1. Introduction
The purpose of this report is to analyse why the market would fail to provide the optimum amount of healthcare and also to consider the advantages and disadvantages of alternative policies that are open to a government to ensure effective healthcare provision.
In order to achieve this, let’s first analyse the UK healthcare market and the way it is operated then we’ll identify the potential alternatives and their pros and cons.
2. The UK healthcare market.
As the NHS is primarily funded by taxation, which means that if the demand increases, then the taxes devoted to NHS will also have to increase. This system has pros and cons for sure, but the way high demand is dealt with from a financial perspective makes sense if we consider the solidarity aspect of the philosophy of this business model. This is the reason why the budget has increased and is now over the GBP 100 billion. So NHS healthcare is free, therefore the demand is high. There are other factors that may jeopardize the current budget: the population is ageing, costs of new treatments due to lifestyle decreases.
According to Wanless (2002), high demand is shouldered by the government through provision of additional investment in the NHS. From the report, NHS is now funded at close to the EU average and the 100 billion should suffice to cover its needs including inflation and demography changes. To deal with the high demand, some services are subsidised, so the patients have to pay a minimal amount. So this may help to cope with the demand but, as some won’t be able to pay this amount, it may also be seen as a breach of NHS core principles (NHS 2010):
o That it meet the needs of everyone
o That it be free at the point of delivery
o That it be based on clinical need, not ability to pay
Another way of dealing with the high demand is the queuing system which works based on illness severity i.e. urgent treatments will take place immediately while less urgent ones may be postponed for days, weeks or months.
The advantages of the current system are mainly:
Costs: as it is free for patients as included in the taxes, everyone makes similar contribution whether they are heavy users or not.
Services availability: indeed there is a huge range of services delivered in many ways like direct calls, pharmacists, general practitioners, walk-in centres, etc….
Quality: there are regular reviews and the NHS is under constant monitoring to ensure better quality in services delivery.
The main disadvantages of the current NHS model are:
Costs: overall running costs increased by almost 20 billion between 2007 and 2009
High demand management: waiting lists and services that are subsidised (not free). These tend to make the system unpopular and even pushes people to go for private insurances and even go abroad for e.g. surgery.
3. Why would the market fail to provide the optimum amount of healthcare?
There are multiple reasons for why the market would fail, the first one could be that people can’t afford treatments anymore due to income distribution. This would mean that the very poor would not have access to treatments as the solidarity principle would be broken. In this case the only way to maintain the status quo would be to work on taxes to ensure that no one will be left out. It will also offer to redistribute incomes to achieve greater social efficiency equitably. Everyone is taxed, even those who are very poor. Also since tax is equitably imposed, it is most likely that those who pay the least are the ones who will be spending more in terms of healthcare, given their very poor health conditions.
Difficulty for people to predict their own medical needs i.e. uncertainty of falling ill in the future and hence requiring medical treatment. This may lead people who can afford it to go for private medical insurance as this will avoid the waiting list issue and offers more flexibility but at a much higher cost as, anyway, you pay for NHS coverage through the taxes. Additionally those who have good health conditions or who require little medical treatment may end up paying much more than would have otherwise be needed.
Externalities are external benefits provided by the healthcare to the patient (Sloman and Wride 2009). For instance, a person having a contagious disease will be seeking healthcare, but it will not only benefit the patient, but also the people interacting with him or her. However, if the patient is required to pay for treatment, they may not be able to afford, hence contributing to social cost as those around him/her maybe infected as well. This may be mitigated by law in the sense that in the context of e.g. a pandemic, the government may make the decision to quarantine contagious people, running the risk to stigmatise part of the population.
Patient ignorance is also a reason why the system could fail as the doctors who know better could advise more expensive treatments for different reasons like incentives from pharmaceutical companies, etc….
This market answers the oligopoly characteristics:
• Small number of sellers.
• Interdependence of sellers
• Undifferentiated or differentiated product
• Restricted entry
• Some control over price.
• Size of the companies can vary as it does for the product differentiation.
• Demand curve uncertainty (due to the number of sellers), mainly due to the lack of opportunity to forecast policies changes by the competitors.
This thus means that there is a risk of collusion between doctors and hospitals to set-up standards and prices and so impact, at the end of the day, the NHS costs and subsequently the taxes. There is then a risk that overall quality goes down for cost cutting reasons using patients’ ignorance.
4. What could be the alternative policies?
One of the alternative of NHS would be privatisation, but then it means that the government would lose grip on healthcare in the country, and private companies, who will be looking to make profit, will charge as much as they can (price differentiation). The potential advantage will be for the ones who can afford insurance and get best in class healthcare, while others won’t potentially have access to minimum service. Private insurances can provide peace of mind, higher standards and also shorten waiting times to get treatment. There is, on the other hand, a concern, due to the cost of such a cover, that it is “elitist” and would only be for people who can afford it. Pragmatically, the government would have to keep an “NHS” alongside the private healthcare sector to provide the minimum services to the population. The other main disadvantage of private insurances is that the premium will depend on your profile e.g. age, diet, medical history and so the more likely you are to fall ill, the higher the premium will be and there are also usually exclusions in the contracts.
Another alternative could be to go for government cash benefits for the lowest incomes and decrease taxes related to NHS and so for the ones above the threshold the state will define, there will be the private healthcare sector. The main drawback is that, for the ones just above the defined income, it may be hard to afford treatments but on the other hand the tax weight on each citizen will decrease. We would also run the risk that the overall quality of health services would go down and won’t reach the social minimum a government should deliver to its population.
Another option would be keeping the NHS but getting the patients to pay and get reimbursed. This may then give more administration as it will be more complex. The advantage here is that only the patients are paying and the solidarity contribution would decrease but it will be overall less expensive. The downside is that there will then be a necessity to have an insurance system to fill the gap, but this will also be more affordable. Alongside this alternative, a higher health education would help people to detect their symptoms earlier and proactively take mitigating actions and subsequently reduce costs.
5. Conclusions
There is no perfect system unless there is unlimited funding from the government. Having said this, the goal will be to find the best balance to offer the best quality health services to all at an affordable cost without excluding the poorest fringe of the population.
According to me, the best balance would be 100% free services for the population earning less than a specific amount. For the rest of the population, the government would subsidise the services (e.g. social security) and a private insurance would complete the amount.
6. References / Bibliography:
MONETOS, 2010. Private health insurance. [online]. Hamburg, Germany: MONETOS GmbH. Available from: http://www.monetos.co.uk/insurance/health-insurance/private/ [Accessed 30 November 2010].
MONETOS, 2010. The National Health Service / NHS. [online]. Hamburg, Germany: MONETOS GmbH. Available from: http://www.monetos.co.uk/insurance/health-insurance/nhs/ [Accessed 30 November 2010].
NHS, 2009. Core principles. [online]. London, The UK: Department of health. Available from: http://www.nhs.uk/NHSEngland/thenhs/about/Pages/nhscoreprinciples.aspx [Accessed 30 November 2010].
SLOMAN, J and WRIDE, A., 2009. Economics. 7th ed. Harlow, England: Pearson Education Limited.
WANLESS, D., 2004. Securing Good Health for the Whole Population. London, The UK: Department of health.
Saturday, 5 March 2011
Corporate governance in The UK
1. Introduction
The subject of this report is to get an understanding of what is corporate governance and, in the UK context, critically discuss its regulation. In order to achieve this, we will firstly look at the academic definitions of corporate governance and then analyse what were the impacts and reasons of the improvements over time. We shall also analyse the recommendations coming from the different codes established over time to improve the corporate governance including the main mitigation in place i.e. the principal – agent model.
2. What do you understand by the term corporate governance?
Depending on the source, we can find different but not conflicting academic definitions of corporate governance. I listed here three definitions coming from three different worlds: audit, OECD corporate governance scope and finance.
The International Standards for the Professional Practice of Internal Auditing (Standards) define governance as: “the combination of processes and structures implemented by the board to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives.” (Chartered Institute of Internal Auditors 2010)
The OECD Principles were originally released in 1999 and revised in 2003-2004, they also are one of the 12 key standards of the Financial Stability Forum. These principles are addressing key areas of corporate governance e.g. shareholders, stakeholders, board accountability, transparency, disclosure, etc… (OECD 2004)
From a financial perspective: “Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations.” (SearchFinancialSecurity.com 2010)
At the end of the day what is important to take away from these is that it is about accountability and to close the gap of the principal – agent problem.
3. With reference to the UK, critically discuss the way in which corporate governance is regulated.
As explained by Brian Coyle (2005) different committees have been reported in The UK to improve the corporate governance of companies listed on the London Stock of Exchange.
In the UK, after companies’ failures in the 80’s, the London Stock of Exchange established a commission chaired by Sir Adrian Cadbury in 1992. They developed a code aiming to raise the corporate governance standards and the financial reporting. The recommendations were mainly already spread best practices. They better defined the relationship between executive and non-executive directors and their independence with shareholders. The code stresses also the responsibilities of the board members individually and as a whole and also the relationship with external auditors. This code was on a voluntary basis but the London Stock of Exchange brought pressure on all listed companies to comply.
After this first report was implemented, another report took place, the Greenbury report in 1995, to tackle the issue of directors making money in amounts unrelated to the companies’ results. The committee recommended to implement a remuneration committee made of non-executive directors to define remuneration of the executive directors; review the notice for directors; recommendations to disclose the remuneration policies including the one of the directors.
In 1996 the Hampel committee has been set-up to review both Cadbury and Greenbury reports. In 1998, the output is to publish principles in general terms more than a tick in the box exercise. The recommendations are about the board of directors’ composition and the processes to compose it, another main topic is about the directors’ remuneration. The report also delivers recommendations on how to best manage the communication with the shareholders and also about accountability and audit as already treated by Cadbury.
After this, in 2002, the law was altered to enforce listed companies to provide the details of the remuneration policies and annual reports. Right was also given to shareholders to vote on remuneration policy for directors.
Other influential reports in the UK include Rutteman Report 1994, Myners report 2001 and Tyson report 2003 (Chartered Accountants Ireland 2010). Most of these reports have been reactive to inappropriate practices by companies which resulted into financial losses e.g. Smith report in 2003 as a result of the collapse of Arthur Anderson, Enron and WorldCom in 2002.
Sir David Walker and Lord Turner both did review corporate governance in UK banks and other financial organisations after the latest financial crisis in 2009. Walker`s review (2009) delivered 39 recommendations in different areas like effective risk management at board level including the incentives in remuneration policy to manage risk effectively; the balance of skills; experience and independence required on the boards of UK bank institutions; effectiveness of Board`s practices and the performance of audit, risk, remuneration and nomination committee; the role of institutional shareholders in engaging effectively in companies and monitoring of boards and whether UK approach is consistent with international practices and how national and international best practices can be promulgated. On the other hand, Turner`s recommendations (Financial Services Authority 2009) were based on analysing the origins of the crisis, assessing whether deficiencies in the regulation contributed to it and making recommendations for change. The FRC (Financial Reporting Council 2010) agreed to implement these recommendations through revision to the code which will apply after June 2010. Although, the recommendations have been implemented and are more or less prescriptive, the organisations need some flexibility and use of their judgement in making some decisions.
4. The principal – agent model and the differing objectives of the principals and agents.
As we could read in the previous paragraphs, to ensure better corporate governance, it is important to properly manage the relationship between the shareholders and the board of directors.
In order to improve the corporate governance, one of the models is the principal – agent that will resolve the problem of ownership versus control by having a contract in place that will ensure the managers’ or directors’ goals (agents) are aligned with the ones of the shareholders (principal).
As described by Sloman and Wride (2009) this model generates a problem, the asymmetric information as shareholders and managers may have different aims. The shareholders are looking for profit maximisation while the managers might be more attracted by salary, status, prestige, bonus, etc…. Dutta (1999) defines that this problem “arises when non-economic agent – the agent – takes an action that affects another economic agent – the principal.”.
This situation of potential asymmetric information can be mitigated in different ways. Sloman (2008) and others like Milgrom and Roberts (1992) came with solutions to this problem by implementing two major principles, the monitoring and setting up of an incentive programme. Using these two appropriately will decrease the gap between the agent and the principal goals and align them better. On the one hand, the monitoring will mainly happen through the AGM (Annual General Meeting) where the performance of the board can be assessed. The incentive programmes, on the other hand, are focusing on how to best remunerate the agents e.g. the board members according to their performance via bonuses, shares, etc….
So the better the principal – agent problem is being handled, the better the corporate governance will be but let’s see in the next topic whether it means that it does influence the companies’ overall performance.
5. In conclusion, why are the governance structures identified in the Codes believed to produce good governance and therefore better performance?
The main reason why there is such a belief is that these codes has been put in place in a reactive way and intend to bring solution to the past crisis root causes. This is the reason why there had multiple reviews over time to “fine-tune” existing recommendations or develop new ones.
There are no convincing empirical evidences that the codes have improved the performance of the UK listed companies. As an evidence of this, each of the codes described is reactive to proven bad governance e.g. ENRON, Arthur Andersen, etc… i.e. even with all the recommendations made, bad performance – behaviours still persist. Win Hornby (2009) also confirms that most of the governance-performance studies have been inconclusive.
On the other hand though, as Davies (2006) mentions, in two surveys (1997 and 2000) from Business Week magazine, companies with the highest rankings in terms of governance are the ones showing the highest financial returns. Is good governance enough to have high financial returns? It cannot be the only one but it is one of the most important factors as corporate governance encompasses all processes and controls in place to operate the business. This also means that the influence of the codes in the composition of the board of directors, the way it interacts internally and externally and also gets remunerated is key to align the goals of the shareholders and the managers (directors) and deliver a win-win for all stakeholders.
In the UK unlike in the US only little has been turned into laws. So concerns about corporate governance is still there as not all companies will comply. The risks coming from bad governance are not fully mitigated yet and may thus lead to another set of reports and codes in the future or law amendments to even go further in best practices enforcement.
6. References / Bibliography:
CHARTERED ACCOUNTANTS IRELAND, 2010. The UK Corporate Governance Code. [online]. Dublin, Ireland: Chartered Accountants Ireland. Available from: http://www.charteredaccountants.ie/Members/Technical1/Corporate-Governance/Featured-Content/ [Accessed 30 October 2010].
CHARTERED INSTITUTE OF INTERNAL AUDITORS, 2010. PA 2110-1: Governance: Definition. London: Chartered Institute of Internal Auditors.
COYLE, B., 2005. Risk awareness and corporate governance. Canterbury: IFS.
DAVIES, A., 2006. Best Practice in Corporate Governance: Building Reputation And Sustainable Success. Aldershot, UK: Gower Publishing.
DUTTA, P., 1999. Strategies and Games: Theory and Practice. Cambridge, USA: The MIT Press.
FINANCIAL REPORTING COUNCIL, 2010. The UK Corporate Governance Code and associated guidance. [online]. London: The Financial Reporting Council Limited. Available from: http://www.frc.org.uk/corporate/ukcgcode.cfm [Assessed 30 October 2010]
FINANCIAL SERVICES AUTHORITY, 2009. The Turner Review A regulatory response to the global banking crisis. London: The Financial Services Authority.
HORNBY, W., 2009. 2009_Business_Objectives.ppt. Unpublished.
MILGROM, P. R. and ROBERTS, J., 1992. Economics, organization, and management. London, UK: Prentice-Hall.
OECD, 2004. OECD Principles of Corporate Governance. Paris, France: OECD Publications.
SEARCHFINANCIALSECURITY.COM, 2010. Definitions. [online]. US: Searchfinancialsecurity.com. Available from: http://searchfinancialsecurity.techtarget.com/sDefinition/0,,sid185_gci1174602,00.html [Accessed 22 October 2010].
SLOMAN, J and WRIDE, A., 2009. Economics. 7th ed. Harlow, England: Pearson Education Limited.
WALKER, D., 2009. A review of corporate governance in UK banks and other financial industry entities - Final recommendations. London: The Walker review secretariat.
The subject of this report is to get an understanding of what is corporate governance and, in the UK context, critically discuss its regulation. In order to achieve this, we will firstly look at the academic definitions of corporate governance and then analyse what were the impacts and reasons of the improvements over time. We shall also analyse the recommendations coming from the different codes established over time to improve the corporate governance including the main mitigation in place i.e. the principal – agent model.
