Effective Management: A of Competition, Culture and Control - Case Study Example

EFFECTIVE MANAGEMENT: A STUDY OF COMPETITION, CULTURE AND CONTROL NOVEMBER 2008 PRINCIPLES OF MANAGEMENT EFFECTIVE MANAGEMENT: A STUDY OF COMPETITION, CULTURE AND CONTROL Abstract One of the goals of an efficient management is to protect the organization from the forces of competition and help the organization maintain its own position in the industry. The Five Forces Model developed by Michael E. Porter helps managers analyze the different forces of the market in order to develop an appropriate business strategy. Organization control is the process of influencing the behavior of the people of an organization so as to increase the likelihood of achieving the organizational goals. The Tata Business Excellence Model is an example of an effective organizational control system. Corporate culture is the collective behavior of the individuals in an organization who work towards common corporate goals. The Toyota Way proves how the right corporate culture can strengthen the competitive edge of an organization. Introduction The formulation of an effective strategy for an organization or business requires a thorough understanding of its competition. One of the goals of an efficient management in formulating an appropriate strategy is to protect the organization from the forces of competition on the one hand and to overcome competition and help the organization maintain its position in the industry on the other. A deep understanding of the different sources of competition that an organization faces can help the management in gauging the relative status of the organization in the industry, its relative strengths and weaknesses, and the changing trends in the industry. The Five Forces Model developed by Michael E. Porter helps managers study the business environment by analyzing the five forces of the market, namely, “the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the rivalry among existing players, and the threat of substitute products” (Analyzing the business environment 2005). The management of an organization also deals with issues that affect its short-term success and its long-term survival by coordinating and integrating its activities through various management control systems (Fundamentals of management control 2008, p 10). The different management controls can be categorized based on the object of control, the extent of formalization of control (formal and informal) and time of implementation of control. Based on object of control, management controls can be divided mainly into three, namely, action controls, results controls and personnel/cultural control. Action controls target the various actions that take place at the various levels of an organization while the results controls aim at the results of the actions taken and personnel/cultural controls focus on the people and the organizational culture “with the expectation that the right people in the right culture will perform the right actions that will ultimately yield the desired results” (Fundamentals of management control 2008, p 12). The ideal control system for any organization is one that is tailored to its goals and resources (CliffsNotes.com 2008). In today’s global economy, which is becoming more and more competitive, businesses are searching for and finding new ways and means to become more competitive. While new methods are being evolved like maximizing efficiency, ensuring accuracy and timeliness, streamlining decision-making, employing latest technologies, etc. these approaches may not have “sustainable results or lasting competitive advantage without proper cultural nurturing” (Panico 2004, p 1). The most crucial factor that decides whether a management can successfully bring about a positive change in the organizational culture is the trust the employees have in the management. Porter’s Five Forces Model According to Porter, the threat of new entrants, the bargaining power of buyers, the bargaining power of suppliers, the rivalry among existing players, and the threat of substitute products are the forces that play a significant role in deciding an organization’ future (Analyzing the business environment 2005). New entrants to any industry will bring in new capacity, new technology, and new skills and hence more competition. This can lead to price wars and falling returns, causing a decline in profitability, which in turn creates a problem for the new entrants. There are six barriers to entry into an industry which include economies of scale, product differentiation, capital needs, cost disadvantages, accessibility to distribution channels and government policies. Product differentiation is achieved by establishing brand identification and building customer loyalty. Product differentiation and economies of scale are employed by businesses like brewing companies to create barriers that are almost impenetrable (Analyzing the business environment 2005). Intense rivalry among competitors occurs when they take efforts to increase their market share in a setting where there are many competitors of similar size, there is slowdown in industrial growth, there is lack of differentiation among products of the rivals, there are no switching costs, there are barriers to exit, like high fixed asset investment, etc. This can lead to price wars, advertising wars, new product launching, and increased customer services and warranties (Analyzing the business environment 2005). Customers, when they are