may be attributable to the overall success of the industry in which it competes and not necessarily due to the unique actions of the organization. Sometimes success in the absence of formal planning approaches may be due to the inherent genius or other special talents of some members of an organization. (Although, when organizations grow and become more com-plex, it becomes more difficult for individual contributors to successfully guide the organization in this manner.) As organizations evolve and recognize their limitations, the approach described in this chapter for Identifying the “Right Work” will become more beneficial and likely lead to better outcomes than using random or individually inspired efforts. Conventional business logic is that when you’re starting something new, you create a ‘Minimal Viable Product’ or MVP. Essentially that means that you create a version of your product that is very light in terms of functionality, but just about ‘gets the job done’. It also means that the first version of your product usually has to be sold at a fairly low starting price, both to compensate for its lack of features, and to generate interest in a new launch. Some organizations (including many tech startups) take this concept even further and launch the first version of their product completely free of charge, with a plan to ‘monetize’ later on once they’ve added more features and feel confident that people will be willing to pay money for what they’re offering. Tesla on the other hand, did things completely the other way around. It’s been known for a long time that Tesla’s long term goal is to be the biggest car company in the world. They know that in order to become the biggest by volume, they’re going to have to kill in the lower-end consumer car space - that is cars costing less than around US$30,000 to buy. Rather than start with this market though, and create a cheap low-featured ver-sion of their electric car to achieve scale quickly (and therefore benefit from econo-mies of scale in addition to reaching their growth goals) - Tesla instead created the absolute most luxurious, expensive, fully-featured sports car that they could mus-ter. That car was the Tesla Roadster, and for context, the newest generation of the Roadster will retail from upwards of US$200,000 for the base model. And this was the first car that they ever produced - knowing that they couldn’t achieve the neces-sary scale or efficiency to turn a profit (even at such a high price). Fast-forward to today, Tesla just recently beat General Motors in becoming the most valuable car company in the world. So their unconventional strategy certainly seems to be working...