2. What do you understand by the term corporate governance?
Depending on the source, we can find different but not conflicting academic definitions of corporate governance. I listed here three definitions coming from three different worlds: audit, OECD corporate governance scope and finance.
The International Standards for the Professional Practice of Internal Auditing (Standards) define governance as: “the combination of processes and structures implemented by the board to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives.” (Chartered Institute of Internal Auditors 2010)
The OECD Principles were originally released in 1999 and revised in 2003-2004, they also are one of the 12 key standards of the Financial Stability Forum. These principles are addressing key areas of corporate governance e.g. shareholders, stakeholders, board accountability, transparency, disclosure, etc… (OECD 2004)
From a financial perspective: “Corporate governance is a term that refers broadly to the rules, processes, or laws by which businesses are operated, regulated, and controlled. The term can refer to internal factors defined by the officers, stockholders or constitution of a corporation, as well as to external forces such as consumer groups, clients, and government regulations.” (SearchFinancialSecurity.com 2010)
At the end of the day what is important to take away from these is that it is about accountability and to close the gap of the principal – agent problem.
3. With reference to the UK, critically discuss the way in which corporate governance is regulated.
As explained by Brian Coyle (2005) different committees have been reported in The UK to improve the corporate governance of companies listed on the London Stock of Exchange.
In the UK, after companies’ failures in the 80’s, the London Stock of Exchange established a commission chaired by Sir Adrian Cadbury in 1992. They developed a code aiming to raise the corporate governance standards and the financial reporting. The recommendations were mainly already spread best practices. They better defined the relationship between executive and non-executive directors and their independence with shareholders. The code stresses also the responsibilities of the board members individually and as a whole and also the relationship with external auditors. This code was on a voluntary basis but the London Stock of Exchange brought pressure on all listed companies to comply.
After this first report was implemented, another report took place, the Greenbury report in 1995, to tackle the issue of directors making money in amounts unrelated to the companies’ results. The committee recommended to implement a remuneration committee made of non-executive directors to define remuneration of the executive directors; review the notice for directors; recommendations to disclose the remuneration policies including the one of the directors.
In 1996 the Hampel committee has been set-up to review both Cadbury and Greenbury reports. In 1998, the output is to publish principles in general terms more than a tick in the box exercise. The recommendations are about the board of directors’ composition and the processes to compose it, another main topic is about the directors’ remuneration. The report also delivers recommendations on how to best manage the communication with the shareholders and also about accountability and audit as already treated by Cadbury.
After this, in 2002, the law was altered to enforce listed companies to provide the details of the remuneration policies and annual reports. Right was also given to shareholders to vote on remuneration policy for directors.
Other influential reports in the UK include Rutteman Report 1994, Myners report 2001 and Tyson report 2003 (Chartered Accountants Ireland 2010). Most of these reports have been reactive to inappropriate practices by companies which resulted into financial losses e.g. Smith report in 2003 as a result of the collapse of Arthur Anderson, Enron and WorldCom in 2002.
Sir David Walker and Lord Turner both did review corporate governance in UK banks and other financial organisations after the latest financial crisis in 2009. Walker`s review (2009) delivered 39 recommendations in different areas like effective risk management at board level including the incentives in remuneration policy to manage risk effectively; the balance of skills; experience and independence required on the boards of UK bank institutions; effectiveness of Board`s practices and the performance of audit, risk, remuneration and nomination committee; the role of institutional shareholders in engaging effectively in companies and monitoring of boards and whether UK approach is consistent with international practices and how national and international best practices can be promulgated. On the other hand, Turner`s recommendations (Financial Services Authority 2009) were based on analysing the origins of the crisis, assessing whether deficiencies in the regulation contributed to it and making recommendations for change. The FRC (Financial Reporting Council 2010) agreed to implement these recommendations through revision to the code which will apply after June 2010. Although, the recommendations have been implemented and are more or less prescriptive, the organisations need some flexibility and use of their judgement in making some decisions.
4. The principal – agent model and the differing objectives of the principals and agents.
As we could read in the previous paragraphs, to ensure better corporate governance, it is important to properly manage the relationship between the shareholders and the board of directors.
In order to improve the corporate governance, one of the models is the principal – agent that will resolve the problem of ownership versus control by having a contract in place that will ensure the managers’ or directors’ goals (agents) are aligned with the ones of the shareholders (principal).
As described by Sloman and Wride (2009) this model generates a problem, the asymmetric information as shareholders and managers may have different aims. The shareholders are looking for profit maximisation while the managers might be more attracted by salary, status, prestige, bonus, etc…. Dutta (1999) defines that this problem “arises when non-economic agent – the agent – takes an action that affects another economic agent – the principal.”.
This situation of potential asymmetric information can be mitigated in different ways. Sloman (2008) and others like Milgrom and Roberts (1992) came with solutions to this problem by implementing two major principles, the monitoring and setting up of an incentive programme. Using these two appropriately will decrease the gap between the agent and the principal goals and align them better. On the one hand, the monitoring will mainly happen through the AGM (Annual General Meeting) where the performance of the board can be assessed. The incentive programmes, on the other hand, are focusing on how to best remunerate the agents e.g. the board members according to their performance via bonuses, shares, etc….
So the better the principal – agent problem is being handled, the better the corporate governance will be but let’s see in the next topic whether it means that it does influence the companies’ overall performance.
5. In conclusion, why are the governance structures identified in the Codes believed to produce good governance and therefore better performance?
The main reason why there is such a belief is that these codes has been put in place in a reactive way and intend to bring solution to the past crisis root causes. This is the reason why there had multiple reviews over time to “fine-tune” existing recommendations or develop new ones.
There are no convincing empirical evidences that the codes have improved the performance of the UK listed companies. As an evidence of this, each of the codes described is reactive to proven bad governance e.g. ENRON, Arthur Andersen, etc… i.e. even with all the recommendations made, bad performance – behaviours still persist. Win Hornby (2009) also confirms that most of the governance-performance studies have been inconclusive.
On the other hand though, as Davies (2006) mentions, in two surveys (1997 and 2000) from Business Week magazine, companies with the highest rankings in terms of governance are the ones showing the highest financial returns. Is good governance enough to have high financial returns? It cannot be the only one but it is one of the most important factors as corporate governance encompasses all processes and controls in place to operate the business. This also means that the influence of the codes in the composition of the board of directors, the way it interacts internally and externally and also gets remunerated is key to align the goals of the shareholders and the managers (directors) and deliver a win-win for all stakeholders.
In the UK unlike in the US only little has been turned into laws. So concerns about corporate governance is still there as not all companies will comply. The risks coming from bad governance are not fully mitigated yet and may thus lead to another set of reports and codes in the future or law amendments to even go further in best practices enforcement.
6. References / Bibliography:
CHARTERED ACCOUNTANTS IRELAND, 2010. The UK Corporate Governance Code. [online]. Dublin, Ireland: Chartered Accountants Ireland. Available from: http://www.charteredaccountants.ie/Members/Technical1/Corporate-Governance/Featured-Content/ [Accessed 30 October 2010].
CHARTERED INSTITUTE OF INTERNAL AUDITORS, 2010. PA 2110-1: Governance: Definition. London: Chartered Institute of Internal Auditors.
COYLE, B., 2005. Risk awareness and corporate governance. Canterbury: IFS.
DAVIES, A., 2006. Best Practice in Corporate Governance: Building Reputation And Sustainable Success. Aldershot, UK: Gower Publishing.
DUTTA, P., 1999. Strategies and Games: Theory and Practice. Cambridge, USA: The MIT Press.
FINANCIAL REPORTING COUNCIL, 2010. The UK Corporate Governance Code and associated guidance. [online]. London: The Financial Reporting Council Limited. Available from: http://www.frc.org.uk/corporate/ukcgcode.cfm [Assessed 30 October 2010]
FINANCIAL SERVICES AUTHORITY, 2009. The Turner Review A regulatory response to the global banking crisis. London: The Financial Services Authority.
HORNBY, W., 2009. 2009_Business_Objectives.ppt. Unpublished.
MILGROM, P. R. and ROBERTS, J., 1992. Economics, organization, and management. London, UK: Prentice-Hall.
OECD, 2004. OECD Principles of Corporate Governance. Paris, France: OECD Publications.
SEARCHFINANCIALSECURITY.COM, 2010. Definitions. [online]. US: Searchfinancialsecurity.com. Available from: http://searchfinancialsecurity.techtarget.com/sDefinition/0,,sid185_gci1174602,00.html [Accessed 22 October 2010].
SLOMAN, J and WRIDE, A., 2009. Economics. 7th ed. Harlow, England: Pearson Education Limited.
WALKER, D., 2009. A review of corporate governance in UK banks and other financial industry entities - Final recommendations. London: The Walker review secretariat.
The UK grocery provision market structure
1. Introduction
The UK grocery provision market has changed over time to fit the new needs from consumers. This includes the evolution from High Street multiple stores to large stores outside of the town in order to better fit the demand from e.g. working housewives leading to faster horizontally merged self-services with parking places.
But how is the market structured and what is the impact on the competition?
2. The UK grocery market description
Based on the July 16th 2009 report from Peter Davis and Alan Reilly (Groceries Market Investigation: Market Power, Market Outcomes and Remedies 2009), in 2007, an estimated £110 billion of grocery sales in the UK were made through almost 100,000 grocery stores, including both supermarkets and convenience stores.
The top 10 UK grocery market based on 5th of June 2009 publication includes supermarkets as ASDA 1965, Morrisons1899, Marks and Spencer 1884, Tesco 1919, Waitrose 1904, Sainsbury 1875, SPAR 1932, The Co-operative Group 1863, Iceland 1970, Aldi 1913.
Just over 65 percent of UK grocery sales were made by the four largest grocery retailers (ASDA, Morrisons, Sainsbury’s, and Tesco) from a combined total of around 3,600 stores. A further 20 percent of sales were shared among 4,000 stores belonging to an additional four grocery retailers (The Co-operative Group (Co-op), Marks & Spencer (M&S), Somerfield, and Waitrose). Within this group of eight large grocery retailers there is a degree of product differentiation. For example, M&S and Waitrose place an emphasis on high quality products, while ASDA emphasises its price competitiveness.
There is also differentiation in terms of the store formats offered by each of these retailers. For example, ASDA and Morrisons operate very few stores smaller than 1,000 sq. meters (approx. 10,800 sq. feet), while Sainsbury’s and Tesco operate large and mid-sized supermarkets as well as convenience stores.
3. Market structure
1. Definitions
Based on the market statistics and the different definitions of the oligopoly (Kumar and Sharma 1998):
• Mrs. John Robinson. “Oligopoly is market situation between Monopoly and Perfect Competition in which the number of sellers is more than one but is not so large that the market price is not influenced by any one of them”
• Prof, George J. Stigler. “Oligopoly is a market situation in which a firm determines its marketing policies on the basis of expected behaviour of close competitors.”
• Prof. Stoneur and Hague. “Oligopoly is different from Monopoly on one hand in which there is a single seller. On the other hand, it differs from perfect competition and monopolistic competition also in which there is a large number of sellers. In other words, while describing the concept of Oligopoly, we include the concept of small number of firms.”
• Prof. Leftwitch. “Oligopoly is a market situation in which there is a small number of sellers and the activities of every seller are important for others.”
that this market is oligopolistic in the sense that only 8 firms are sharing 85% of the market i.e. relatively large market shares. Another criterion that is met is that by owning that distribution channel, it creates barriers for others to easily enter the market unless they have enough funding to create such a network. Having this type of end-to-end management of the provision allows them to also have a better grip on the margins and so subsequently the prices as they can manage where to make the profits from (transfer prices).
2. Characteristics
Based on these definitions, that tend to go in the same direction, we can check whether the oligopoly characteristics are met by The UK grocery market:
• Small number of sellers as described in the statistics given in the market description.
• Interdependence of sellers, due to the small numbers no one has enough monopolistic power to shift behaviours i.e. they are all interrelated in changing policies and prices.
• Undifferentiated or differentiated product, unlike in a monopoly situation or perfect competition, we may have a mix in terms of product and service e.g. some may be open 24/7 and others offer on-line services.
• Restricted entry, this is not only due to the initial investment but also to the critical mass you have to offer to your supplier in order to please the demand (price competitiveness).
• Some control over price. There is space between price control and collusive oligopoly. Control is coming from the fact that only few competitors are to be monitored and price alignment is not mandatory.
• Size of the companies can vary as it does for the product differentiation.
• Demand curve uncertainty (due to the number of sellers) mainly due to the lack of opportunity to forecast policies changes by the competitors.
3. Kinked demand curve
"Kinked" demand curves like traditional demand curves are going downwards. They are distinguished by a convex bend with a discontinuity at the "kink" (Sloman and Wride 2009).
The theory assumes that we maximise profit when marginal revenue (how much people will pay for each additional unit) equals marginal cost (how much it costs to make each additional unit). Any change in the marginal cost or the marginal revenue will generate a new price and/or quantity sold of the item. This will not happen if there is a "kink" and so marginal costs could change without changing the price or quantity. It also implies that the industry will try to produce at the kink level i.e. before demand becomes inelastic. This theory can also explain why supermarkets are not starting pricing wars and also shows a lack of price competition. There is no incentive for the players to cut prices and subsequently decrease their profit.
From an academic perspective (George, Joll and Lynk 1992) this model has been criticised both on the theory and also the empirical viewpoints. From a theoretical standpoint, there are criticisms about the competitors’ reactions and also the how the price has been set-up first and also that companies getting interrelated overtime, the market will tend to remove the kink in the demand curve. From the empirical viewpoint, it appears that there is no evidence that rivals are less likely to follow price increases than decreases, secondly experience shows that prices are more stable in a oligopoly than in a monopoly and thirdly there is no evidence in a oligopoly the prices will follow the model.
4. Impact on competition
The leading 7 majors dominate the UK market and their impact on competition is very key, this is because competition keeps the market going, not only in the grocery provision but in all market areas. The fact is that rivalry and competition keeps each business on top of its game for the fear of losing its customers and eventually its business.
Almost all decisions made by any one of the 7 giants has an impact on the other players e.g. Waitrose introduced a new scheme, M&S would also launch something on the same lines.
The extreme competition between the giants have made the market to large extent a consumer oriented market.
This competitive aspect of the business also impacts on new companies that want to spring up into same business. A new business has to come into the market cheaper than all 7 giant grocery stores or already be an established global leader such as Carrefour to take on the UK market. As mentioned above there are de facto barriers to enter the market, for example:
• Getting competitive in terms of costs management versus the 7 large firms
• Acquiring enough land to get a critical mass of stores
• Having a decent distribution channel
Another impact on competition is illegal coordination between the 7 majors to avoid or block new competitors and/or agree on retail prices to maximise profits (interdependence). Collusion has already happen in the past and the Office of Fair Trading who found evidences of collusion lead as result that parties have accepted a liability in principle, and will pay penalties which amount to a maximum of over £116 million. ( http://www.oft.gov.uk/news-and-updates/press/2007/170-07 )
Customer services even in the grocery industry matters a lot, for example, if a customer is being treated badly, by a store attendant in ASDA, chances are that the customer may get upset and will rather go to Sainsbury where there is better customer service and even discourage others who have not yet experienced such treatment and by this, if care is not taken, ASDA might be losing a customer x 2 which can in a way affect the business.
Another important impact is the change in the market landscape since the mid-fifties. The market was lead at the time by High Street shops i.e. a mix of butchers, tobacconists, green grocers, etc… i.e. the so called “small shops”. Since then the self-service and supermarkets moved the market to a situation described in point 3 i.e. mainly large faceless out of town stores. ( http://www.historyandpolicy.org/papers/policy-paper-70.html )
5. Conclusion
The market is still mixing large companies and small shops so that all consumers can still, based on their class, ethnic background, etc…, find their preferred way of shopping.
The fact that the market is an oligopoly is a risk for consumers as it limits the competition in terms of pricing and market entry on top of the legal risk of collusion between the majors.
6. Reference list / Bibliography
THE UK COMPETITION COMMISSION, 2009. Groceries Market Investigation: Market Power, Market Outcomes and Remedies. (Deputy Chairman: Peter Davis). London.
