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
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