bulk buyers like wholesalers or supermarkets, have greater bargaining power and can demand lower prices. When buyers are in a weaker position and the suppliers have more bargaining power, they can hike prices and reap high profits. According to Porter, buyers are powerful when the suppliers are many and the buyers a few, when buyers make bulk purchases, when suppliers’ industry depends on the buyers’ orders, when buyers can switch orders between suppliers at a low cost, and when it is economically feasible for the buyers to purchase from different sources (Analyzing the business environment 2005). The suppliers are more powerful when their products have few substitutes and they are essential for the buyers, when the supplier has no single industry as a major customer, and when the products are highly differentiated and the buyers cannot afford to switch suppliers. The existence of close substitutes of its products limits the profitability of a company. Substitutes can cater to the needs of the customer much in the same way as the original product. Hence, if prices are hiked, customers tend to switch products (Analyzing the business environment 2005). The Porter’s model can be used here, as an example, to study the winery industry. For an Indiana winery, there are several options for procuring its essential ingredients, which are wine grapes and juice. The options include owning a vineyard, purchasing grapes or purchasing juice. Overabundance of grapes and juice from the West Coast of the U.S. can increase the bargaining power of the winery, while lack of grape-growing experience can weaken its bargaining power with the suppliers (Ehmke et al. 2004). If the winery requires a specific variety of grape and there is shortage of its supply, then that will weaken its bargaining power against the increasing bargaining power of the supplier. As production of grapes is cyclical in nature, the price, quality and availability will also vary cyclically. Unexpected weather variations can also affect supply and in such conditions, small wineries will be hit the most. By co-operation with other small wineries and having positive relationships with suppliers, a small winery can secure and maintain its place in the market. An Indiana winery’s buyers comprise of wholesalers, retailers and direct customers. Direct customers are mostly holidaymakers over whom the winery can have some bargaining power, however, that the customers have multiple other options for entertainment is a fact to be considered. When compared to wholesalers and retailers, the winery is in a weaker bargaining position as they have several other brands to choose from. To counter this situation, a small winery owner can offer special local Indiana brands, offer loyalty programs and increase the perceived value. In the winery business, however, the barriers for new entrants are high. This is because the business is capital intensive, licensing procedures are time consuming, initial production time can be prolonged and there is a necessity for extensive knowledge base. But competition has a positive effect for the winery business in that when a group of wineries exist in close proximity, “it enhances the attractiveness and profitability of all wineries involved” (Ehmke et al. 2004). Lastly, when considering threat from substitutes, an Indiana winery must consider several options. A winery is not just a place that sells alcoholic beverage, but also a place for entertainment and education, which is rich in history and culture. The management of a winery will have to consider all these options to decrease the threat of substitutes and hold its position in the market (Ehmke et al. 2004). Effective Organizational Control System Organization control is the process of “controlling or influencing the behavior of people as members of a formal organization to increase the likelihood that they will achieve organizational goals” (Flamholtz 1996, p 2). The concept of control has four dimensions in that it is goal-oriented, it assumes a total lack of goal congruence, it is a process and it is probabilistic. An organization develops an appropriate control system that assists it in achieving its goals. The goals of the organization differ from the goals of the individuals or groups of individuals that belong to the organization. The control must be an ongoing process that is dynamic and not static in that it must adjust and conform to the changes in the goals that may occur over time. Control is more probabilistic than deterministic in that its aim is to maximize the likelihood of people performing and behaving in such a way that the organizational objectives are met (Flamholtz 1996, p 3). The most appropriate and effective control system for any organization, hence, is one that is oriented to its goals and tailored to its resources. An organization has to use its resources, human and otherwise, efficiently and effectively in order to ensure complete success of its processes. A great deal of focus has to be given to cost and quality. Standards have to be maintained for which regular monitoring and corrective actions become necessary. The reactions and expectations of the employees should also be taken well into consideration. Effective organizational control systems share several common characteristics which can be summarized as follows: An effective control system focuses on critical points. It must is well integrated into established processes. It is well accepted by the employees of the organization. It