OFFICE OF FAIR TRADING, 2010. OFT welcomes early resolution agreements and agrees over £116m penalties. London, UK: Office of Fair Trading. Available from: http://www.oft.gov.uk [Accessed 25 October 2010]
GEORGE, K., JOLL, C. and LYNK, E.L., 1992. Industrial Organization: Competition, Growth and Structural Change. London: Routledge
HISTORY AND POLICY, 2010. Regulating UK supermarkets: an oral-history perspective. London, UK: History and Policy. Available from: http://www.historyandpolicy.org [Accessed 26 October 2010]
KUMAR, A. and SHARMA, R., 1998. Managerial Economics. New Delhi, India: Atlantic Publishers & Distributors.
SLOMAN, J and WRIDE, A., 2009. Economics. 7th ed. Harlow, England: Pearson Education Limited.
The UK grocery provision market has changed over time to fit the new needs from consumers. This includes the evolution from High Street multiple stores to large stores outside of the town in order to better fit the demand from e.g. working housewives leading to faster horizontally merged self-services with parking places.
But how is the market structured and what is the impact on the competition?
2. The UK grocery market description
Based on the July 16th 2009 report from Peter Davis and Alan Reilly (Groceries Market Investigation: Market Power, Market Outcomes and Remedies 2009), in 2007, an estimated £110 billion of grocery sales in the UK were made through almost 100,000 grocery stores, including both supermarkets and convenience stores.
The top 10 UK grocery market based on 5th of June 2009 publication includes supermarkets as ASDA 1965, Morrisons1899, Marks and Spencer 1884, Tesco 1919, Waitrose 1904, Sainsbury 1875, SPAR 1932, The Co-operative Group 1863, Iceland 1970, Aldi 1913.
Just over 65 percent of UK grocery sales were made by the four largest grocery retailers (ASDA, Morrisons, Sainsbury’s, and Tesco) from a combined total of around 3,600 stores. A further 20 percent of sales were shared among 4,000 stores belonging to an additional four grocery retailers (The Co-operative Group (Co-op), Marks & Spencer (M&S), Somerfield, and Waitrose). Within this group of eight large grocery retailers there is a degree of product differentiation. For example, M&S and Waitrose place an emphasis on high quality products, while ASDA emphasises its price competitiveness.
There is also differentiation in terms of the store formats offered by each of these retailers. For example, ASDA and Morrisons operate very few stores smaller than 1,000 sq. meters (approx. 10,800 sq. feet), while Sainsbury’s and Tesco operate large and mid-sized supermarkets as well as convenience stores.
3. Market structure
1. Definitions
Based on the market statistics and the different definitions of the oligopoly (Kumar and Sharma 1998):
• Mrs. John Robinson. “Oligopoly is market situation between Monopoly and Perfect Competition in which the number of sellers is more than one but is not so large that the market price is not influenced by any one of them”
• Prof, George J. Stigler. “Oligopoly is a market situation in which a firm determines its marketing policies on the basis of expected behaviour of close competitors.”
• Prof. Stoneur and Hague. “Oligopoly is different from Monopoly on one hand in which there is a single seller. On the other hand, it differs from perfect competition and monopolistic competition also in which there is a large number of sellers. In other words, while describing the concept of Oligopoly, we include the concept of small number of firms.”
• Prof. Leftwitch. “Oligopoly is a market situation in which there is a small number of sellers and the activities of every seller are important for others.”
that this market is oligopolistic in the sense that only 8 firms are sharing 85% of the market i.e. relatively large market shares. Another criterion that is met is that by owning that distribution channel, it creates barriers for others to easily enter the market unless they have enough funding to create such a network. Having this type of end-to-end management of the provision allows them to also have a better grip on the margins and so subsequently the prices as they can manage where to make the profits from (transfer prices).
2. Characteristics
Based on these definitions, that tend to go in the same direction, we can check whether the oligopoly characteristics are met by The UK grocery market:
• Small number of sellers as described in the statistics given in the market description.
• Interdependence of sellers, due to the small numbers no one has enough monopolistic power to shift behaviours i.e. they are all interrelated in changing policies and prices.
• Undifferentiated or differentiated product, unlike in a monopoly situation or perfect competition, we may have a mix in terms of product and service e.g. some may be open 24/7 and others offer on-line services.
• Restricted entry, this is not only due to the initial investment but also to the critical mass you have to offer to your supplier in order to please the demand (price competitiveness).
• Some control over price. There is space between price control and collusive oligopoly. Control is coming from the fact that only few competitors are to be monitored and price alignment is not mandatory.
• Size of the companies can vary as it does for the product differentiation.
• Demand curve uncertainty (due to the number of sellers) mainly due to the lack of opportunity to forecast policies changes by the competitors.
3. Kinked demand curve
"Kinked" demand curves like traditional demand curves are going downwards. They are distinguished by a convex bend with a discontinuity at the "kink" (Sloman and Wride 2009).
The theory assumes that we maximise profit when marginal revenue (how much people will pay for each additional unit) equals marginal cost (how much it costs to make each additional unit). Any change in the marginal cost or the marginal revenue will generate a new price and/or quantity sold of the item. This will not happen if there is a "kink" and so marginal costs could change without changing the price or quantity. It also implies that the industry will try to produce at the kink level i.e. before demand becomes inelastic. This theory can also explain why supermarkets are not starting pricing wars and also shows a lack of price competition. There is no incentive for the players to cut prices and subsequently decrease their profit.
From an academic perspective (George, Joll and Lynk 1992) this model has been criticised both on the theory and also the empirical viewpoints. From a theoretical standpoint, there are criticisms about the competitors’ reactions and also the how the price has been set-up first and also that companies getting interrelated overtime, the market will tend to remove the kink in the demand curve. From the empirical viewpoint, it appears that there is no evidence that rivals are less likely to follow price increases than decreases, secondly experience shows that prices are more stable in a oligopoly than in a monopoly and thirdly there is no evidence in a oligopoly the prices will follow the model.
4. Impact on competition
The leading 7 majors dominate the UK market and their impact on competition is very key, this is because competition keeps the market going, not only in the grocery provision but in all market areas. The fact is that rivalry and competition keeps each business on top of its game for the fear of losing its customers and eventually its business.
Almost all decisions made by any one of the 7 giants has an impact on the other players e.g. Waitrose introduced a new scheme, M&S would also launch something on the same lines.
The extreme competition between the giants have made the market to large extent a consumer oriented market.
This competitive aspect of the business also impacts on new companies that want to spring up into same business. A new business has to come into the market cheaper than all 7 giant grocery stores or already be an established global leader such as Carrefour to take on the UK market. As mentioned above there are de facto barriers to enter the market, for example:
• Getting competitive in terms of costs management versus the 7 large firms
• Acquiring enough land to get a critical mass of stores
• Having a decent distribution channel
Another impact on competition is illegal coordination between the 7 majors to avoid or block new competitors and/or agree on retail prices to maximise profits (interdependence). Collusion has already happen in the past and the Office of Fair Trading who found evidences of collusion lead as result that parties have accepted a liability in principle, and will pay penalties which amount to a maximum of over £116 million. ( http://www.oft.gov.uk/news-and-updates/press/2007/170-07 )
Customer services even in the grocery industry matters a lot, for example, if a customer is being treated badly, by a store attendant in ASDA, chances are that the customer may get upset and will rather go to Sainsbury where there is better customer service and even discourage others who have not yet experienced such treatment and by this, if care is not taken, ASDA might be losing a customer x 2 which can in a way affect the business.
Another important impact is the change in the market landscape since the mid-fifties. The market was lead at the time by High Street shops i.e. a mix of butchers, tobacconists, green grocers, etc… i.e. the so called “small shops”. Since then the self-service and supermarkets moved the market to a situation described in point 3 i.e. mainly large faceless out of town stores. ( http://www.historyandpolicy.org/papers/policy-paper-70.html )
5. Conclusion
The market is still mixing large companies and small shops so that all consumers can still, based on their class, ethnic background, etc…, find their preferred way of shopping.
The fact that the market is an oligopoly is a risk for consumers as it limits the competition in terms of pricing and market entry on top of the legal risk of collusion between the majors.
6. Reference list / Bibliography
THE UK COMPETITION COMMISSION, 2009. Groceries Market Investigation: Market Power, Market Outcomes and Remedies. (Deputy Chairman: Peter Davis). London.
OFFICE OF FAIR TRADING, 2010. OFT welcomes early resolution agreements and agrees over £116m penalties. London, UK: Office of Fair Trading. Available from: http://www.oft.gov.uk [Accessed 25 October 2010]
GEORGE, K., JOLL, C. and LYNK, E.L., 1992. Industrial Organization: Competition, Growth and Structural Change. London: Routledge
HISTORY AND POLICY, 2010. Regulating UK supermarkets: an oral-history perspective. London, UK: History and Policy. Available from: http://www.historyandpolicy.org [Accessed 26 October 2010]
KUMAR, A. and SHARMA, R., 1998. Managerial Economics. New Delhi, India: Atlantic Publishers & Distributors.
SLOMAN, J and WRIDE, A., 2009. Economics. 7th ed. Harlow, England: Pearson Education Limited.
British Airways HRM (part 2)
Introduction and background
British Airways (BA) is the UK’s largest international scheduled carrier and also one of the leading global airlines. Some figures to better understand British Airways’ importance in the economic landscape, it connects to 300 destinations and carried in 2009/2010 nearly 32 million passengers. The revenue during the same exercise was GBP 8 billion with 238 aircrafts in service (British Airways Plc. 2010).
As per the British Airways annual report 2009/2010 (British Airways Plc. 2010), the company has defined five main strategic objectives to transform British Airways into the world’s leading global premium airline:
• “Be the airline of choice for long haul premium customers.
• Deliver an outstanding service for customers at every touch point.
• Grow our presence in key global cities.
• Build on our leading position in London.
• Meet our customers’ needs and improve margins through new revenue streams.”
This shows that BA is currently undertaking major changes to achieve these objectives impacting human resources. It is thus interesting to determine the top three challenges that BA is facing, highlight the academic underpinning and compare with current behaviours to draw conclusions and detect areas of improvement.
Aims and objectives
This report comprises in four main parts. It will begin with the identification of BA’s main challenges, then a comparison between current behaviour and academic underpinning. Next it will be a critical analysis of areas of improvement. Only then can conclusions be drawn.
What are the main challenges to BA?
Ledwidge (2007) offers findings identifying one main challenge, the employees’ relation with their employer. He states that “BA's drive for efficiency – in terms of relentless cost-cutting and outsourcing – came at a cost as the airline experienced industrial disputes and employee unrest that dented its image.”. Many examples of strikes are visible on the BBC website (e.g. http://news.bbc.co.uk/1/hi/8411214.stm for Christmas 2009 cabin crew strike) with the details of the reasons but most of them are related to changes in employment terms and conditions. Those issues are highly visible to the public as strikes usually hit passengers during peak season i.e. July/August or Christmas/New Year period.
Recruitment, selection and HR planning is another important challenge BA has to consider due to the amount of changes they go through. BA has gone through major changes like the privatisation in 1987 and the strategic turn-around in 1997 as described by Analoui (2002). But this is not all: BA keeps moving forward as they signed a merger agreement with IBERIA and, as per Chairman’s statement in the 2009/2010 Annual Report (British Airways Plc. 2010), “all the signs are that we can win anti-trust immunity from the US Department of Transportation along with regulatory approval from the EU competition authorities, to operate a joint business with American Airlines and Iberia over the North Atlantic.”. These changes imply new challenges as resourcing and planning gets more international and decentralised than it was in the past.
The third main challenge will be about Performance management for the resources. In his SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis, Robert Heller (2006) states that “So long as they 'understand' that BA wants to be seen as a global airline, not a national carrier, that's fine. But consider this quotation: 'At a recent employee gathering in New York, none of the 75 people in the audience could remember the company's... mission statement' - which was only a single sentence. To put it mildly, there's not much point in a mission that everybody has forgotten.”. This shows the difficulty to get all the resources working towards the same vision… So it makes it more difficult to manage performance if they do not feel like owning the objectives. The following statement in the 2009/2010 Annual Report (British Airways Plc. 2010) “Our main aim is to develop a customer focused, high performing culture that offers rewards for great individual performance but also recognizes different people in the business have different needs in terms of benefits, training and development.” And this shows that BA is on a journey i.e. it is recognised that it is still a challenge.
Comparison between current behaviour and academic underpinning
As stated in the CIPD factsheet (2007), “For the most part, people have belonged to trade unions because they offer protection – in the early days to provide help in the absence of a welfare state, and then to counteract the greater economic strength of employers, to provide legal and other support to members who believe they suffer injustices, and to campaign for reform”. Even if the Unions are in decline (Torrington, Taylor and Hall 2008) from 13 million at its peak in 1979 down to 6.4 million in 2005, Purcell and Sisson (1983) define five management styles in relationship with employee relation including unions: traditional, paternalist, consultative, constitutional and opportunistic. Unions like The GMB, BALPA or Unite are recognised and involved in BA’s life and change process. The CEO recognises the negotiations and the collaboration between the different bodies by stating in the annual report 2009/2010 that “Our position is clear. We’ve done some excellent work with the unions over the years and we’re happy to work with them. But we can’t let them stand in the way of the progress that’s needed to make our airline’s future more secure.”. So, clearly, we have here a constitutional management style as we look for formal agreements between powerful protagonists, unions and the BA board. This will lead to a negotiated type of consent of a multi-union bargaining, as the unions can commit on behalf of the workers (Torrington, Taylor and Hall 2008). This analysis is confirmed in the 2009/2010 annual report stating that “We negotiate with a total of three trade unions representing colleagues across the business. We seek to work constructively with colleagues and their representatives to improve productivity and performance.” and “We have a large unionised workforce. Collective bargaining takes place on a regular basis and a breakdown in the bargaining process may disrupt operations and adversely affect business performance. Our continued effort to manage employment costs increases the risk in this area.”.
Another key aspect of the employees’ relationship with the employer is the pay scheme, including profit sharing and encouraged share ownership. This is an effective way for employees to feel more involved in the company’s results (British Airways Plc. 2010). This type of remuneration package clearly has a “unitarist” influence i.e. that business organisation can be seen “as a team united by shared interests and values, with senior management as the sole source of authority and focus of loyalty.” (Rowley and Jackson 2010). This is interesting because the general behaviour of BA can be seen as “pluralist” (opposite of “unitarist”) as it is recognised that BA values the variety of sociological diversity in the company e.g. the following statement “We are proud to be a business that welcomes and nurtures difference. Diversity and inclusion are a way of life for us.” (British Airways Plc. 2010).
A third aspect is the international perspective of the employee relations in BA. In total the BA group has 5,574 resources overseas and 35,920 UK based (British Airways Plc. 2010). Torrington, Taylor and Hall (2008) state that “there is a great deal of variation within as well as between national systems in all the above areas. It is also true that things do not remain static over time and that prevailing norms within any country evolve in new directions. However, it remains the case that certain approaches remain associated with particular countries.”. This also has an impact on where to locate resources and how to manage tasks, as some characteristics will influence these decisions:
– “high - low union membership
– single employer - multi-employer bargaining
– interventionist - non-interventionist government role
– adversarial - social partnership role
– autocratic - democratic management role”
(Torrington, Taylor and Hall 2008). This brings an introduction to the next topic about recruitment, selection and HR planning.
BA is basically in the middle of an organisational change. , There are 3 main approaches to organisational change: planned, emergent and contingency (Internal Approaches to Change – Change Models 2009). Lewin (1947), Bullock & Batten (1985) and Kotter (1995) defined steps in the Planned approach, but based on the change that has been implemented and also the way it had been done shows a mix of the Planned (top-down) and Emergent approach, as they will change the structure, the culture, the learning and the managerial behaviour. The CEO also involved the E and O theory in the process and built a shared vision i.e. the overall approach used is the Contingency one, which means seeking to use the best method available for a specific environment.
In theory, one would recruit once the Refreezing period kicks in or a little before that to ensure the new organisation will be optimally resourced once the change is complete. To achieve the goals, BA changed its recruitment policies to cope with the current situation as they are still implementing changes.
HR planning is a key point for BA, as one major part of its scope is forecasting future human resource needs i.e. “translate the strategic objectives of the organisation and environmental influences into qualitative or soft human resource goals” (Torrington, Taylor and Hall 2008). Reading the vacancy details on the Explore our working world website, BA developed a methodology looking at competences, behaviours and knowledge to recruit both experienced resources or new graduates.
