How Modern Business Can Remain Competitive - Essay Example

Executive Summary The competitive landscape in which the today’s business organizations are performing has changed dramatically and at rapid phase, fuelled by the major economic and political changes occurring in the world and the improvements in technologies. The radical developments in IT and communication fields have shorten the operating distance between factors of production, suppliers and buyers and compressed the whole global arena in to the micro and macro environments of an organization, no matter in which corner of the world they operate. This trend towards globalization has competitive implications as well as pressure for performance and change, which all organizations needs to take in to account seriously, if they are to survive in the new market scenario. Nature of today’s business is that an organization no longer can hope to achieve a competitive advantage through product quality, speed of supply, production costs or even innovation. These factors have become prerequisites to stay in business and no longer offer a platform for competitive advantage. Concept of adopting Best Practices has ensured that many organizations, in varying degree have incorporated means of addressing above areas successfully, copying from the pioneers and thus nullifying the competitive advantages, which was developed by these early developers. In today’s globalize scenario, the competitive advantage lies in the manner an organization manages itself and specifically derive a competitive advantage through its human capital. Therefore, it is of crucial importance that companies develop their remuneration strategies to reward performance that will drive the organizational success. 1. Introduction Evidence that the business environment is increasingly competitive is everywhere. Greater Free Trade has facilitated the movement of not only the traded goods but the factors of production as well. Organizations seeking competitive advantages are increasingly seeking out global locations, which offer a comparative advantage in terms of their factor endowment (Hill 2004). More and more companies from the developed word is moving its labor intensive production facilities to low labor costing countries in the developing world. This is also facilitating an unprecedented level of technology transfer and facilitating the competitiveness of these developing nations’ products in terms of quality, efficiency and productivity. Today developing countries like China, India and Mexico pose cost competitions in an unprecedented scale for the world players, especially those who are operating in high wage costing developed nations. Thus it is of paramount importance that organizations in developed nations adopt their own strategies in managing their organizations, specifically the human capital to seek out areas of competitive advantage (Lawler 2000). This involves increasing productivity, efficiency and reducing costs through numerous aspects of Human Resource management involving better selection and recruitment, development and training, fostering of learning environments, fostering innovation, performance management and implementing effective rewarding strategies to drive performance. 2. Organizational Background In the above market scenario, Pacific Oceania Pte Ltd. (POL) is an Australian based company operates in manufacturing and marketing of a range of ocean sports products. POL is a small scale specialized operation involved in manufacturing and marketing of specialized ocean sports goods as surf boards, scuba diving gears, snorkeling accessories and a host of other high quality sports wear. The key product range includes the surfboards and diving gears, which the company manufactures itself while the other products are sourced from various local suppliers. The company operates 7 retail outlets in the main beach resorts areas of Southern Australia and also distributes its manufactured products to other sports goods retailers. Established in 1972, the company has developed itself in to a well know brand name “Oceania” among the Australian water sports lovers and has enjoyed attractive profits by catering to this specialized market segment of the overall sports goods business domain. The product quality has been always maintained at a high level and pricing has been done on a premium scale. 3. Market & Competitor Analysis Two other main competitors who also market similar range of products have opted to be price followers and enjoys similar profits without entering in to price wars which squeeze out the supplier profitability. However, a recent new entrant established two years ago with geographical concentration in the Southern region is now affecting this consolidated status of POL, with its aggressive expansions in to the national market. The new entrant, Champion Sports Inc. is a US based company with a comprehensive chain of sports goods stores in USA. With its manufacturing facilities in China, Champion Sports has managed to dominate the US market with its cost advantages and is now seeking aggressive global presence through direct investments and joint ventures. Champion Sports Inc. entered in to a joint venture with PRO Athlete Pte. Ltd in Australian in 2003 and set up a chain of sports goods supermarkets “Pro Sports” offering a vast variety of sports related goods for armatures as well as professional. The positioning of the Pr Sports outlets was “If its Sport goods…We are Game”, highlighting the wide availability of products. Although not highlighted in their positioning, the pricing of the products was below the existing market rates due to two reasons. One is the cost advantage enjoyed by the Champion Sports manufacturing facilities in China due to cheap labor costs. As most sports ware are labor intensive, almost 60% of the production cost of these products are attributed to the cost of labor. The manufacturing costs of Pacific Oceania Pte Ltd and other similar local manufacturers are comparatively higher by about 10 times. Wage parity between Australian skilled laborer which is in the range of US$ 25 per hour vs. a Chinese laborer’s hour daily wage of approximately US$ 0.25 (1:10 ratio) Second advantage is due to the bulk purchasing of