Business 101 Notes Chapter 6 Managing Don Wagner, October 7, What you should understand from this chapter

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1 Business 101 Notes Chapter 6 Managing Don Wagner, October 7, 2008 What you should understand from this chapter 1. Students should be conversant with the terms frequently used in strategic planning, and understand the importance of setting goals and formulating strategies as the starting points of effective management. 2. Students should be familiar with the core functions of management, and the different types of managers that exist, including terms that refer to their level in the organization, and terms that refer to their area of management. 3. Students should know what skill sets are required to be an effective manager, and why those skills are important. 4. Students should understand the meaning and importance of corporate culture and how that culture is developed. Strategy Mission/Vision Many business consultants and academics talk about vision, mission, goals, objectives, and strategy. Some argue that a common difference between successful and unsuccessful companies is that the successful ones have a clear mission. That is, those companies know what they stand for. Commentators differ on what a mission statement should look like. o Some claim that a mission statement should address how the company plans to serve each of its key stakeholder categories i.e. shareholders, customers, employees, the community, and the environment. Such mission statements can sometimes run two pages. o Others claim that a mission statement must be short (e.g. long enough to be meaningful, but short enough to be shouted). A review of various companies mission statements (or vision statements) would show that companies often design their statement for PR (public relations) purposes or as an employee-motivational tool. A mission statement (or vision statement) is particularly useful in non-profit organizations, where the purpose of the organization might otherwise not be clear to everyone. UPEI s mission and goals statement is: The University of Prince Edward Island, founded on the tradition of liberal education, exists to encourage and assist people to acquire the skills, knowledge, and understanding necessary for critical and creative thinking, and thus prepare them to contribute to their own betterment and that of society through the development of their full potential. 1

2 To accomplish these ends the University is a community of scholars whose primary tasks are to teach and to learn, to engage in scholarship and research, and to offer service for the benefit of our Island and beyond. Evaluate this mission statement. Do you think it is useful for the purposes of directing UPEI s strategy? Or do you think it is designed for PR or employee motivation? Do you think it is a good mission statement? For profit-oriented businesses, there generally are two primary objectives that work hand-in-hand: o to earn attractive profits, and o to serve customers. Mission statements for profit-oriented businesses sometimes mention the first objective, but almost always say something about the second objective. Goal-Setting Do you set goals for yourself as a student? Should you? What is the purpose of goals in a business context? Situation Analysis EXTERNAL ENVIRONMENT: In chapter two we addressed external factors that affect a business. Usually, the most important external factor to consider is the nature of the industry in which the firm competes. Porter s 5-forces model is one of the best approaches to analyzing the external environment. INTERNAL ENVIRONMENT: Businesses also need to understand their strengths and weaknesses. Often, the strengths are factors that have been built up over many years. Examples are as follows: o certain capabilities such as: well-engineered products, manufacturing processes with low defect rates, or the ability to adapt products quickly to the needs of customers o a reputable brand name o strong relationships with clients o friendly employees SWOT ANALYSIS: A useful and well-known framework for analyzing a firm s situation is a SWOT analysis. SWOT stands for Strengths, Weaknesses, Opportunities and Threats. This tool can often be useful as a starting point for an organization formulating a strategy. Four years ago, we did a SWOT analysis for UPEI as part of a process towards developing an Academic Plan. (The Academic Plan will address questions such as what type of programs the university should offer, what type of students should it be attracting, what type of professors it should be recruiting, should we have masters programs, etc.) What do you think are the university s strengths, weaknesses, opportunities and threats? Competitive Strategy Strategy is very important to a business success. Here at UPEI s business school, we teach strategy in the 3 rd year. After taking courses in the various disciplines (e.g. 2