BA uses a Resource-based Model to achieve above-average profitability by developing VRIN (Value, Rare, Inimitable, Non-substitutable) resources (Barney 1991). To substantiate this (Parker 1999), let us go back to the mid-nineties when the group started a portfolio analysis and defined the level of criticality of its operations. Based on this analysis, decision has been made to outsource resources that are not key to the core business. As other major corporations, they retained the strategic components (VRIN) and outsourced the routine activities, this decision helping the group to achieve outsourcing goals i.e. costs reduction, higher quality of services, agility and better focus on core business to meet the business objectives. Retention is thus important to ensure talents remain in the company and growth opportunities are made available for these resources. This is the reason why, even if a third of the managers left (voluntary severance) in 2008, others have been encouraged to change function to widen their skills and capabilities for further moves in the organisation. This should offer the possibility to develop succession plans and help the forecasts but, as Hirsh (2000) points out, “this model is appropriate to a stable environment “ and BA is in an environment change jeopardising this type of planning.
A job application can only happen through the website and the assessment will include different types of tests, “The assessment methods we use include group exercises, interviews, psychometric tests, presentations, fact-finding exercises and one-to-one role play” (British Airways Plc. 2010). This complies with what Torrington, Taylor and Hall (2008) state i.e. “A combination of selection methods is usually chosen, based upon the job, appropriateness, acceptability, time, administrative ease, cost, accuracy and the abilities of the selection staff.”
Performance management has been identified as the third main challenge BA is facing. Clark (2005) defines performance management as “Establishing a framework in which performance by human resources can be directed, monitored, motivated and refined, and that the links in the cycle can be audited.”. The key part of the framework is the performance management process (system) to be put in place, as described by Torrington, Taylor and Hall (2008) page 299 meaning that mission statement has to be provided to the system to initiate the circle of stages i.e. definition of business roles, planning performance, delivering & monitoring and formal assessment & reward. As explained in the 2009/2010 Annual Report, BA has a mission with “Compete 2012” and developed business goals towards this. Specific metrics have been developed to track progress against the business plan, three of which are used to set targets for the basis of remuneration (customer recommendation, operating margin and network punctuality). To achieve this, BA made the link between the mission statement and the individual targets by communicating the common vision (weak point), agreeing accountabilities (visible in job descriptions) and motivating and inspiring others.
Performance appraisal determines the new salary level, bonus and shares, but also current performance versus agreed objectives, areas of growth, training/development plans, agreements on future objectives i.e. a holistic review of the employee profile. BA does not mention a 360 degrees type of feedback i.e. using a full range of sources to be collected about the individual (Torrington, Taylor and Hall 2008) but a one-to-one type of appraisal with the manager.
Performance management reflects the company culture i.e. “the collective programming of the mind.” (Hofstede 2001) and the culture will drive an attitude i.e. “certain regularities of an individual’s feelings, thoughts and predispositions to act towards some aspects of their environment” (Secord and Backman 1969) that will then lead the capacity of delivering towards objectives.
The company’s culture is then key to foster better performance. There are different ways the culture can manifest itself e.g. Deal and Kennedy’s corporate culture (1982), Hofstede (1997) or Johnson and Scholes (2008) but they all converge saying that the way of working (organisation, controls, practices, environment, …) is one of the main attributes of the culture. BA adapted its culture to cope with the different events depicted before and subsequent different visions-missions e.g. from “To be a safe airline” to “To be a competitive airline” i.e. the values and beliefs had to shift from a technical, bureaucratic and authoritarian orientation (Royal Air Force background) to a customer facing, market orientated organisation. To ensure implementation of this new culture, it implied a change in ways of working and a shift of attitude, measured through performance management, to achieve the new objectives.
Areas of improvement
As per Mullins (2005) and Buchanan & Huczynski (2004) change is generating resistance, and that can be attributed to different factors as e.g. misunderstanding, fear of the unknown etc... What is important is how to handle and overcome the resistance to change in order to deliver the change itself.
Resistance to change becomes a restraining factor as they have to fight against people losing part of their power as the organisation is flattening to transform from a technology based company into a learning one. To achieve this though, it will be necessary to improve the communication to cascade the vision and mission of the company to all layers to also implement the new culture and modify employees’ attitude. This would also improve the performance of the employees as this will drive towards the desired attitude.
BA should improve the employees’ relations by, even if the style is constitutional, spending more times to get stakeholders, including unions, on board and get their buy-in before going to implementation. This means involving stakeholders in the decision process and convincing them on the rationale behind the change.
Refreezing the organisation may become necessary at least for a period of time in order to have a new baseline from where to start fresh and develop the two main new views i.e. “As is” and “To be”. This will allow HR to do proper planning and adapt policies and processes to recruit the right people with the right skills and competences for the right jobs at the right time.
Conclusion
In conclusion, HRM practices have definitely helped in all areas of the BA metamorphosis. It has been in the centre of the change process to review the organisational structure, hire the right resources, develop the redundancy programme, etc… Without implementing proper HRM processes, BA would have failed to improve their organisational effectiveness and, even if not perfect, it should give a long-term competitive advantage against the competition by its resources’ heterogeneity and deployment of the key resources to increase the returns. It also makes the whole coherent to become the world’s leading global premium airline.
References and bibliography
ANALOUI, F., 2002. The Changing Patterns of Human Resource Management. Ashgate, Hampshire.
BARNEY, J., 1991. Firm resources and sustained competitive advantage. Journal of Management Vol. 17, No. 1, pp 99-120.
BRITISH AIRWAYS Plc., 2010. 2009/10 Annual Report and Accounts. (Chairman Martin Broughton). London: Likemind.
BRITISH AIRWAYS Plc., 2010. Explore Our Working World. [online]. Harmondsworth: British Airways Plc.. Available from: http://www.britishairwaysjobs.com/baweb1/ [Accessed 9 December 2010]
BUCHANAN, D. and HUCZYNSKI, A., 2004. Organizational Behaviour – An Introductory Text, 5th ed. London, UK: FT Prentice Hall.
CIPD, 2007. Factsheet “Trade unions: a short history”. London, UK: CIPD
CLARK, G., 2005. Performance Management Strategies, in G. Salaman, J. Storey and J. Billsberry (eds), Strategic Human Resource Management: Theory and Practice . London: The Open University in association with Sage.
HELLER R., 2006. SWOT: Assess the strengths, weaknesses, opportunities and threats of your business with SWOT analysis. [online]. Cornwall, UK: Thinking Managers Heller Management Ltd. Available from: http://www.thinkingmanagers.com/management/strengths-weaknesses.php [Accessed 9 December 2010]
HOFSTEDE, G., 2001. Culture's Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations 2nd ed. Thousand Oaks, CA: Sage Publications, Inc.
LEDWIDGE J., 2007. "British Airways: the case for a human makeover: New approach would leave the airline less prone to disruptions and PR blunders". Human Resource Management International Digest, Vol. 15 Iss: 5, pp.7 – 10
MULLINS L., 2005. Management and Organisational Behaviour. 7th ed. UK: Pearson Education Limited.
PARKER, D., 1999. Privatization and Supply Chain Management: On the Effective Alignment of Purchasing and Supply after Privatization. New York, USA: Routledge.
PURCELL, J. and SISSON, K., 1983. Strategies and practice in the management of industrial relations. Oxford: Blackwell.
REY-MARMONIER, E., 2009. Internal Approaches to Change – Change Models (TOPIC_6_Approaches_to_change_management.ppt). UK: The Robert Gordon University
ROWLEY, C. and JACKSON, K., 2010. Human Resource Management: The Key Concepts. London: Routledge.
SECORD, P.F. and BACKMAN, C.W., 1969. Social Psychology. New York: McGraw-Hill.
TORRINGTON, D., TAYLOR, S. and HALL, L., 2008. Human Resource Management, 7th ed. London, UK: Prentice-Hall.
British Airways (BA) is the UK’s largest international scheduled carrier and also one of the leading global airlines. Some figures to better understand British Airways’ importance in the economic landscape, it connects to 300 destinations and carried in 2009/2010 nearly 32 million passengers. The revenue during the same exercise was GBP 8 billion with 238 aircrafts in service (British Airways Plc. 2010).
As per the British Airways annual report 2009/2010 (British Airways Plc. 2010), the company has defined five main strategic objectives to transform British Airways into the world’s leading global premium airline:
• “Be the airline of choice for long haul premium customers.
• Deliver an outstanding service for customers at every touch point.
• Grow our presence in key global cities.
• Build on our leading position in London.
• Meet our customers’ needs and improve margins through new revenue streams.”
This shows that BA is currently undertaking major changes to achieve these objectives impacting human resources. It is thus interesting to determine the top three challenges that BA is facing, highlight the academic underpinning and compare with current behaviours to draw conclusions and detect areas of improvement.
Aims and objectives
This report comprises in four main parts. It will begin with the identification of BA’s main challenges, then a comparison between current behaviour and academic underpinning. Next it will be a critical analysis of areas of improvement. Only then can conclusions be drawn.
What are the main challenges to BA?
Ledwidge (2007) offers findings identifying one main challenge, the employees’ relation with their employer. He states that “BA's drive for efficiency – in terms of relentless cost-cutting and outsourcing – came at a cost as the airline experienced industrial disputes and employee unrest that dented its image.”. Many examples of strikes are visible on the BBC website (e.g. http://news.bbc.co.uk/1/hi/8411214.stm for Christmas 2009 cabin crew strike) with the details of the reasons but most of them are related to changes in employment terms and conditions. Those issues are highly visible to the public as strikes usually hit passengers during peak season i.e. July/August or Christmas/New Year period.
Recruitment, selection and HR planning is another important challenge BA has to consider due to the amount of changes they go through. BA has gone through major changes like the privatisation in 1987 and the strategic turn-around in 1997 as described by Analoui (2002). But this is not all: BA keeps moving forward as they signed a merger agreement with IBERIA and, as per Chairman’s statement in the 2009/2010 Annual Report (British Airways Plc. 2010), “all the signs are that we can win anti-trust immunity from the US Department of Transportation along with regulatory approval from the EU competition authorities, to operate a joint business with American Airlines and Iberia over the North Atlantic.”. These changes imply new challenges as resourcing and planning gets more international and decentralised than it was in the past.
The third main challenge will be about Performance management for the resources. In his SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis, Robert Heller (2006) states that “So long as they 'understand' that BA wants to be seen as a global airline, not a national carrier, that's fine. But consider this quotation: 'At a recent employee gathering in New York, none of the 75 people in the audience could remember the company's... mission statement' - which was only a single sentence. To put it mildly, there's not much point in a mission that everybody has forgotten.”. This shows the difficulty to get all the resources working towards the same vision… So it makes it more difficult to manage performance if they do not feel like owning the objectives. The following statement in the 2009/2010 Annual Report (British Airways Plc. 2010) “Our main aim is to develop a customer focused, high performing culture that offers rewards for great individual performance but also recognizes different people in the business have different needs in terms of benefits, training and development.” And this shows that BA is on a journey i.e. it is recognised that it is still a challenge.
Comparison between current behaviour and academic underpinning
As stated in the CIPD factsheet (2007), “For the most part, people have belonged to trade unions because they offer protection – in the early days to provide help in the absence of a welfare state, and then to counteract the greater economic strength of employers, to provide legal and other support to members who believe they suffer injustices, and to campaign for reform”. Even if the Unions are in decline (Torrington, Taylor and Hall 2008) from 13 million at its peak in 1979 down to 6.4 million in 2005, Purcell and Sisson (1983) define five management styles in relationship with employee relation including unions: traditional, paternalist, consultative, constitutional and opportunistic. Unions like The GMB, BALPA or Unite are recognised and involved in BA’s life and change process. The CEO recognises the negotiations and the collaboration between the different bodies by stating in the annual report 2009/2010 that “Our position is clear. We’ve done some excellent work with the unions over the years and we’re happy to work with them. But we can’t let them stand in the way of the progress that’s needed to make our airline’s future more secure.”. So, clearly, we have here a constitutional management style as we look for formal agreements between powerful protagonists, unions and the BA board. This will lead to a negotiated type of consent of a multi-union bargaining, as the unions can commit on behalf of the workers (Torrington, Taylor and Hall 2008). This analysis is confirmed in the 2009/2010 annual report stating that “We negotiate with a total of three trade unions representing colleagues across the business. We seek to work constructively with colleagues and their representatives to improve productivity and performance.” and “We have a large unionised workforce. Collective bargaining takes place on a regular basis and a breakdown in the bargaining process may disrupt operations and adversely affect business performance. Our continued effort to manage employment costs increases the risk in this area.”.
Another key aspect of the employees’ relationship with the employer is the pay scheme, including profit sharing and encouraged share ownership. This is an effective way for employees to feel more involved in the company’s results (British Airways Plc. 2010). This type of remuneration package clearly has a “unitarist” influence i.e. that business organisation can be seen “as a team united by shared interests and values, with senior management as the sole source of authority and focus of loyalty.” (Rowley and Jackson 2010). This is interesting because the general behaviour of BA can be seen as “pluralist” (opposite of “unitarist”) as it is recognised that BA values the variety of sociological diversity in the company e.g. the following statement “We are proud to be a business that welcomes and nurtures difference. Diversity and inclusion are a way of life for us.” (British Airways Plc. 2010).
A third aspect is the international perspective of the employee relations in BA. In total the BA group has 5,574 resources overseas and 35,920 UK based (British Airways Plc. 2010). Torrington, Taylor and Hall (2008) state that “there is a great deal of variation within as well as between national systems in all the above areas. It is also true that things do not remain static over time and that prevailing norms within any country evolve in new directions. However, it remains the case that certain approaches remain associated with particular countries.”. This also has an impact on where to locate resources and how to manage tasks, as some characteristics will influence these decisions:
– “high - low union membership
– single employer - multi-employer bargaining
– interventionist - non-interventionist government role
– adversarial - social partnership role
– autocratic - democratic management role”
(Torrington, Taylor and Hall 2008). This brings an introduction to the next topic about recruitment, selection and HR planning.
BA is basically in the middle of an organisational change. , There are 3 main approaches to organisational change: planned, emergent and contingency (Internal Approaches to Change – Change Models 2009). Lewin (1947), Bullock & Batten (1985) and Kotter (1995) defined steps in the Planned approach, but based on the change that has been implemented and also the way it had been done shows a mix of the Planned (top-down) and Emergent approach, as they will change the structure, the culture, the learning and the managerial behaviour. The CEO also involved the E and O theory in the process and built a shared vision i.e. the overall approach used is the Contingency one, which means seeking to use the best method available for a specific environment.
In theory, one would recruit once the Refreezing period kicks in or a little before that to ensure the new organisation will be optimally resourced once the change is complete. To achieve the goals, BA changed its recruitment policies to cope with the current situation as they are still implementing changes.
HR planning is a key point for BA, as one major part of its scope is forecasting future human resource needs i.e. “translate the strategic objectives of the organisation and environmental influences into qualitative or soft human resource goals” (Torrington, Taylor and Hall 2008). Reading the vacancy details on the Explore our working world website, BA developed a methodology looking at competences, behaviours and knowledge to recruit both experienced resources or new graduates.
BA uses a Resource-based Model to achieve above-average profitability by developing VRIN (Value, Rare, Inimitable, Non-substitutable) resources (Barney 1991). To substantiate this (Parker 1999), let us go back to the mid-nineties when the group started a portfolio analysis and defined the level of criticality of its operations. Based on this analysis, decision has been made to outsource resources that are not key to the core business. As other major corporations, they retained the strategic components (VRIN) and outsourced the routine activities, this decision helping the group to achieve outsourcing goals i.e. costs reduction, higher quality of services, agility and better focus on core business to meet the business objectives. Retention is thus important to ensure talents remain in the company and growth opportunities are made available for these resources. This is the reason why, even if a third of the managers left (voluntary severance) in 2008, others have been encouraged to change function to widen their skills and capabilities for further moves in the organisation. This should offer the possibility to develop succession plans and help the forecasts but, as Hirsh (2000) points out, “this model is appropriate to a stable environment “ and BA is in an environment change jeopardising this type of planning.