items which the Pro Sports procure from cheap supply sources as China at largely discounted rates. Both of these advantages combined, put Pro Sports at a highly competitive position in its cost base, which they are using to gain market share. Part of the high profit margins from these low costs is being used to offer lower prices while Pro Sports also spends heavily on market awareness, promotions as sponsoring a large number of sports events and mass advertising. They are also channeling some of these cost savings in to building a highly motivated team of employees who has demonstrated their high caliber during the short tenure of operations, by wining many of last years national awards for service quality, and setting benchmark standards for innovative promotions, consumer care and driving organizational profitability. In this new market scenario, fuelled by the trends of escalating globalization, Pacific Oceania has realized the need for change in order to safeguard its position in the market and also explore avenues for growth rather then remaining myopic in its business perspective. A complete restructuring plan has been drawn and one of the key areas of change relates to the revamping of the existing systems of managing their human capital so that resulting productivity and efficiency derived from the restructuring can yield a competitive advantage. Pacific Oceania has realized the need for linking its remuneration strategies to strategic plan management so that a synergy is acquired from the integrated approach. 4. Overview of Organizational Remuneration Strategies An organization’s remuneration system involves financial and non-financial benefits, which an organization is able to and willing to offer to its employees in exchange of for employee contribution (Cascio 1998). Remuneration management is one of the key areas, which has impact on the performance of the overall organization and its competitiveness in the market place. 4.1 Need for Integrating Remuneration Strategies with Company Objectives Remuneration Strategies should be addressed with an integrated approach rather than treating in isolation and should be developed in a systematic manner than resorting to ad-hoc means. The lack of a strategic reward management system in any organizations takes away the opportunities to influence the behavior of employees in a way that could benefit the business. As remunerations generally represent one of the most significant costs for the majority of organizations, the focal point of many remuneration management programs remains on lowering the costs of the system instead of analyzing the benefits that comes with a well-designed remuneration structure. An effective remuneration strategy will aid the company in attaining not only the cost control objectives but also a host of other objectives, which has direct impact on achieving the Organization’s overall Strategic Goals and Corporate Vision. Some of the key objectives of a Remuneration system will include acquiring quality personnel who can add value to company operations, retaining present employees, ensuring equity, rewarding desired behavior in compliance with company culture and goal and also comply with the legal regulations (Schwind & Wager 2002). Aligning the remuneration strategies of the company with its overall goals and objectives is a challenge and requires a systematic approach. To fully gain competitive advantage from remuneration systems, it is essential that the system is understood by and designed with the full participation of those who hold overall responsibility for the business and those who stand to be remunerated. A company’s reward system should reflect its business strategy, the organizational culture and its values. 4.2 Implications of Motivation Theories in developing Reward Systems In developing a remuneration system, it is important to consider the motivational aspects involved. Remuneration provides the reinforcement needed to ensure company goals are achieved. Theory of Reinforcement in motivational studies indicates that Consequences, which give Rewards, increase a behavior while consequences, which give Punishments, decrease a behavior. Consequences, which give neither Rewards nor Punishments, extinguish a behavior (Weiss 2001). Practical applicability of this theory for organizations is that the reward systems should incorporate rewards for reinforcing desired behavior while having punishments and penalties for signaling the undesired behaviors. Another motivational theory, which has implications for remuneration strategy, is the expectancy theory. Expectancy Theory of motivation aims at understanding how individuals make decisions regarding various behavioral alternatives. In an organizational context for example, the behavioral alternatives will be to work at average level or be innovative and strive for excellence. The theory suggests that when deciding among behavioral options, individuals select the option with the greatest motivation forces (MF). Motivational Force is defined as a function of three factors: Expectancy, Instrumentality and Valance. Expectancy refers to the Probability of the desired outcome. That is the belief that ones effort will result is attainment of desired performance goals. This belief, or perception, is generally based on an individuals past experience, self-confidence, and the perceived difficulty of the performance standard or goal. The instrumentality is the belief that by meeting the performance expectations, a greater reward will be forthcoming. The valance refers the value of the reward to the individual and will is a function of his or her needs, goals, values and Sources of Motivation. (Weiss 2001, pp 108 - 110) Practical applicability of this theory is three pronged. The Expectancy factor indicates that organizations should maintain consistency in the remuneration policies, have the faith of the workforce and should have attainable and realistic goals linked to the remuneration system. The instrumentality aspect suggests that the organization should have proper means of measuring performance and have performance-linked remuneration so that greater the performance the higher will be the reward. The valence aspect also has critical implications for the