3 accounting, marketing, finance, HR), the strategy course addresses the question of how you use that knowledge to actually generate a profit. In a business context, strategy must take into account the fact that the firm has competitors. As a result, strategy is much richer than minimizing costs and chasing large markets. In fact, many of the largest markets are quite unprofitable for most firms! (e.g. the airline industry). Good strategic thinking must consider the following realities of a competitive environment: o competitors are looking to take some of your market share away from you; o new competitors may arise if they see an opportunity; o buyers are looking for ways to reduce the price they pay and get better value for their money; o suppliers are looking for ways to earn higher margins when supplying your business; and o your product may become obsolete by changes in technology. The main idea in strategy involves identifying a target market and then building your organization around serving that market better than your rivals can. For example, Southwest Airlines and Westjet Airlines have targeted customers who want affordable flights, and who are willing to give up meals, baggage transfer etc to get a good deal. By avoiding some of these extras, these airlines are able to minimize the amount of time their planes are on the ground at airports. As a result, they use their assets much more efficiently, enabling them to keep their costs down. (There are numerous other aspects to their strategy of serving this type of customer.) Two main types of strategies are: o Cost Leadership: Firms that pursue a cost leadership strategy aim to cut costs and then compete on price. Examples include Wal-Mart and Dell. Very few firms are able to pursue this strategy successfully, because there can at most be one cost leader in any industry, and it is extremely difficult to beat all the competitors on cost. Wal-Mart and Dell have pulled it off, and are extremely profitable. o Differentiation: For most businesses, a differentiation strategy is more promising than a cost-leadership strategy. Under this strategy, a firm identifies a target market and aims to meet the needs of that market better than all its competitors. Since different people have different preferences, it is quite possible for numerous competitors to be the best in the business along some dimension. Consider the following businesses and identify how they differentiate their business from their competitors: Subway Sandwiches Tim Hortons Mercedes Benz Toyota o (The textbook adds a third strategy called the focus strategy. In a sense, it is a form of the differentiation strategy, since it aims to meet the needs of the target niche better than competitors do.) 3

4 Getting the Right People In today s knowledge economy many firms (especially firms in service industries) recognize that hiring talented and motivated employees is one of the most keys to success. For example, UPEI s president, Wade MacLauchlan, claims that one of his most important tasks (perhaps his most important task) is getting the right people to work at UPEI. Why is getting the right people so important? If you have good management systems in place, does it really matter who you hire? Recessions can wreak havoc upon a company s efforts to retain good employees. Economies tend to go in cycles. In some years it is an employers market (when it is hard for people to find a job, and it is easy for employers to find interested people) and in other years it is an employees market (when it is hard for employers to find workers, and it is easy for workers to find jobs). In fact, in hard times, companies often have to scale back their operations often resulting in lay-offs. In those situations it can be hard to retain their best people. What makes it so hard? On the plus side, if a firm is fortunate enough to be hiring new people during a recession, it can get the very best people available. Management Process The textbook identifies four key steps in the management process planning, organizing, leading and controlling. The management process is best learned by practicing it. In the business program, we design many of our projects to give you that opportunity. For example, the group projects in this course require all four of the above skills. Of the four steps, the first two (planning and organizing) are very context-specific. The third (leading) was discussed in chapter 9. Below, the fourth step (controlling) is discussed a little bit further. Controlling Controlling is ensuring that what we want to happen does happen. Key elements of control include measurement and monitoring. In the 1950s, Peter Drucker introduced the notion of management by objectives (MBO). For several decades MBO was touted as an effective way to motivate employees and to measure their performance. Under this approach, managers would sit down with each of their subordinates and the two individuals would jointly decide on measurable objectives that the subordinate should aim to meet. The objectives should be designed to align the actions of the individual with the objectives of the firm, and should be achievable. The manager later evaluates the subordinate based on whether he/she met those objectives. The approach is very much a results-oriented way of managing, rather than a process-oriented approach. What disadvantages do you see with this approach? In general, it is much easier to use results to assess managers/employees who provide their services to external customers. If the manager/employee performs poorly, customers will become dissatisfied and take their business elsewhere. Many employees/managers, however, provide their services to other departments within the organization. For example, a computer-support team normally provides its services 4