A job application can only happen through the website and the assessment will include different types of tests, “The assessment methods we use include group exercises, interviews, psychometric tests, presentations, fact-finding exercises and one-to-one role play” (British Airways Plc. 2010). This complies with what Torrington, Taylor and Hall (2008) state i.e. “A combination of selection methods is usually chosen, based upon the job, appropriateness, acceptability, time, administrative ease, cost, accuracy and the abilities of the selection staff.”
Performance management has been identified as the third main challenge BA is facing. Clark (2005) defines performance management as “Establishing a framework in which performance by human resources can be directed, monitored, motivated and refined, and that the links in the cycle can be audited.”. The key part of the framework is the performance management process (system) to be put in place, as described by Torrington, Taylor and Hall (2008) page 299 meaning that mission statement has to be provided to the system to initiate the circle of stages i.e. definition of business roles, planning performance, delivering & monitoring and formal assessment & reward. As explained in the 2009/2010 Annual Report, BA has a mission with “Compete 2012” and developed business goals towards this. Specific metrics have been developed to track progress against the business plan, three of which are used to set targets for the basis of remuneration (customer recommendation, operating margin and network punctuality). To achieve this, BA made the link between the mission statement and the individual targets by communicating the common vision (weak point), agreeing accountabilities (visible in job descriptions) and motivating and inspiring others.
Performance appraisal determines the new salary level, bonus and shares, but also current performance versus agreed objectives, areas of growth, training/development plans, agreements on future objectives i.e. a holistic review of the employee profile. BA does not mention a 360 degrees type of feedback i.e. using a full range of sources to be collected about the individual (Torrington, Taylor and Hall 2008) but a one-to-one type of appraisal with the manager.
Performance management reflects the company culture i.e. “the collective programming of the mind.” (Hofstede 2001) and the culture will drive an attitude i.e. “certain regularities of an individual’s feelings, thoughts and predispositions to act towards some aspects of their environment” (Secord and Backman 1969) that will then lead the capacity of delivering towards objectives.
The company’s culture is then key to foster better performance. There are different ways the culture can manifest itself e.g. Deal and Kennedy’s corporate culture (1982), Hofstede (1997) or Johnson and Scholes (2008) but they all converge saying that the way of working (organisation, controls, practices, environment, …) is one of the main attributes of the culture. BA adapted its culture to cope with the different events depicted before and subsequent different visions-missions e.g. from “To be a safe airline” to “To be a competitive airline” i.e. the values and beliefs had to shift from a technical, bureaucratic and authoritarian orientation (Royal Air Force background) to a customer facing, market orientated organisation. To ensure implementation of this new culture, it implied a change in ways of working and a shift of attitude, measured through performance management, to achieve the new objectives.
Areas of improvement
As per Mullins (2005) and Buchanan & Huczynski (2004) change is generating resistance, and that can be attributed to different factors as e.g. misunderstanding, fear of the unknown etc... What is important is how to handle and overcome the resistance to change in order to deliver the change itself.
Resistance to change becomes a restraining factor as they have to fight against people losing part of their power as the organisation is flattening to transform from a technology based company into a learning one. To achieve this though, it will be necessary to improve the communication to cascade the vision and mission of the company to all layers to also implement the new culture and modify employees’ attitude. This would also improve the performance of the employees as this will drive towards the desired attitude.
BA should improve the employees’ relations by, even if the style is constitutional, spending more times to get stakeholders, including unions, on board and get their buy-in before going to implementation. This means involving stakeholders in the decision process and convincing them on the rationale behind the change.
Refreezing the organisation may become necessary at least for a period of time in order to have a new baseline from where to start fresh and develop the two main new views i.e. “As is” and “To be”. This will allow HR to do proper planning and adapt policies and processes to recruit the right people with the right skills and competences for the right jobs at the right time.
Conclusion
In conclusion, HRM practices have definitely helped in all areas of the BA metamorphosis. It has been in the centre of the change process to review the organisational structure, hire the right resources, develop the redundancy programme, etc… Without implementing proper HRM processes, BA would have failed to improve their organisational effectiveness and, even if not perfect, it should give a long-term competitive advantage against the competition by its resources’ heterogeneity and deployment of the key resources to increase the returns. It also makes the whole coherent to become the world’s leading global premium airline.
References and bibliography
ANALOUI, F., 2002. The Changing Patterns of Human Resource Management. Ashgate, Hampshire.
BARNEY, J., 1991. Firm resources and sustained competitive advantage. Journal of Management Vol. 17, No. 1, pp 99-120.
BRITISH AIRWAYS Plc., 2010. 2009/10 Annual Report and Accounts. (Chairman Martin Broughton). London: Likemind.
BRITISH AIRWAYS Plc., 2010. Explore Our Working World. [online]. Harmondsworth: British Airways Plc.. Available from: http://www.britishairwaysjobs.com/baweb1/ [Accessed 9 December 2010]
BUCHANAN, D. and HUCZYNSKI, A., 2004. Organizational Behaviour – An Introductory Text, 5th ed. London, UK: FT Prentice Hall.
CIPD, 2007. Factsheet “Trade unions: a short history”. London, UK: CIPD
CLARK, G., 2005. Performance Management Strategies, in G. Salaman, J. Storey and J. Billsberry (eds), Strategic Human Resource Management: Theory and Practice . London: The Open University in association with Sage.
HELLER R., 2006. SWOT: Assess the strengths, weaknesses, opportunities and threats of your business with SWOT analysis. [online]. Cornwall, UK: Thinking Managers Heller Management Ltd. Available from: http://www.thinkingmanagers.com/management/strengths-weaknesses.php [Accessed 9 December 2010]
HOFSTEDE, G., 2001. Culture's Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations 2nd ed. Thousand Oaks, CA: Sage Publications, Inc.
LEDWIDGE J., 2007. "British Airways: the case for a human makeover: New approach would leave the airline less prone to disruptions and PR blunders". Human Resource Management International Digest, Vol. 15 Iss: 5, pp.7 – 10
MULLINS L., 2005. Management and Organisational Behaviour. 7th ed. UK: Pearson Education Limited.
PARKER, D., 1999. Privatization and Supply Chain Management: On the Effective Alignment of Purchasing and Supply after Privatization. New York, USA: Routledge.
PURCELL, J. and SISSON, K., 1983. Strategies and practice in the management of industrial relations. Oxford: Blackwell.
REY-MARMONIER, E., 2009. Internal Approaches to Change – Change Models (TOPIC_6_Approaches_to_change_management.ppt). UK: The Robert Gordon University
ROWLEY, C. and JACKSON, K., 2010. Human Resource Management: The Key Concepts. London: Routledge.
SECORD, P.F. and BACKMAN, C.W., 1969. Social Psychology. New York: McGraw-Hill.
TORRINGTON, D., TAYLOR, S. and HALL, L., 2008. Human Resource Management, 7th ed. London, UK: Prentice-Hall.
British Airways HR Management (part 1)
1. Introduction
British Airways is the UK’s largest international scheduled carrier and also one of the leading global airlines. Some figures to better understand British Airways’ importance in the economic landscape, it connects to 300 destinations and carried in 2009/2010 nearly 32 million passengers. The revenue during the same exercise was GBP 8 billion with 238 aircrafts in service (British Airways Plc. 2010).
Two main events led British Airways to adopt its current strategy. The first is in 1987 the privatisation and the adoption of a new mission ‘To be the Best and Most Successful Company in the Airline Industry’. The second being the strategic turn-around in 1997 that lead to the definition of a new mission to address four key areas: the global economic climate, the competition, what customers and employees want (Analoui 2002).
Now that we have a better view on the company’s characteristics, we can develop the two folds of the question, critical evaluation of British Airways HR management and analysis of the fit between the organisation’s human resources and corporate strategies.
2. British Airways Human Resources (HR) strategy
a. Human Resources Management (HRM) models
There are many HRM models out there (Harvard, Michigan, etc…) but there are mainly three different approaches (Torrington, Hall and Taylor 2008) to achieve competitive advantage through HRM. The universalist approach described by Guest (1989) as a one size fits all i.e. derived from the best practices philosophy also supported by other academics e.g. Delery and Dory (1996), Pfeffer (1994) but some others are also questioning how easy it may be to shift focus of the organisation (Whipp 1992) and even to achieve the goals (Purcell 1991). The fit or contingency approach that can be found in Fombrun et al (1984) is based on both internal and external fit and focus on selection, appraisal, development and reward. This model has been criticised mainly because of its one-way relationship with organisational strategy. The resourced-based approach (Boxall 1996) is built on attributes of resources. To achieve competitive advantage, resources should be Valuable, Rare, Inimitable and Non-substitutable (VRIN).
b. British Airways HRM aspects
To define the HR model used by British Airways, we should first analyse the main aspects of its HR Management:
• creating motivation and commitment of all employees which continue to play a major part in the success of the company.
• some of HR measures are clearly designed to improve and support employees’ motivation (British Airways Plc. 2010).
• a remuneration scheme with profit sharing and encouraged share ownership, this is an effective way for employees to feel more involved in the company’s results (British Airways Plc. 2010),
• training and development are instrumental to ensure resources will be able not only to feel valued in the company but also will be able to enable business objectives achievement (British Airways Plc. 2010)
• diversity and inclusiveness is seen as a key aspect in the recruitment strategy, this includes genders, ethnicities, religions, etc… (British Airways Plc. 2010)
c. HRM model used by British Airways
The aspects depicted in the previous paragraph show that the internal resources are linked (KPIs, ownership, etc…) including the human resources. As described above we also realise that human values are in the middle of British Airways strategy. As quoted page 236 of the 4th edition of Managing Change (Burnes 2004), Hax and Majluf (1996 p. 10) state that: “The essence of the resource-based model ... [is] that competitive advantage is created when resources and capabilities that are owned exclusively by the firm are applied to developing unique competencies. Moreover, the resulting advantage can be sustained due to the lack of substitution and imitation capabilities by the firm’s competitors.”
British Airways used a Resourced Based Model to achieve above average profitability by developing VRIN (Value, Rare, Inimitable, Non-substitutable) resources (Barney 1991). To substantiate this (Parker 1999), let us go back to the mid-nineties when the group started a portfolio analysis and defined the level of criticality of its operations. Based on this review, decision has been made to outsource resources (including human resources) that are not key to the core business. As other major corporations, they retained the strategic components (VRIN) and outsourced the routine activities. This decision helping the group to achieve outsourcing goals i.e. costs reduction, higher quality of services, agility and better focus on core business to meet the business objectives as defined in the introduction.
d. Limitations of the Resource-based model
There is no perfect model, or else there would only be one. But what are the ones of this model used by British Airways? Burnes (2004) mentions the lack of empirical support and also the complexity and ambiguousness of the resources definition. By design, the model is more focusing to the internal resources than on the external competition e.g. there is no link with the product markets, it may be difficult to find VRIN resources. There is also little evidence that many firms have adopted the model.
e. Conclusion
British Airways is implementing a model that, even if not perfect, should give a long-term competitive advantage against the competition by its resources heterogeneity and deployment of the key resources to increase the returns.
3. The fit between the organisation’s human resources and corporate strategies
a. British Airways strategies and objectives
As per the British Airways annual report 2009/2010, the company has defined five main strategic objectives to transform British Airways into the world’s leading global premium airline:
• Be the airline of choice for long haul premium customers.
• Deliver an outstanding service for customers at every touch point.
• Grow our presence in key global cities.
• Build on our leading position in London.
• Meet our customers’ needs and improve margins through new revenue streams.
To deliver these objectives five main streams have been developed to build the business plan i.e. the orientation of the company till 2012. These streams are colleagues, partnership, performance, excellence and customer. Each of them is measured since 2006 and allow a close monitoring of delivery. There is an HRM component in all streams to become the world’s leading premium airline.
b. Human Resources support to corporate strategies
We can indeed talk of a fit relationship between business and HR strategy. The fit model (Torrington, Hall and Taylor 2008) recognises the important of the human resources (employees) in the achievements of the company i.e. business objectives. Based on the 2009/2010 annual report, it is clearly stated “The Board sets the Company’s strategic aims, ensures that the necessary financial and human resources are in place for the Company to meet its objectives and reviews management performance”. This tells that we have a top-down approach from the board and that HR will have to respond to the business strategy by defining its own strategy to support the business goals. What does that mean in details for our five strategic business objectives?
In order to be the airline of choice for long haul premium customers, deep understanding of customers’ needs is key and so retaining experienced staff is important and hiring new resources with sharp specific skills will be at the heart of recruitment. On the other delivering an outstanding service, specific training as for instance service with style and also have a reward scheme. Thirdly to grow in key global cities, the strategy here will be to do this not only through under British Airways payroll employees but also use partnerships (expanding airlines network) to fill these new positions. For building on their leading position in London, it is important to centralise core processes and skilled employees in London to make this a sustainable position. To improve margins and develop new streams, a specific strategy will have to take place to develop actions in the group in order to get creativity and this including external resources too.
In summary, the company will keep building on the resources’ commitment by increasing awareness about customer service and making sure that this behaviour will be embedded in the company’s culture. There will be emphasis on the front-line leaders and this strategy will also be reflected in the reward scheme and a performance-related pay (British Airways Plc. 2010). Looking at the Explore our working world website (British Airways Plc. 2010), we can clearly see that HR developed positions or roles in order to be successful in achieving its business objectives.
c. Conclusion
British Airways did define clear strategic objectives and did adapt their HR management to support the delivery of its goals. Using the fit model (business objectives driving HR strategy) that puts employees in the centre is aligned with the HRM model, resourced-based, and therefore makes the whole coherent to achieve long-term competitive advantage to become the world’s leading global premium airline.
4. References and bibliography
ANALOUI, F., 2002. The Changing Patterns of Human Resource Management. Ashgate, Hampshire.
BARNEY, J., 1991. Firm resources and sustained competitive advantage. Journal of Management Vol. 17, No. 1, pp 99-120.
BOXALL, P.F. ,1996. The strategic HRM debate and the resource-based view of the firm, Human Resource Management Journal, Vol. 6, No. 3, pp. 59–75.
BRITISH AIRWAYS Plc., 2010. 2009/10 Annual Report and Accounts. (Chairman Martin Broughton). London: Likemind.
BRITISH AIRWAYS Plc., 2010. Explore Our Working World. [online]. Harmondsworth: British Airways Plc.. Available from: http://www.britishairwaysjobs.com/baweb1/ [Accessed 2 November 2010]
BURNES, B., 2004. Managing Change. 4th ed. London, UK: Prentice-Hall.
DELERY, J. and DOTY, D.H., 1996. Modes of Theorising in Strategic Human Resource Management: Tests of Universalistic, Contingency and Configurational Performance Predictions, Academy of Management Journal , Vol. 39, No. 4.
FOMBRUN, C., TICHY, N.M. and DEVANNA, M.A., 1984. Strategic Human Resource Management. New York: John Wiley and Sons.
GUEST, D., 1989. Personnel and HRM: Can you tell the difference?, Personnel Management (January).
PARKER, D., 1999. Privatization and Supply Chain Management: On the Effective Alignment of Purchasing and Supply after Privatization. New York, USA: Routledge.
PFEFFER, J., 1994. Competitive Advantage Through People . Boston: Harvard Business School Press.
PURCELL, J., 1991. The impact of corporate strategy on human resource management, in J. Storey (ed.) New Perspectives on Personnel Management. London: Routledge.
TORRINGTON, D., TAYLOR, S. and HALL, L., 2008. Human Resource Management, 7th ed. London, UK: Prentice-Hall.
WHIPP, R., 1992. Human resource management, competition and strategy: some productive tensions, in P. Blyton and P. Turnbull (eds) Reassessing Human Resource Management. California: Sage Publications.
British Airways is the UK’s largest international scheduled carrier and also one of the leading global airlines. Some figures to better understand British Airways’ importance in the economic landscape, it connects to 300 destinations and carried in 2009/2010 nearly 32 million passengers. The revenue during the same exercise was GBP 8 billion with 238 aircrafts in service (British Airways Plc. 2010).
Two main events led British Airways to adopt its current strategy. The first is in 1987 the privatisation and the adoption of a new mission ‘To be the Best and Most Successful Company in the Airline Industry’. The second being the strategic turn-around in 1997 that lead to the definition of a new mission to address four key areas: the global economic climate, the competition, what customers and employees want (Analoui 2002).
Now that we have a better view on the company’s characteristics, we can develop the two folds of the question, critical evaluation of British Airways HR management and analysis of the fit between the organisation’s human resources and corporate strategies.