development of an effective remuneration system. Valence factor of the theory suggests that individuals will have differing values attached to the rewards and this will depend on their value system. For some, the financial benefits will be most crucial while some others will value the fringe benefits. The need based motivational theories as Maslow’s Hierarchy of needs may indicate that pay strategies will have to be classified to suit different groups of employees. As the need theories stress, upper level needs can not provide a source of motivation until the lower levels needs are satisfied, these will have implications in deciding what needs are to be first fulfilled. For example, the dominating physiological needs may lead to greater importance placed on cash remunerations among the factory workers. In contrast the senior level management may be more appreciative of status symbols as entertainment accounts and company paid vehicles etc, while the financial remunerations also stay as a part of the package. Another important issue to note is the equity of the remuneration system. The equity theory of motivation suggests that people compare their efforts and rewards with the others to determine the fairness of the outcome. Perceived inequities may prompt the individuals to take actions to remedy the felt inequities. Such actions may include demand for more rewards or reducing of efforts. Both have negative implications for an organization’s productivity. If the demands are in the form of unionized bargaining, this affects the workforce moral as well as the overall company image. It is therefore of great importance to strive for internal as well as external equity in developing remuneration strategies (Lawler 2000). Ensuring Internal Equity involves carrying out job evaluations and establishing job rankings based on their perceived importance and worth to the organization. The remuneration levels will be linked to these levels of importance to the company. External competitiveness is also a key issue where organizations that pay lower than the industry standards are at a risk of losing valuable human resource to their competitors. Wage and Salary surveys are means of establishing the market rates and provide guidelines for the organization’s positioning in the labor market. A firm can decide to be the pay leader, to match the competition or be a follower. Organizational Policy of External Competitiveness will depend upon factors such as labor conditions, union bargaining status, affordability of organization stemming from product market conditions and financial state of the company. Another factor influencing this decision will be the organization’s strategic intent and objectives. If these include development of human resource to leverage competitive advantages, it is likely that the choice on External competitiveness will not be to occupy a “low pay” position in the job market (Bratten & Gold 1999). 4.3 Implications of Legislature and Trade Unions on Remunerations Systems In developing a remuneration strategy, a company has to take in to account the prevailing legislature concerning remunerations and collective bargaining agreements and enterprise bargaining agreements. These enterprise bargaining reflect the decentralized nature and flexibility attached by the Australian Labor legislature to the collective bargaining process. While collective bargaining encompass wage agreements negotiated by trade unions to be applicable for a whole industry, enterprise agreements are more organizational specific (Weilis & Lansbury 1999). 5. Framework for Implementation at Pacific Oceania Pte Ltd. In order to develop an effective remuneration strategy for Pacific Oceania Pte Ltd., in line with its organizational restructuring efforts, a systematic process needs to be followed. A basic framework that is recommended in formulating an effective remuneration strategy includes, analysis of the existing situation, developing a remuneration policy, planning the implementation, Job evaluation (concerned with internal equity), Market surveys (concerned with external equity), establishing Salary structure and development of a performance appraisal system that can integrate with the remuneration strategy. 5.1 Situational Audit An analysis of the existing situation of remuneration administration in POL, indicates that the remuneration strategy has so far been administered in a rather isolated manner. Flat salaries have been administered for all staff without considering the opportunities to apply motivational incentives to critical performance areas of the operation. No links has been established with the remunerations and management responsibilities of the senior management cadre. Areas of applying Agent/Principal theory concept for remuneration of Higher-level executives have been overlooked. Agent theory suggests that the motives and interests of the Agent (managers in the case of organizations) may differ from those motives and interests of the Principal (The Owners and shareholder in organizational context) Remuneration strategies as Profit sharing and Stock Options aimed at aligning the interests of the agent with those of the principal (Cieri 2003). The organizational structure of Pacific Oceania has remained as a traditional hierarchical structure with multiple levels of supervision burdening the cost of the company. The management has realized the need to convert its organizational structure in to one of High Performance structures advocating team efforts and flatter supervision layers, in order to achieve a competitive advantage in the face of aggressive competition. The company’s 105-employee carder is allocated to functional departments, which has created a “Stove Pipe” mentality arising from these functional structures. Manufacturing operations carry 40 employees while 25 personnel are in the retail outlet operation. 