5 to the rest of the organization. If they perform poorly, their internal customers cannot take their business elsewhere. In recognition of this problem, managers have sought to create a customer-service mentality within those departments. What steps can managers take to promote this type of mentality? Management Skills Technical Skills Businesses need employees and managers with strong technical skills in order to survive and thrive. For example, accounting firms need accountants who are proficient in accounting and capable of giving first rate professional advice. Similarly, pharmaceutical companies need scientists who excel at research, manufacturers need engineers who are able to design processes and mechanisms that allow their factories to manufacture efficiently and reliably, and consumer product companies need marketers who excel at their functions. Technical skills are important at all levels of management, but as one rises through the ranks of management, managers spend a smaller proportion of their time on technical aspects of the job, and a greater proportion on managing other people and strategic planning. Much of your university education focuses on developing your technical skills. This is particularly true in the professional programs (e.g. business, education, nursing) as well as in the sciences and some of the arts programs. Human Relations Skills Human relations skills are also important at all levels of management. A few guest speakers we have previously had in this course have told our Business 101 students that universities do not teach human relations skills. This claim may be a bit of an exaggeration, but it is certainly true that the amount of attention universities pay to human relations skills is nowhere close to proportionate with the importance of these skills in the business world. Human relations skills can be learned and improved upon. What are some things you can do while at university to develop those skills? Conceptual Skills Conceptual skills include the ability to understand problems, analyze issues and develop reasonable solutions that consider numerous issues at the same time. Universities are comparatively strong at teaching conceptual skills. One of the advantages of universities over community colleges is that universities focus less on technical skills and more on conceptual skills. Moreover, within the university students are encouraged (required, in fact) to take a broad range of subjects, because doing so considerably improves one s conceptual skills. Unlike the business programs at many other universities, UPEI s business program does not have specializations/majors in specific business disciplines (such as marketing, human resources or finance). Some students contend that UPEI should 5

6 introduce majors because specialized degrees would improve our students employment prospects. Do you agree with this view? Decision-Making Skills Think of someone you know who has strong decision-making skills. What is it about that person that makes you think that? How important is it to make decisions quickly? Suppose as a manager you make a decision and later conclude that it was the wrong decision. Should you always stick with your first decision? Should you always correct your decision (to the extent that you can)? Time-Management Skills Time management skills is a misnomer. No-one can manage time; it just keeps moving along no matter what anybody does. However, you can manage yourself. Time-management is really self-management. What are some bad habits that cause people to squander time? International Skills Increasingly, it is becoming important that managers are skilled at working with people of other cultures. Many large companies regard international experience as a prerequisite for senior management positions. While at UPEI, seriously consider doing a term on international exchange, or doing a co-op placement overseas. Also, make friends with people of other cultures here at UPEI. Corporate Culture Employees and managers are enormously influenced by corporate culture. Many firms have a very pronounced philosophy of how they operate. Certain cultural traits are desirable in virtually all firms. These include: o A culture of ethical behaviour: Of course, moral behaviour is desirable for its own sake, but why is it important to the business to have a culture of ethical behaviour? o A culture of co-operation: Many large organizations are plagued by office politics where managers interfere with progress in an effort to protect their own power within the organization. o A spirit of high performance. Nevertheless, not all firms should have the same culture. Some aspects of culture are strategy-dependent. A conservative culture may suit a firm in a mature industry or an industry where mistakes can devastate the firm. A frugal culture may suit a firm pursuing a cost-leadership strategy, but not a firm using a premium product strategy. For example, Wal-Mart seeks to promote a culture that is people-friendly and that celebrates cheapness. Hewlett Packard seeks to promote cooperation between divisions by building a culture around The HP Way. How can management influence corporate culture? 6