2. British Airways Human Resources (HR) strategy
a. Human Resources Management (HRM) models
There are many HRM models out there (Harvard, Michigan, etc…) but there are mainly three different approaches (Torrington, Hall and Taylor 2008) to achieve competitive advantage through HRM. The universalist approach described by Guest (1989) as a one size fits all i.e. derived from the best practices philosophy also supported by other academics e.g. Delery and Dory (1996), Pfeffer (1994) but some others are also questioning how easy it may be to shift focus of the organisation (Whipp 1992) and even to achieve the goals (Purcell 1991). The fit or contingency approach that can be found in Fombrun et al (1984) is based on both internal and external fit and focus on selection, appraisal, development and reward. This model has been criticised mainly because of its one-way relationship with organisational strategy. The resourced-based approach (Boxall 1996) is built on attributes of resources. To achieve competitive advantage, resources should be Valuable, Rare, Inimitable and Non-substitutable (VRIN).
b. British Airways HRM aspects
To define the HR model used by British Airways, we should first analyse the main aspects of its HR Management:
• creating motivation and commitment of all employees which continue to play a major part in the success of the company.
• some of HR measures are clearly designed to improve and support employees’ motivation (British Airways Plc. 2010).
• a remuneration scheme with profit sharing and encouraged share ownership, this is an effective way for employees to feel more involved in the company’s results (British Airways Plc. 2010),
• training and development are instrumental to ensure resources will be able not only to feel valued in the company but also will be able to enable business objectives achievement (British Airways Plc. 2010)
• diversity and inclusiveness is seen as a key aspect in the recruitment strategy, this includes genders, ethnicities, religions, etc… (British Airways Plc. 2010)
c. HRM model used by British Airways
The aspects depicted in the previous paragraph show that the internal resources are linked (KPIs, ownership, etc…) including the human resources. As described above we also realise that human values are in the middle of British Airways strategy. As quoted page 236 of the 4th edition of Managing Change (Burnes 2004), Hax and Majluf (1996 p. 10) state that: “The essence of the resource-based model ... [is] that competitive advantage is created when resources and capabilities that are owned exclusively by the firm are applied to developing unique competencies. Moreover, the resulting advantage can be sustained due to the lack of substitution and imitation capabilities by the firm’s competitors.”
British Airways used a Resourced Based Model to achieve above average profitability by developing VRIN (Value, Rare, Inimitable, Non-substitutable) resources (Barney 1991). To substantiate this (Parker 1999), let us go back to the mid-nineties when the group started a portfolio analysis and defined the level of criticality of its operations. Based on this review, decision has been made to outsource resources (including human resources) that are not key to the core business. As other major corporations, they retained the strategic components (VRIN) and outsourced the routine activities. This decision helping the group to achieve outsourcing goals i.e. costs reduction, higher quality of services, agility and better focus on core business to meet the business objectives as defined in the introduction.
d. Limitations of the Resource-based model
There is no perfect model, or else there would only be one. But what are the ones of this model used by British Airways? Burnes (2004) mentions the lack of empirical support and also the complexity and ambiguousness of the resources definition. By design, the model is more focusing to the internal resources than on the external competition e.g. there is no link with the product markets, it may be difficult to find VRIN resources. There is also little evidence that many firms have adopted the model.
e. Conclusion
British Airways is implementing a model that, even if not perfect, should give a long-term competitive advantage against the competition by its resources heterogeneity and deployment of the key resources to increase the returns.
3. The fit between the organisation’s human resources and corporate strategies
a. British Airways strategies and objectives
As per the British Airways annual report 2009/2010, the company has defined five main strategic objectives to transform British Airways into the world’s leading global premium airline:
• Be the airline of choice for long haul premium customers.
• Deliver an outstanding service for customers at every touch point.
• Grow our presence in key global cities.
• Build on our leading position in London.
• Meet our customers’ needs and improve margins through new revenue streams.
To deliver these objectives five main streams have been developed to build the business plan i.e. the orientation of the company till 2012. These streams are colleagues, partnership, performance, excellence and customer. Each of them is measured since 2006 and allow a close monitoring of delivery. There is an HRM component in all streams to become the world’s leading premium airline.
b. Human Resources support to corporate strategies
We can indeed talk of a fit relationship between business and HR strategy. The fit model (Torrington, Hall and Taylor 2008) recognises the important of the human resources (employees) in the achievements of the company i.e. business objectives. Based on the 2009/2010 annual report, it is clearly stated “The Board sets the Company’s strategic aims, ensures that the necessary financial and human resources are in place for the Company to meet its objectives and reviews management performance”. This tells that we have a top-down approach from the board and that HR will have to respond to the business strategy by defining its own strategy to support the business goals. What does that mean in details for our five strategic business objectives?
In order to be the airline of choice for long haul premium customers, deep understanding of customers’ needs is key and so retaining experienced staff is important and hiring new resources with sharp specific skills will be at the heart of recruitment. On the other delivering an outstanding service, specific training as for instance service with style and also have a reward scheme. Thirdly to grow in key global cities, the strategy here will be to do this not only through under British Airways payroll employees but also use partnerships (expanding airlines network) to fill these new positions. For building on their leading position in London, it is important to centralise core processes and skilled employees in London to make this a sustainable position. To improve margins and develop new streams, a specific strategy will have to take place to develop actions in the group in order to get creativity and this including external resources too.
In summary, the company will keep building on the resources’ commitment by increasing awareness about customer service and making sure that this behaviour will be embedded in the company’s culture. There will be emphasis on the front-line leaders and this strategy will also be reflected in the reward scheme and a performance-related pay (British Airways Plc. 2010). Looking at the Explore our working world website (British Airways Plc. 2010), we can clearly see that HR developed positions or roles in order to be successful in achieving its business objectives.
c. Conclusion
British Airways did define clear strategic objectives and did adapt their HR management to support the delivery of its goals. Using the fit model (business objectives driving HR strategy) that puts employees in the centre is aligned with the HRM model, resourced-based, and therefore makes the whole coherent to achieve long-term competitive advantage to become the world’s leading global premium airline.
4. References and bibliography
ANALOUI, F., 2002. The Changing Patterns of Human Resource Management. Ashgate, Hampshire.
BARNEY, J., 1991. Firm resources and sustained competitive advantage. Journal of Management Vol. 17, No. 1, pp 99-120.
BOXALL, P.F. ,1996. The strategic HRM debate and the resource-based view of the firm, Human Resource Management Journal, Vol. 6, No. 3, pp. 59–75.
BRITISH AIRWAYS Plc., 2010. 2009/10 Annual Report and Accounts. (Chairman Martin Broughton). London: Likemind.
BRITISH AIRWAYS Plc., 2010. Explore Our Working World. [online]. Harmondsworth: British Airways Plc.. Available from: http://www.britishairwaysjobs.com/baweb1/ [Accessed 2 November 2010]
BURNES, B., 2004. Managing Change. 4th ed. London, UK: Prentice-Hall.
DELERY, J. and DOTY, D.H., 1996. Modes of Theorising in Strategic Human Resource Management: Tests of Universalistic, Contingency and Configurational Performance Predictions, Academy of Management Journal , Vol. 39, No. 4.
FOMBRUN, C., TICHY, N.M. and DEVANNA, M.A., 1984. Strategic Human Resource Management. New York: John Wiley and Sons.
GUEST, D., 1989. Personnel and HRM: Can you tell the difference?, Personnel Management (January).
PARKER, D., 1999. Privatization and Supply Chain Management: On the Effective Alignment of Purchasing and Supply after Privatization. New York, USA: Routledge.
PFEFFER, J., 1994. Competitive Advantage Through People . Boston: Harvard Business School Press.
PURCELL, J., 1991. The impact of corporate strategy on human resource management, in J. Storey (ed.) New Perspectives on Personnel Management. London: Routledge.
TORRINGTON, D., TAYLOR, S. and HALL, L., 2008. Human Resource Management, 7th ed. London, UK: Prentice-Hall.
WHIPP, R., 1992. Human resource management, competition and strategy: some productive tensions, in P. Blyton and P. Turnbull (eds) Reassessing Human Resource Management. California: Sage Publications.
Saturday, 11 December 2010
Oticon - Change Management
Critically assess Oticon’s approach to change management.
Oticon is born in 1904 as a distributor and in 2007, Oticon’s most sophisticated product ever was introduced on the market (Oticon 2009). A major milestone in the 100 years of Oticon’s existence has been the implementation of the strategic change initiated by Lars Kolind in response to modifications in the operating environment and is resulting to multiple operational changes.
We are here in front of a change that modifies in depth the culture, management and structure of the whole organisation. Beside the dimension of the change there are other factors that have to be analysed like change typologies, strategies, triggers, drivers and barriers and also the level of effectiveness of this change.
a. Typologies:
There are different change typologies e.g. Grundy (1993), Tushman et al (1986), Dunphy & Stace (1993) or Burnes (2004 p.323) “Incremental or fine-tuning forms of change are geared more to changing the activities, performance, behaviour, attitudes of individuals and groups, whereas transformational change is geared towards the processes, structures and culture of the entire organisation”.
Nadler et al. (1995) also defined 4 types of changes that are somehow similar to the three already described; Tuning (incremental and proactive), Adaptation (incremental and reactive), Re-orientation (transformational and proactive) and Re-creation (transformational and reactive).
This change is a large scale Re-creation or Corporate transformation i.e. frame-breaking or discontinuous change to transform the organisation from slow and inflexible old-fashioned lacking key capabilities especially in developing and promoting new products, into a learning and knowledge based organisation. Kolind made the decision to be radical by removing all vestiges of Oticon’s “old style” and replacing all the ways of working in terms of organisation, communication, job descriptions, line management, etc… even building and workstations.
b. Strategies
According to Johnson, G. & Scholes, K. (1993 p.10), strategy could be defined as: “the direction and scope of an organisation over the long term which achieves advantage for the organisation through its configuration of resources within a changing environment to meet the needs of markets and to fulfil stakeholder expectations.”
Interpreting the drivers for change experienced by Oticon, which necessitated a radical re-thinking of the company’s competitive strategies, demonstrates that the company found itself misaligned with its external environment. Trading losses, increased competition and technological advances challenging Oticon’s state of equilibrium (Hayes, 2007 p.80) triggered a hard drive to improve financial performance and maintain competitive advantage.
There are different models of strategy that are adopted in practice, i.e.:
a) Porter’s Competitive Forces Model
b) Resource Based Model
c) Strategic Conflict Model
d) Theory E and O
e) Vision building
Depending on the phases of the change we are in and the level of change (corporate, business or functional) we can use multiple strategies or at the same time or in the different implementation steps.
Considering the competitive forces model (threat of new entrants, bargaining power of suppliers, threat of substitute products or services and bargaining power of buyers), Porter maintains that only three generic strategies are available to organisations: cost leadership, product differentiation and specialisation by focus. Oticon’s CEO built his vision of product differentiation developing a concept of the organisation’s ideal future, identifying its mission and formulating a clear statement of desired outcomes. He made it clear that the new mission of the company was: “To help people with hearing difficulties to live life as they wish, with the hearing they have.”.
At the same time we can also observe the mix of Theory E and O (Beer and Nohria. 2000 pp. 133-141) being implemented at the same time (1 2 Manage 2009 extract of “The key differences between theory E and Theory O” table):
Dimension of Change Theory E Theory O Theories E and O Combined
Leadership Manage from the top down Encourage participation from the bottom up Set direction from the top and engage the people below
Focus Emphasize structure and systems Build up corporate culture; employees’ behaviour and attitudes Focus simultaneously on the hard (structures and systems) and the soft (corporate culture)
Process Plan and establish programs Experiment and evolve Plan for spontaneity
If we look at the Leadership, Focus and Process, we realise that Oticon is effectively using that strategy in order to bring more buy-in from the organisation to develop a new culture based on blending the new systems (knowledge based organisation) and the human values (treat employees as responsible adults).
As mentioned earlier we also realise that human values are in the middle of Oticon’s new strategy. As quoted page 236 of the 4th edition of Managing Change (Burnes 2004), Hax and Majluf (1996 p. 10) state that:
“The essence of the resource-based model ... [is] that competitive advantage is created when resources and capabilities that are owned exclusively by the firm are applied to developing unique competencies. Moreover, the resulting advantage can be sustained due to the lack of substitution and imitation capabilities by the firm’s competitors.”
Oticon used a Resourced Based Model to achieve above average profitability by developing VRIN (Value, Rare, Inimitable, Non-substitutable) resources. They indeed involved the workers in getting consensus on the new direction and its rationale and developed new resources like offices, IT capabilities, skills, knowledge and aptitudes.
c. Triggers, drivers and barriers
The main triggers here are changes in technology, disconnect with market’s needs, unbalanced global positioning and more advanced competitors leading to the risk of being out of business. The company had to make a decision and define what will support the change initiative (drivers).
As described by Hayes, Force-field analysis, based on Lewin’s (1951) three-steps model involves two broad types of forces, the ones supporting and the ones resisting change. “When the forces pushing in one direction exceed the forces pushing in the opposite direction the dynamic equilibrium changes. The level of behaviour can be changed towards a more desirable state by increasing the strength of forces for change in the desired direction (increasing the driving forces) or by diminishing the strength of restraining forces” (2007 p. 137). There are other tools or methods to evaluate drivers and barriers to change as e.g. SWOT or PESTEL analysis that may even be more valuable as they will encompass a broader spectrum of data to analyse.
One of the main drivers (Supporting forces) was to bring Kolind as CEO of the company. Oticon was evolving in a growing market which is positive force to achieve better results. He had a vision for Oticon which was revolutionary by changing in depth the company’s values i.e. its reason to be and also to implement the technology to enable the change e.g. IT. Another major driver is the consistence of the vision and strategy and the way it had been put in place by involving all workforces (even if it is a top-down approach) and explaining not only the change but also the rationale.
On the other hand, there were some resisting forces as after analysis the CEO realised that there was nothing they could do better than the competition. Original skills and competencies were not adapted to the new structure and so had to change the culture.
Resistance to change was a restraining factor as they had to fight against people losing part of their power as the organisation was flattening to transform from a technology based company into a knowledge based one.
d. Level of effectiveness of the approach
There are 3 main approaches to Organisational change, planned, emergent and contingency. Lewin (1947), Bullock & Batten (1985) and Kotter (1995) defined steps in the Planned approach but based on the change that has been implemented and also the way it had been done shows a mix of the Planned approach (top-down approach) and Emergent as they will change the structure, the culture, the learning and the managerial behaviour. The CEO also involved the theory E and O in the process and built a shared vision i.e. we may say that the overall approach used is the Contingency one, meaning seeking to use the best method available for a specific environment.
Another key point explaining it is not a 100% Planned approach is that even if indeed we have an Unfreeze and a Make the change steps, we don’t really have a Refreeze as when it seemed to re-freeze, the CEO went back to a Make the change step (step 5 from Kotter 8 steps, 1995).
In conclusion, based on financial terms, market shares or the sustainability of the solution, there is no doubt this approach has been the right one for this specific environment. The vision has been clearly communicated and the different strategies used have been effectively and efficiently implemented to drive the change and overcome the resistance that could have undermined the objectives’ achievement.
Critically evaluate how Oticon deals with people issues during their change process
The implemented change is impacting not only the organisation but also the other stakeholders. It is therefore interesting to first analyse who are the impacted people to see how they were impacted and how their resistance has been overcome while implementing the new structure. The leadership style used to change the company’s culture is also key to analyse how Oticon dealt with people during the change.
The aim of the change is multiple, redefining corporate culture to include a better customer service, to improve employees’ involvement and also to facilitate launches of new ideas and products on the market place, to achieve competitive edge in the sector.
a. Stakeholders analysis
I would paraphrase the PMBOK Guide definition of stakeholder i.e. an individual or an organisation that is actively involved in the change, or whose interests may be positively or negatively affected as a result of change execution or change completion; they may also exert influence over the change and its result (PMBOK Guide, 2000).
Based on this definition, we can identify the stakeholders and map them according to their Power/Interest in the change to assess their level of influence:
This analysis allows us to better determine how to approach the different stakeholders to make sure we can get their buy-in to achieve the objectives of the change.