36 personnel are engaged in support administrative functions as marketing, procurement, admin and HR, Finance and General Affairs and logistics divisions. Senior Management consists of the CEO and three Functional Directors. Pay administration has not classified the workforce has allowed all employees to be treated under one single payroll. Current performance appraisal system is at rudimentary level and carried out annually with rather subjective superior recommendation in the form of Global Essay format of performance appraisal coupled with some trait rankings in the appraisal format. The company has stressed on the output levels of the factory and the minimization of rejects but no links have been established to the remuneration system and the production performance criteria. 5.2 Development of Remuneration Policy Having identified the current situation of the POL’s existing remuneration system and impinging human resource areas such as performance management, a remuneration policy needs to be established based on which the remuneration strategies can be formulated. The remuneration policy should establish the organization’s position on the key structural factors that needs to be addressed in a remuneration system design. These involves, whether the remuneration will be Job or Person Based, Degree of importance placed on Performance and how its linked to remuneration, organization’s position in the labor market (i.e. Pay Master or Low Payer) how important will internal and external equity be, degree of importance of hierarchy in pay, how flexible will the remuneration mix be, and what level of significance does seniority and job security holds (Lawler 2000). In the case of POL, a remuneration policy is proposed to leverage on human performance to achieve competitiveness. Thus the policy will advocate a Skilled based remuneration system with high component of performance related incentives and a flexible reward mix to cater to the motivational needs of different employment categories. The firm will position it self as a above average payer for employees though not the leaders position, due to the cost constraints stemming from its high cost structure and lower margins available compared to its cheaply priced competition. With the restructuring of the organization from a hierarchical to a High performing Team structure, the importance of hierarchy-linked remuneration will be replaced with team-based incentives. Seniority factor will not have any implications for remuneration benefits other than the accumulated increments over the seniority period. 5.3 Development of Remuneration Strategies Based on the above remuneration policy the Pacific Oceania Pte Ltd propose to implement its new remuneration strategies with the aim of developing a competitive advantage through increased productivity, shorter lead-time through efficiency, reduced costs through cost reduction plans, innovation and excellence through its employees as well as dynamic leadership from its executive carder through performance aligned reward system. For the purpose of administering the remuneration strategies, the workforce will be treated in three main categories as skilled Laborers, non-executive staff and executive cadre. Current remuneration system of Pacific Oceania Pte Ltd pays flat salaries for all staff immaterial of their output and performance levels. The new strategies proposed aims at setting 50% of total remuneration to be a base salary and balance 50% to be linked to performance based rewards. With the new restructuring of the organization in to one of high performance team based structures, the performance-based remunerations will mainly be team-based rewards. The base salaries will be a Skill Base pay to facilitate the restructuring of the organization in to a high-performance team structure where staff has to be competent in multi tasking with diverse skills and competencies. Although adopting a job based pay system with broad banding is an alternative in managing the base pay component of the remuneration, the organization’s decision to move away from hierarchical, specific job profiles in to team structure, favors a Skill Based pay over the job based pay system. Job based pay structures evaluate the importance of the job to the organization and then set a salary to reflect this worth of the job. The person who does that job is therefore is worth to the organization as much as the job’s worth (Lawler 2000). Concept of Broad-Banding is used to improve upon the Job Based Pay systems where there are upper and lower limits within each band, which contains pay zones signifying similarly grouped jobs. Broad banding allows the remuneration system to recognize high performance within fixed pay structures where band span may range up to 200% of the minimum pay for the particular pay band (Armstrong & Murlis 1988). Pay raises of the base salary in a skill based remuneration system will be available to those who acquire wider skills, competencies and opt for multiple task handling within the teams. POL will strive to offer maximum level of flexibility in developing the Performance linked remuneration component. This flexibility is mainly targeted at the Executive carder’s performance related remuneration. A cafeteria style reward strategy will be applied to maximize the worth of the reward mix to each individual concerned, keeping in mind the expectancy theory which states that valence or perceived worth of rewards will differ from person to person depending on their personal factors. 5.3.1 Base Pay Administration Based on the above remuneration strategies, all employees will be paid a base pay through a skills based pay system. Skill base pay systems vary pay as a function of the number of different jobs or skills that an employee is capable of performing competently. Skill Base pay systems aim at increasing functional flexibility and diversification (Bratten & Gold 1999). As Pacific Oceania is a small-scale operation with 105 staff, to achieve greater efficiency and lean cost structures in order to compete effectively with globalize competition, the firm needs to develop multi-tasking staff that are willing and capable of carrying out several functions and duties within their work teams. For example, the manufacturing operation which is currently a hierarchical, and heavy with supervisory levels will be dismantled in to production teams responsible for manufacturing various product groups and will include team members who are able to multi task as skilled operators, quality supervisors and team leaders. The same principle will be applied in to retail outlets where the hierarchical structure will be replaced with team structures and will be linked to skill-based remuneration for the base pay component. The remaining staff, both non executive and executives will be grouped in to support service teams based on key product categories “ Surf Gear”, “Diving Gear” and “Other Sports”. The senior management team including the CEO will also be placed on skill based pay for the base salary component as they too will be required to acquire knowledge in various aspects of management to ensure total integration of the operation instead of functional operations which has so far prevailed. 