ensures availability of information if and when needed. It ensures economic feasibility. It adheres to accuracy. It is comprehensible (CliffsNotes.com 2008). Critical areas of an organization are those that directly affect the success of its main operations, those where neither failure nor excessive expenditure can be incurred. An effective control system must ensure that all the operations of an organization function harmoniously without creating any bottlenecks. Involvement of the employees in the different stages of devising a control system can ensure their acceptance, which is imperative for the smooth running of the system. Timely information should be provided, which is factual, “useful, reliable, valid, and consistent” (CliffsNotes.com 2008). Failures and time shortcomings can lead to heavy expenses. An effective control system cannot afford to take its focus off costs and should see that the benefits always outweigh the costs. Controls, to be effective, must be simple to operate and easy to comprehend. The Tata Business Excellence Model (TBEM) is a model developed by the Tata Group which has driven the group of companies, especially Tata Steel (TISCO) to great heights of business excellence and high degrees of profitability securing them a prominent position in the global scenario. TBEM has achieved this by ensuring continuous improvement of quality in all business processes by focusing on all aspects of management including leadership, strategic planning, information management, etc. along with customer and market focus as well as linking business performance with individual performance. Thanks to TBEM, TISCO has been ranked as the world’s lowest-cost producer of steel in April 2001. “The ranking was based on several factors including low operating costs, special company culture, good profitability, skilled and productive workforce, high quality and niche products and proactive and experienced management” (Implementing Tata Business Excellence Model in Tata Steel 2003). The model is being constantly updated to incorporate changing needs of changing times. The model has a process-oriented approach ensuring the need and efficacy of every process, with due focus on all critical processes like product development, market intelligence, complaint handling and customer satisfaction, etc. The model also ensures people involvement by giving them training, and gauging and influencing their perceptions. Organizational Culture and Competitive Advantage Corporate culture is the collective behavior of the individuals in an organization who, with their own values, beliefs, habits, attitudes and ethnic culture, work towards common organizational corporate goals. “So corporate culture encompasses moral, social and behavioral norms of (the) organization based on the values, beliefs, attitudes and priorities of its members” (Kotelnikov n.d.(a)). In today’s global economy, which is becoming more and more competitive every day, businesses are searching for and finding or developing newer ways to become more competitive, which include newer approaches for maximizing efficiencies, accelerating retrieval of data to ensure accuracy and timeliness, streamlining decision-making, creating project management offices, ensuring execution of projects, employing latest technologies, etc. (Panico 2004, p 1). However, there are other organizational characteristics too that are key to sustaining performance and attaining competitive advantage, which include “unwavering faith and passion; rigorous discipline and focus; clearly communicated and practiced core values and timeless principles; modest leadership; strong work ethics and choosing individuals with the ‘right’ character traits, among others” (Collins, cited in Panico 2004, p 1). These traits, obviously, form the culture of the organization. Market knowledge, intellectual property management, technology, etc. are, though important, easily replaceable and therefore of less competitive advantage. Culture is the one asset that an organization cannot purchase. In the organization, when people are recognized, valued, developed and rewarded, they tend to come closer together to form “a stronger, more loyal and more productive workforce” (Saltzman 2007, p 1). Every organization has a cultural identity whether they have tried to create one or not, and to use it to their competitive advantage, they should have their expectations from each and every one of its constituents clearly defined. The organization should also respond to the expectations of its employees. Pitney Bowes, one of the world’s largest providers of mailstream services, is an organization that has demonstrated how organizational culture can be used as competitive advantage. The company drew feedbacks from its employees worldwide on their expectations. When the company understood that the employees anticipated rewards and recognitions as well as opportunities of career development, the company took adequate measures to provide the same (Saltzman 2007, p 1). United Rentals, the country’s largest equipment rental company based at Connecticut, in order to drive commitment and performance, and reduce employee turnover, conducted surveys to get a clear picture of workforce concerns. Knowing that involvement and career opportunities are great drivers of engagement, the company has taken great efforts to provide development programs and career advancement opportunities to the employees and have effectively communicated this to the employees (Saltzman 2007, p 