As we can see, internally the resources are highly interested in the change as they will be the engine to make it happen. To mitigate the risk of potential conflicts, Lars Kolind has clearly communicated that he has the legitimate formal power to send the ultimatum that if someone is not eager to accept the change he should leave the company.
b. Resistance to change
As per Mullins (2005) and Buchanan & Huczynski (2004) change is generating resistance and that can be attributed to different factors as e.g. misunderstanding, fear of the unknown etc... What is important is how we handle and overcome the resistance to change in order to deliver the change itself. We also have to recognise that at the same time different parts of the same organisation can be at different stages of the change. Elisabeth Kubler-Ross demonstrated in 1969 the main steps individuals go through when there is a change:
• Denial
• Anger
• Bargaining
• Depression
• Acceptance
We also have to realise that even if we go through these stages, it may take more or less time to go through these.
If we consider the timeline of the Oticon change, we can see that it took from 1988 (appointment of the new president) till August 8 at 08:00AM (this shows Chinese superstition) to have the change implemented and impressive results were reported in 1994. After 2 years of using the usual tools to increase profit, Lars Kolind realised that he had to go for more radical change to bring Oticon to a sustained competitive edge. It took 15 months to prepare all minds and souls to accept the change to work in a “structureless” structure or a “spaghetti organisation”.
He also successfully used the Participation tactic (Kotter and Schlesinger 1979) to overcome the potential reluctance in the company. As the company is to be seen as being composed by responsible adults, they could not hide the situation anyway, therefore it made sense to get the support from the staff and be open with them. Other tools have also been used, education and communication as communication is at the centre of the new approach, so the new direction and the human values have been communicated to get employees buy-in and understanding. Facilitation and support tactic to ensure staff will have the right level of skills has also been put in place. Oticon offered the employees a PC and motivated them to identify their training needs.
On the other hand, no negotiation was available, as if the staff rejects the new approach, he is asked to leave the company.
c. Leadership style
Leadership means different things to different people and many theories have been developed about leadership e.g. Fred E. Fiedler (Contingency Model in 1967), James Kouzes and Barry Posner (Leadership in Action in 2003), etc… Let us also clarify the difference between a Leader and a Manager to avoid confusion. Hayes (2007 pp. 168-69) will split the differences in terms of what has to be done and the capacity to do it.
• “Managers decide what needs to be done through a process of goal setting, establishing detailed steps for achieving these goals and identifying and allocating the resources necessary for their achievement (through planning and budgeting). They develop the capacity to accomplish their agenda by organizing and staffing.”
• “Leaders, on the other hand, focus on setting a direction and developing the strategies necessary to move in that direction (creating a vision). They focus on aligning people, communicating the new direction and creating coalitions committed to getting there.”
Lars Kolind can be seen as a visionary leader using a transformational approach to motivate his employees to deliver is vision. He is, as defined by Burnes (2004 p.510), using the force of his personality to motivate his followers to sacrifice their self-interest in favour of Oticon.
The Managers also had to play a role (Top, Middle and First level management, (Burnes 2004 p.500)) delivering the vision. Simple processes have been implemented to open projects (1 senior manager approval is enough) and the most impacted managers are the ones moving from a hierarchical structure to a project based organisation which implied changes in their behaviour to attract the best staff in their team and retain them.
Oticon made the conscious decision to treat their employees as responsible adults i.e. used Theory Y assumptions. McGregor (1960) maintained that there are basically two views of human nature: a negative view – Theory X; and a positive view – Theory Y.
Theory X, consists in a view where the workforce tries to do as less as possible, avoid responsibility and will look for security more than what is best for the company.
Theory Y, on the other hand, consists in assumptions that give a much more positive view of human nature, e.g. eager to increase the level of responsibility, staff is usually keen on sharing and use creativity and consider work as something natural.
d. Oticon’s culture
Burns listed many definitions of organisational culture, but the one, even if laconic, I would go with, is the one from Drenna (1992: 3) i.e. Culture is “how things are done around here” (Burnes 2004 p.170).
We demonstrated that the change in Oticon can be seen as a Re-creation or Corporate transformation i.e. frame-breaking or discontinuous change that impacts the whole organisation. This means the culture in the organisation will have to change to enable sustainability of the competitive edge. This is the reason why all things reminding the past and the old culture had to disappear including walls and buildings.
Burke and Litwin (1992) consider that a transformational change e.g. Oticon’s involves a paradigm shift, and completely new behaviours. Instead of changes designed to help the organisation do things better (incremental change) the organisation needs to do things differently or do different things (Hayes 2007 p.121).
Denison gives us the 4 main pillars to success in this type of cultural change, consistency, mission, involvement and adaptability (Denison Consulting 2009). Lars Kolind used those 4 main streams in his implementation plan as he spent time building his vision, developed the mission for the company, consistently communicated it and involved the stakeholders in the process to adapt the company to the better respond to the market.
To conclude this part of the essay, we can say that Lars Kolind had the right leadership style to change in depth the culture of Oticon and sustain this change in order to deliver the vision he committed to.
Reference list / Bibliography
1 2 Manage, 2009. Theory E and Theory O. Edinburgh, UK: 1 2 Manage. Available from: http://www.12manage.com/description_beer_nohria_theories.html [Accessed 04 July 2009]
BEER, M. and NOHRIA, N., 2000. Cracking the code of change. Harvard Business Review (May-June), pp. 133-141
BUCHANAN, D. and HUCZYNSKI, A., 2004. Organizational Behaviour – An Introductory Text, 5th ed. London, UK: FT Prentice Hall.
BURKE, W. and LITWIN, G.H., 1992. A Causal Model of Organizational Performance and Change, Journal of Management, 18 (3), pp. 523–45.
BURNES, B., 2004. Managing Change, 4th ed. London, UK: Prentice-Hall.
DENISON CONSULTING, 2009, Presentation SIOP Profiles of Organizational Culture. Ann Arbor, MI, USA: Denison Consulting. Available from: www.denisonconsulting.com/dc/Portals/0/Docs/Presentation_SIOP_Profiles_of_Organizational_Culture.ppt [Accessed 05 July 2009]
HAYES, J. 2007. The Theory and Practice of Change Management. 2nd ed. Basingstoke, UK: Palgrave MacMillan
JOHNSON, G. & SCHOLES, K., 1993. Exploring Corporate Strategy. London, UK: Prentice Hall.
KOTTLER, J.P. and SCHLESINGER, L.A., 1979. Choosing strategies for change. Harvard Business Review, pp. 106-114.
MCGREGOR, D., 1960. Theory X and Theory Y, in D.S. Pugh (ed.), Organization Theory: Selected Readings. London, UK: Penguin.
MULLINS L., 2005. Management and Organisational Behaviour. 7th ed. UK: Pearson Education Limited.
NADLER, D., SHAW, R. and WALTON, A.E., 1995. Discontinuous Change. San Francisco, CA: Jossey - Bass.
OTICON, 2009, Oticon through the years. Copenhagen, Denmark: Oticon. Available from: http://www.oticon.com/com/AboutOticon/CorporateCulture/OticonThroughTheYears/index.htm [Accessed 09 July 2009]
Oticon is born in 1904 as a distributor and in 2007, Oticon’s most sophisticated product ever was introduced on the market (Oticon 2009). A major milestone in the 100 years of Oticon’s existence has been the implementation of the strategic change initiated by Lars Kolind in response to modifications in the operating environment and is resulting to multiple operational changes.
We are here in front of a change that modifies in depth the culture, management and structure of the whole organisation. Beside the dimension of the change there are other factors that have to be analysed like change typologies, strategies, triggers, drivers and barriers and also the level of effectiveness of this change.
a. Typologies:
There are different change typologies e.g. Grundy (1993), Tushman et al (1986), Dunphy & Stace (1993) or Burnes (2004 p.323) “Incremental or fine-tuning forms of change are geared more to changing the activities, performance, behaviour, attitudes of individuals and groups, whereas transformational change is geared towards the processes, structures and culture of the entire organisation”.
Nadler et al. (1995) also defined 4 types of changes that are somehow similar to the three already described; Tuning (incremental and proactive), Adaptation (incremental and reactive), Re-orientation (transformational and proactive) and Re-creation (transformational and reactive).
This change is a large scale Re-creation or Corporate transformation i.e. frame-breaking or discontinuous change to transform the organisation from slow and inflexible old-fashioned lacking key capabilities especially in developing and promoting new products, into a learning and knowledge based organisation. Kolind made the decision to be radical by removing all vestiges of Oticon’s “old style” and replacing all the ways of working in terms of organisation, communication, job descriptions, line management, etc… even building and workstations.
b. Strategies
According to Johnson, G. & Scholes, K. (1993 p.10), strategy could be defined as: “the direction and scope of an organisation over the long term which achieves advantage for the organisation through its configuration of resources within a changing environment to meet the needs of markets and to fulfil stakeholder expectations.”
Interpreting the drivers for change experienced by Oticon, which necessitated a radical re-thinking of the company’s competitive strategies, demonstrates that the company found itself misaligned with its external environment. Trading losses, increased competition and technological advances challenging Oticon’s state of equilibrium (Hayes, 2007 p.80) triggered a hard drive to improve financial performance and maintain competitive advantage.
There are different models of strategy that are adopted in practice, i.e.:
a) Porter’s Competitive Forces Model
b) Resource Based Model
c) Strategic Conflict Model
d) Theory E and O
e) Vision building
Depending on the phases of the change we are in and the level of change (corporate, business or functional) we can use multiple strategies or at the same time or in the different implementation steps.
Considering the competitive forces model (threat of new entrants, bargaining power of suppliers, threat of substitute products or services and bargaining power of buyers), Porter maintains that only three generic strategies are available to organisations: cost leadership, product differentiation and specialisation by focus. Oticon’s CEO built his vision of product differentiation developing a concept of the organisation’s ideal future, identifying its mission and formulating a clear statement of desired outcomes. He made it clear that the new mission of the company was: “To help people with hearing difficulties to live life as they wish, with the hearing they have.”.
At the same time we can also observe the mix of Theory E and O (Beer and Nohria. 2000 pp. 133-141) being implemented at the same time (1 2 Manage 2009 extract of “The key differences between theory E and Theory O” table):
Dimension of Change Theory E Theory O Theories E and O Combined
Leadership Manage from the top down Encourage participation from the bottom up Set direction from the top and engage the people below
Focus Emphasize structure and systems Build up corporate culture; employees’ behaviour and attitudes Focus simultaneously on the hard (structures and systems) and the soft (corporate culture)
Process Plan and establish programs Experiment and evolve Plan for spontaneity
If we look at the Leadership, Focus and Process, we realise that Oticon is effectively using that strategy in order to bring more buy-in from the organisation to develop a new culture based on blending the new systems (knowledge based organisation) and the human values (treat employees as responsible adults).
As mentioned earlier we also realise that human values are in the middle of Oticon’s new strategy. As quoted page 236 of the 4th edition of Managing Change (Burnes 2004), Hax and Majluf (1996 p. 10) state that:
“The essence of the resource-based model ... [is] that competitive advantage is created when resources and capabilities that are owned exclusively by the firm are applied to developing unique competencies. Moreover, the resulting advantage can be sustained due to the lack of substitution and imitation capabilities by the firm’s competitors.”
Oticon used a Resourced Based Model to achieve above average profitability by developing VRIN (Value, Rare, Inimitable, Non-substitutable) resources. They indeed involved the workers in getting consensus on the new direction and its rationale and developed new resources like offices, IT capabilities, skills, knowledge and aptitudes.
c. Triggers, drivers and barriers
The main triggers here are changes in technology, disconnect with market’s needs, unbalanced global positioning and more advanced competitors leading to the risk of being out of business. The company had to make a decision and define what will support the change initiative (drivers).
As described by Hayes, Force-field analysis, based on Lewin’s (1951) three-steps model involves two broad types of forces, the ones supporting and the ones resisting change. “When the forces pushing in one direction exceed the forces pushing in the opposite direction the dynamic equilibrium changes. The level of behaviour can be changed towards a more desirable state by increasing the strength of forces for change in the desired direction (increasing the driving forces) or by diminishing the strength of restraining forces” (2007 p. 137). There are other tools or methods to evaluate drivers and barriers to change as e.g. SWOT or PESTEL analysis that may even be more valuable as they will encompass a broader spectrum of data to analyse.
One of the main drivers (Supporting forces) was to bring Kolind as CEO of the company. Oticon was evolving in a growing market which is positive force to achieve better results. He had a vision for Oticon which was revolutionary by changing in depth the company’s values i.e. its reason to be and also to implement the technology to enable the change e.g. IT. Another major driver is the consistence of the vision and strategy and the way it had been put in place by involving all workforces (even if it is a top-down approach) and explaining not only the change but also the rationale.
On the other hand, there were some resisting forces as after analysis the CEO realised that there was nothing they could do better than the competition. Original skills and competencies were not adapted to the new structure and so had to change the culture.
Resistance to change was a restraining factor as they had to fight against people losing part of their power as the organisation was flattening to transform from a technology based company into a knowledge based one.
d. Level of effectiveness of the approach
There are 3 main approaches to Organisational change, planned, emergent and contingency. Lewin (1947), Bullock & Batten (1985) and Kotter (1995) defined steps in the Planned approach but based on the change that has been implemented and also the way it had been done shows a mix of the Planned approach (top-down approach) and Emergent as they will change the structure, the culture, the learning and the managerial behaviour. The CEO also involved the theory E and O in the process and built a shared vision i.e. we may say that the overall approach used is the Contingency one, meaning seeking to use the best method available for a specific environment.
Another key point explaining it is not a 100% Planned approach is that even if indeed we have an Unfreeze and a Make the change steps, we don’t really have a Refreeze as when it seemed to re-freeze, the CEO went back to a Make the change step (step 5 from Kotter 8 steps, 1995).
In conclusion, based on financial terms, market shares or the sustainability of the solution, there is no doubt this approach has been the right one for this specific environment. The vision has been clearly communicated and the different strategies used have been effectively and efficiently implemented to drive the change and overcome the resistance that could have undermined the objectives’ achievement.
Critically evaluate how Oticon deals with people issues during their change process
The implemented change is impacting not only the organisation but also the other stakeholders. It is therefore interesting to first analyse who are the impacted people to see how they were impacted and how their resistance has been overcome while implementing the new structure. The leadership style used to change the company’s culture is also key to analyse how Oticon dealt with people during the change.
The aim of the change is multiple, redefining corporate culture to include a better customer service, to improve employees’ involvement and also to facilitate launches of new ideas and products on the market place, to achieve competitive edge in the sector.
a. Stakeholders analysis
I would paraphrase the PMBOK Guide definition of stakeholder i.e. an individual or an organisation that is actively involved in the change, or whose interests may be positively or negatively affected as a result of change execution or change completion; they may also exert influence over the change and its result (PMBOK Guide, 2000).
Based on this definition, we can identify the stakeholders and map them according to their Power/Interest in the change to assess their level of influence:
This analysis allows us to better determine how to approach the different stakeholders to make sure we can get their buy-in to achieve the objectives of the change.
As we can see, internally the resources are highly interested in the change as they will be the engine to make it happen. To mitigate the risk of potential conflicts, Lars Kolind has clearly communicated that he has the legitimate formal power to send the ultimatum that if someone is not eager to accept the change he should leave the company.
b. Resistance to change
As per Mullins (2005) and Buchanan & Huczynski (2004) change is generating resistance and that can be attributed to different factors as e.g. misunderstanding, fear of the unknown etc... What is important is how we handle and overcome the resistance to change in order to deliver the change itself. We also have to recognise that at the same time different parts of the same organisation can be at different stages of the change. Elisabeth Kubler-Ross demonstrated in 1969 the main steps individuals go through when there is a change:
• Denial
• Anger
• Bargaining
• Depression
• Acceptance
We also have to realise that even if we go through these stages, it may take more or less time to go through these.
If we consider the timeline of the Oticon change, we can see that it took from 1988 (appointment of the new president) till August 8 at 08:00AM (this shows Chinese superstition) to have the change implemented and impressive results were reported in 1994. After 2 years of using the usual tools to increase profit, Lars Kolind realised that he had to go for more radical change to bring Oticon to a sustained competitive edge. It took 15 months to prepare all minds and souls to accept the change to work in a “structureless” structure or a “spaghetti organisation”.