5.3.2 Performance Pay Administration In managing the balance 50% component of the remuneration, which will be performance based, the flexibility aspect will come in to play. The retail outlet teams will be placed on a Branch Incentive Scheme. Branch Incentive Schemes focus on key measures that a branch or retail outlet’s team can influence and relates to the achievement of overall organizational objectives (Armstrong & Muralis 1988). In the case of Pacific Oceania, the performance rewards for retail outlets will be based on criteria such as sales revenue development, customer attraction and retention levels, minimized customer complaints and high customer care. In order to ensure the effectiveness of Team Performance Rewards, the objectives should be clearly outlined. At POL, this will be supported by the implementation of new performance appraisal system incorporating the concepts of Management By Objectives. The production teams’ will also be places on team based performance incentives. The proposed strategy would be to issue team based incentives linked to clearly defined objectives and work targets. These may include the level of productivity, output, quality and reject levels. The teams will be ranked as per their performance and team bonuses will be provided as per the ranking. In order to ensure that team members varying degree of contribution is taken in to account and “free rider” issue is identified if present, a peer rating system will be applied within the team to decide on the sharing of the incentive. This aims to reward those team members who contribute more to the team performance to a greater degree than those who contribute less (Cascio 1998). Non-executive and executive carder who will be performing the support services will be placed on individual performance incentive scheme. Although a Merit pay system , where the individual performance will be appraised and a salary adjustment will be made as per the performance on annual basis was the initial consideration, Pacific Oceania decided against this alternative due to few inherent weaknesses in Merit pay systems. These weaknesses include the ineffectiveness in motivating performance as the principal of merit pay yields “annuity effects: , unclear links to desired performance and lack of correlation between timing of incentive and timing of rewarded performance. The chosen option of Individual performance rewarding was Discretionary Bonus payments, which will be linked to a clearly defined set of objectives. These objectives will be set annually and will be revised on a monthly rolling plan and evaluations done on a quarterly basis. The pay raised will be administered as a percentage increase of their existing salary. This method allows greater rewarding for those who are high performers in the organization. In order to make this system effective, the POL’s implementation of Management By Objectives, performance Management and appraisal system will be critical. Need for linking executive pay to clearly defined and transparent organizational and financial performance indicators is addressed by this system. Lastly the whole workforce of POL will be placed on two organizational performance reward schemes, aiming to integrate all the employee performance towards achieving of the organizational goals. Due to its common impact across the organization, these schemes have positive impact on not only the organizational performance but also the organizational culture as well. The two schemes proposed include a Gain Sharing scheme and a Profit Sharing scheme. Gain sharing plans or Scanlon plans emphasis the win-win philosophy and motivates employees to work together to improve the organizational performance, imperative of their functions and the resulting profits through productivity improvements, cost reductions and other organizational improvements are shared between the employees and the employer (Bratten & Gold 1999). The proposed ratio of sharing is 40%: 60% where 40% of the gains will be shared among the employees on an equal dollar amount. The second organizational performance reward is a profit sharing scheme coupled with a stock purchase option where the employees will be paid annual bonuses depending on the profit achievements. Pacific Oceania targets 14% ROI for the shareholders and therefore the management has approved a pay off up to 4% of net profits, above the 14% compulsory target. That is to say that if 16% net profits is achieved, 2% will be allocated for bonus pay while an atonement of 19% or more will result in a 4% profit sharing between the employees. This bonus will be paid as a percentage of the base pay of an employee. 6. Conclusion These comprehensive approaches to linking remuneration with performance while taking in to account the need for team performance, need for reduced costs and improved performance as well as establishing lean and fast organizational structures aims at leveraging the company in to a strategically advantageous position in the highly competitive business environment. It is noted that Pacific Oceania’s success in the long-term will depend on how effectively these plans are implemented and coordinated in synergy with other operational strategies of the organization. Execution of other HRM functions such as recruitment, training and development and performance evaluation has to be integrated with the proposed remuneration strategy so that the resulting synergy will benefit the company. Reference List Lawler , E.E. 2000, Rewarding Excellence: Pay Strategies for the New Economy, Jossey-Bass Publishers, San Francisco. Cascio, W. 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