2). To reap the maximum benefits out of the people hired, a company should hire the right people who best suit their culture and understand their expectations. To achieve this, besides making their expectations clearly known, organizations should choose the right method to recruit the right people. Golden Corral restaurants, which realized at a point in time that their turnover numbers were much higher than desired, decided to hire people “whose attitudes and performance would better reflect the corporate culture” (Saltzman 2007, p 3). The company used a screening solution to identify the right candidates and thus reduced their recruiting time. Another example is American City Business Journals Inc. They also implemented a recruiting tool which helped them in identifying the right people who suited their culture best which helped them in “building a more cohesive workforce” (Saltzman 2007, p 3). The Toyota Way used by the Toyota corporation proves most effectively how creating the right corporate culture can add to the competitive strength of an organization. Toyota’s corporate philosophy places a great deal of stress on productivity, product development and distribution that is consumer-friendly and market-driven, and continuous improvement and innovation through employee participation which in turn ensures employee loyalty (Kotelnikov n.d.(b)). The main ideas of the Toyota Way include basing management decisions on long-term philosophy, thinking long term, having a process for solving problems, adding value to the organization by developing its people, attaining organizational learning through continuous solving of root problems (Toyota culture and management philosophy n.d.). “A well-developed corporate culture improves morale, performance and engagement, and it offers significant competitive strength when competing for customers, as well as talent” (Saltzman 2007, p 3). Conclusion The formulation of an effective strategy for an organization or business requires a thorough understanding of its competition. Porter’s Five Forces Model helps managers study the business environment by analyzing the five forces of the market, namely, the threat of new entrants, the bargaining power of buyers and the suppliers, the rivalry among existing players, and the threat of substitutes. The most appropriate and effective control system for any organization is one that is oriented to its goals and tailored to its resources. The Tata Business Excellence Model is an effective control system developed by Tata Group which ensures continuous improvement of quality in all business processes by focusing on all aspects of management along with customer and market focus as well as linking business performance with individual performance. In today’s global economy, which is becoming more and more competitive, businesses are searching for new methods to become more competitive. However, lasting competitive advantage will not be possible without proper cultural nurturing. Appendix The Tata Group The Tata Group, which was founded in the 19th century in India, has grown over the years to having its operations in six continents across 80 countries through its 93 operating companies. The companies export products and services to over 140 nations. The Tata Group has its operations spread over seven sectors including information systems and communications, engineering, materials, services, energy, consumer products and chemicals. Tata Steel is the world’s sixth largest steel manufacturer, operating in more than 20 nations and having a commercial presence in more than 50. Tata Steel has invested in Corus (UK), Millenium Steel (Thailand) and NatSteel Asia (Singapore), and has a manufacturing and marketing network in Europe, South-East Asia and the pacific-rim nations. The company can produce 26 million tons of crude steel a year and makes steel for building and construction applications through Tata BlueScope Steel, a joint venture with Australia’s BlueScope Steel. The company has set up joint ventures for developing limestone mines in Thailand, procuring low-ash coal from Australia and coking coal from Mozambique. References ‘Analyzing the business environment’2005, in Introduction to business strategy, ICFAI Center for Management Research, Hyderabad, India, pp. 48-77. CliffsNotes.com 2000, Effective Organizational Control Systems, Wiley Publishing, Inc. Available from: [29 October 2008]. Ehmke, C, Fulton, J, Akridge, J, Erickson, K, Linton, S 2004, Industry analysis: The five forces, Agricultural Innovation & Commercialization Center. Available from: [31 October 2008]. Flamholtz, E 1996, Effective management control: theory and practice, Springer. ‘Fundamentals of management control’ 2008, in Management control systems: An integrated approach to performance and compliance, ICMR, Hyderabad, India, pp. 3-24. Implementing Tata Business Excellence Model in Tata Steel 2003, ICMR. Available from: [31 October 2008]. Kotelnikov, V, n.d.(a), Corporate culture, 1000 Advices. Available from: [1 November 2008]. Kotelnikov, V, n.d.(b), Toyota production system as a sustainable competitive advantage, e-COACH. Available from: [1 November 2008]. Panico, CR 2004, Culture: The greatest competitive advantage, Integrated Project Management Company, Inc. Available from: [29 October 2008]. Saltzman, JM 2007, Recruitment & retension, Talent Management. Available from: [1 November 2008]. Toyota culture and management philosophy n.d., 1000 Advices. Available from: [1 November 2008] Read More