He also successfully used the Participation tactic (Kotter and Schlesinger 1979) to overcome the potential reluctance in the company. As the company is to be seen as being composed by responsible adults, they could not hide the situation anyway, therefore it made sense to get the support from the staff and be open with them. Other tools have also been used, education and communication as communication is at the centre of the new approach, so the new direction and the human values have been communicated to get employees buy-in and understanding. Facilitation and support tactic to ensure staff will have the right level of skills has also been put in place. Oticon offered the employees a PC and motivated them to identify their training needs.
On the other hand, no negotiation was available, as if the staff rejects the new approach, he is asked to leave the company.
c. Leadership style
Leadership means different things to different people and many theories have been developed about leadership e.g. Fred E. Fiedler (Contingency Model in 1967), James Kouzes and Barry Posner (Leadership in Action in 2003), etc… Let us also clarify the difference between a Leader and a Manager to avoid confusion. Hayes (2007 pp. 168-69) will split the differences in terms of what has to be done and the capacity to do it.
• “Managers decide what needs to be done through a process of goal setting, establishing detailed steps for achieving these goals and identifying and allocating the resources necessary for their achievement (through planning and budgeting). They develop the capacity to accomplish their agenda by organizing and staffing.”
• “Leaders, on the other hand, focus on setting a direction and developing the strategies necessary to move in that direction (creating a vision). They focus on aligning people, communicating the new direction and creating coalitions committed to getting there.”
Lars Kolind can be seen as a visionary leader using a transformational approach to motivate his employees to deliver is vision. He is, as defined by Burnes (2004 p.510), using the force of his personality to motivate his followers to sacrifice their self-interest in favour of Oticon.
The Managers also had to play a role (Top, Middle and First level management, (Burnes 2004 p.500)) delivering the vision. Simple processes have been implemented to open projects (1 senior manager approval is enough) and the most impacted managers are the ones moving from a hierarchical structure to a project based organisation which implied changes in their behaviour to attract the best staff in their team and retain them.
Oticon made the conscious decision to treat their employees as responsible adults i.e. used Theory Y assumptions. McGregor (1960) maintained that there are basically two views of human nature: a negative view – Theory X; and a positive view – Theory Y.
Theory X, consists in a view where the workforce tries to do as less as possible, avoid responsibility and will look for security more than what is best for the company.
Theory Y, on the other hand, consists in assumptions that give a much more positive view of human nature, e.g. eager to increase the level of responsibility, staff is usually keen on sharing and use creativity and consider work as something natural.
d. Oticon’s culture
Burns listed many definitions of organisational culture, but the one, even if laconic, I would go with, is the one from Drenna (1992: 3) i.e. Culture is “how things are done around here” (Burnes 2004 p.170).
We demonstrated that the change in Oticon can be seen as a Re-creation or Corporate transformation i.e. frame-breaking or discontinuous change that impacts the whole organisation. This means the culture in the organisation will have to change to enable sustainability of the competitive edge. This is the reason why all things reminding the past and the old culture had to disappear including walls and buildings.
Burke and Litwin (1992) consider that a transformational change e.g. Oticon’s involves a paradigm shift, and completely new behaviours. Instead of changes designed to help the organisation do things better (incremental change) the organisation needs to do things differently or do different things (Hayes 2007 p.121).
Denison gives us the 4 main pillars to success in this type of cultural change, consistency, mission, involvement and adaptability (Denison Consulting 2009). Lars Kolind used those 4 main streams in his implementation plan as he spent time building his vision, developed the mission for the company, consistently communicated it and involved the stakeholders in the process to adapt the company to the better respond to the market.
To conclude this part of the essay, we can say that Lars Kolind had the right leadership style to change in depth the culture of Oticon and sustain this change in order to deliver the vision he committed to.
Reference list / Bibliography
1 2 Manage, 2009. Theory E and Theory O. Edinburgh, UK: 1 2 Manage. Available from: http://www.12manage.com/description_beer_nohria_theories.html [Accessed 04 July 2009]
BEER, M. and NOHRIA, N., 2000. Cracking the code of change. Harvard Business Review (May-June), pp. 133-141
BUCHANAN, D. and HUCZYNSKI, A., 2004. Organizational Behaviour – An Introductory Text, 5th ed. London, UK: FT Prentice Hall.
BURKE, W. and LITWIN, G.H., 1992. A Causal Model of Organizational Performance and Change, Journal of Management, 18 (3), pp. 523–45.
BURNES, B., 2004. Managing Change, 4th ed. London, UK: Prentice-Hall.
DENISON CONSULTING, 2009, Presentation SIOP Profiles of Organizational Culture. Ann Arbor, MI, USA: Denison Consulting. Available from: www.denisonconsulting.com/dc/Portals/0/Docs/Presentation_SIOP_Profiles_of_Organizational_Culture.ppt [Accessed 05 July 2009]
HAYES, J. 2007. The Theory and Practice of Change Management. 2nd ed. Basingstoke, UK: Palgrave MacMillan
JOHNSON, G. & SCHOLES, K., 1993. Exploring Corporate Strategy. London, UK: Prentice Hall.
KOTTLER, J.P. and SCHLESINGER, L.A., 1979. Choosing strategies for change. Harvard Business Review, pp. 106-114.
MCGREGOR, D., 1960. Theory X and Theory Y, in D.S. Pugh (ed.), Organization Theory: Selected Readings. London, UK: Penguin.
MULLINS L., 2005. Management and Organisational Behaviour. 7th ed. UK: Pearson Education Limited.
NADLER, D., SHAW, R. and WALTON, A.E., 1995. Discontinuous Change. San Francisco, CA: Jossey - Bass.
OTICON, 2009, Oticon through the years. Copenhagen, Denmark: Oticon. Available from: http://www.oticon.com/com/AboutOticon/CorporateCulture/OticonThroughTheYears/index.htm [Accessed 09 July 2009]
Marketing strategy - Customer segmentation - Pricing
1. GeoPure Water Technologies Marketing strategy
After having been through the 6 steps (Kotler P. and Keller K.L. 2009) of a market research (including the 2006 research from Texas A&M university), GeoPure launched on the market, based on Texas A&M university technology, a service for desalination of oilfield brine and so generate additional water resources for the Oil & Gas operations. Before going in the Marketing-Mix, let’s first identify the strategy GeoPure has put in place.
Considering the competitive forces model (threat of new entrants, bargaining power of suppliers, threat of substitute products or services and bargaining power of buyers), Michael Porter maintains that only three generic strategies are available to organisations: cost leadership, product differentiation and specialisation by focus.
GeoPure implemented a focused marketing strategy to get more intimacy with the targeted segment (Texas oil and gas industry and groundwater users in west Texas at first). The strategy is dynamic i.e. depending on the environment you have to adapt your strategy to meet the market and GeoPure moved into Differentiation strategy when they started to sell a treatment system to handle feed water where suspended solids have already been removed.
Kotler and Keller define as Categories of Service Mix (2009) the continuum from pure tangible goods to pure service with in the middle tangible goods with accompanying services, hybrid and major service with accompanying minor goods and services. Assuming that GeoPure keeps ownership of all the on-site deployed hardware, they then sell a service to their customers and not tangible goods.
This has an impact on the Marketing-Mix as we have 7 P’s to take into account, Price, Product, Promotion, Place, People, Process and Physical evidences.
The new Product development 8 steps (Kotler P. and Keller K.L. 2009) will help understanding how the 7 P’s interact with each other. Once they knew what would be the product (basic product as per Kotler and Keller 5 levels of products) and got the solution developed and tested they could work on the marketing strategy.
Place is a given as Texas is a major drilling place for the start before testing in other states and Canada. This also drove the distribution channels for this new service. Brassington and Pettitt (1997) define distribution channel as the structure linking a group of individuals or organisations through which a product (tangible) or service (intangible) is made available to the consumer or industrial user. In the GeoPure case, we have direct distribution covering the whole market as it is a new technology they are the only ones to offer.
Promotion has been key in getting the first commercial deals. The GeoPure presence in specific conferences dedicated to the targeted customer segments with marketing booths, published articles and companies specific presentation, opened doors and allowed them to get the first 30 customers.
Pricing is a critical point. We have a new technology so no competitors on this segment yet and customers needing a scarce resource (fresh water) but also a market to “earn”. It looks like a Maximum Market Skimming (Kotler P. and Keller K.L. 2009) approach would be the right one here as we have buyers interested in the service, there is no competition and the price is assumed to be lower than fighting for fresh water including delays caused by issues with local communities. Using this approach will allow GeoPure to make maximum profit before the competition develops similar technology and also come on the market. GeoPure must make sure they don’t overprice else the competitors may be aggressive on the price and ruin the whole strategy.
People are important in the extended Marketing-Mix, skilled workers, employees, management and consumers add value to the offered service. This includes the people in Texas A&M University, GeoPure but also the workforce at the customers’ side.
Process to get the service on the market is key to the strategy and in this case the way to get the demonstration unit built in a travel-friendly container to test and go through the various stages of the feasibility with the customers.
The Physical Evidences are the way to make a service tangible to the customer. The demonstration unit brings this to GeoPure as it will deliver fresh water to the customer as evidence of the efficiency of the service.
All these components of the marketing strategy have been communicated through mainly three out of the eight modes of the marketing communication-mix. Events and experiences, public relations and publicity and finally personal selling are the methods GeoPure used to position themselves on the market and get their first customers in the conferences they participated. These also enforced an integrated marketing communication to ensure all these communication efforts are co-ordinated.
There is no recipe for success but using these frameworks helped identifying what to achieve and having the right controls in place to maximise the success rate.
2. Select two different approaches to customer segmentation, explain their advantages and disadvantages and give examples of how companies have used them in practice.
Generally speaking companies have stopped doing mass marketing, they would prefer now using a “rifle” approach instead of a “shotgun” approach (Kotler P., Wong V., Saunders J. and Armstrong G. 1996). This will allow the company to focus energy and budget on the right target.
There are different dimensions in terms of segmentation as it is not only end-consumers (B2C) that are targeted but also it could be other companies (B2B) and the ways of segmenting will be different as the needs will be different and so may be the geographical aspect.
Segmentation for end consumers has multiple levels from mass marketing (Coke) to individual marketing (local tailor). Between those two extremes, I’ll select the geographic and demographic segmentations as they are popular to define a target segment.
I will use as an example Shell Gas in Belgium and how we used both segmentations together to fine-tune our marketing strategy.
Let’s focus on the small bulk part of the business as the cylinders is less impacted by these two segmentations (depends on a retailers network) and the large bulk is a B2B business.
Firstly we used the geographic segmentation as bulk propane can’t be sold (safety reasons) in cities and secondly we won’t advertise were natural gas is available as we are less convenient and more expensive. The second level is to split into three regions to include language into the equation as in Belgium we have three official languages and cultures. Having isolated per region the rural areas helps to define the target regions. This is where the geographical segmentation will stop, this is good enough if we intend to use press advertising in specific regions or communicate at local communities or even neighbourhood level. In our example of small bulk, this is not enough as propane has the image (in Belgium) of old fashioned individual heaters and not central heating. That explains the reason why we also integrated in the geographic segmentation the demographic aspect.
Demography will give more granularity in our customers’ segmentation. It will include attributes as age, gender, family size, social class, income, etc… (Kotler P. and Keller K.L. 2009). We did first, of course, segment our current customers’ base so that we have a clear idea of what type of demographic profile has our customer. Merging both segmentations will allow us to locate where we can find our potential customers and craft specific direct communication to ensure we send the right message to our prospects. Ideally we should be granular enough to impact the prospect positively when communicating our values.
Bottom line, that information was shared with the sales forces that could adapt the sales arguments (after a segmented communication sent to all prospects) and get the contract.
Based on this experience, these two segmentations are combining quiet well as demographic data can be seen as a “drill down” of the geographical data. This meaning that we can see the demography will be what is in the households. The downside of this combination is that even if it gives you a much better success rate when focusing on your prospects, it is still limited. Those two segmentations are telling you who the prospects are and where they live but not what are their needs and what they aspire to. As example for Shell Gas you may be well in our target profile but, no way, you will use Propane in your garden as you have a son working for Total fuel and so will only buy from that company or you will never buy from a Oil and Gas company because you believe that it is bad for the carbon footprint, etc…
These show that geography and demography are not giving you the motivations of the prospects and the importance of always knowing more about your target to be closer to the prospect and have the right message. So other segmentation types like behavioural or psychographic are complementary to these two in order to adapt the marketing strategy and programme to realise first then recognise the differences between prospects.
Other companies who used those 2 segmentations are e.g. Philips that did not realise that some of their appliances were not fitting in Japanese kitchens or Coca-Cola that sold in Spain bottles of two litres that did not fit in local fridges (Kotler P., Wong V., Saunders J. and Armstrong G. 1996). Mac Donald’s is another good example targeting messages based on both segmentations e.g. children in South of Belgium.
So we could demonstrate that segmentation can help to know customers better, give orientation to allocate resources (budgets) better and also better focus the organisation energy. On the other hand this may also lead to launching a multitude of products and so increase the overall marketing costs and reduce the brand impact on the market.
3. There are a number of strategies that can be taken when pricing products and services. Choose any one pricing approach, then critically analyse its merits and potential difficulties and identify in what market, company and competitive conditions such an approach would be appropriate.
First of all, let’s agree on the definition of price: “The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.” (Kotler P., Wong V., Saunders J. and Armstrong G. 1996). Kotler and Keller (2009) relate the pricing of products and services to where the company wants to position itself on the market. Five main objectives are: survival, maximum current profit, maximum market share, maximum market skimming and product-quality leadership. There are also other objectives related to non-profit or public organisations.
In this exercise, we’ll focus on the maximum market share pricing objective. The aim of this positioning, introducing a product at a low price is, is to increase the market shares of the company in a specific market. To achieve capturing the mass market by high initial sales, a market-based approach to pricing in which the price will be lower than the competition to make the product more attractive to the target has to be put in place.
For this pricing strategy to be effective, the market must be receptive to pricing i.e. low price will increase sales, increasing the volume will decrease the unit costs and low price will discourage competitors to enter the market (Kotler P. and Keller K.L. 2009). So it shows attractiveness where economies of scale can bring unit costs reduction and so can generate room to further decrease prices. A good example of penetration pricing is Dell using direct marketing and selling at low prices due to their direct selling strategy and also reducing distribution costs as they did not use distribution networks like their competitors. They could therefore gain market shares against big competitors as Compaq, HP and IBM. It allowed then this company to be leader in computers’ direct sales and so permitted Dell to make substantial profits.
The flip-side of this story shows also the difficulties that are linked to this strategy. Once the competitors adapted themselves to the new market needs by adding this new business model, Dell started to have problems and results started to soar as the big companies regained market share using the same strategy (Kotler P., Wong V., Saunders J. and Armstrong G. 1996).
The main advantages of this strategy are keeping new entrants (Porter’s Competitive forces model) out of this specific market by taking them by surprise, it may also speed-up the adoption rate of the product by e.g. word of mouth and also motivate the distribution channels as the stock turnover will be high. If the penetration is high and sustained as e.g. Windows, the product may also become an industry standard and so being preferred to even better products due to the adoption level in the sector.
The first downside of this strategy is that you have to make sure you can sustain being a cost leader (Porter’s Competitive forces model) and keep the new entrants out else your profit will quickly soar (look at Dell) and your market shares will drop accordingly. There are two other main disadvantages with this strategy. It becomes really difficult afterwards to raise prices for the same product in the same market as the customers will not understand why this happens, it is then necessary to upgrade the product e.g. from the basic to the expected product or even to the augmented one to justify the price increase. The second main issue is a branding, reputation one i.e. selling low cost may also mean low quality and so impact your image on the market i.e. is detrimental to the brand value and the reputation of the company.
Pushed to the extreme, penetration pricing may become, if the price is not sustainable and only aim to “destroy” the competition, an attempt to build a monopoly and this is illegal in some countries.
In conclusion, maximum market share or penetration pricing objective is a valid strategy as long as we evolve in a market that is ready for this and also only if we are ready to be “all-in” i.e. we go for cost leadership overall marketing strategy. It is critical to ensure the competition is kept out of the market or, as a minimum, unable to compete with the pricing we set. If this is the case, then we can reach a dominated or even captive market as the one of operating systems where Microsoft Windows became a standard after having used such a strategy from the beginning.
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