Managing for Competitive Advantage (part 6)

Ethics and Corporate Responsibility
(part A)

 by

 Charles Lamson

A culture of greed and arrogance breeds excessive secrecy.

A culture of misinformation and secrecy is typical of some public companies that have given in to the pressure to inflate stock prices by all possible means. This has undermined the public's trust in the integrity of the public market. Credibility and trust is everything and trust has evaporated.

What companies should do in the wake of scandals seems simple: Make sure your own accounting and financial-reporting practices are solid; explain how you report your results; double-check the independence of your auditors; speak clearly about your approach to business, and how you make your profits; talk candidly about what is and is not acceptable behavior.

Many of the decisions you face pose ethical dilemmas, and oftentimes the right thing to do is not nearly as evident as it is in many big news business scandals.

This post discusses ethics, and the next post will cover social responsibilities of business.

Ethics

The aim of ethics is to identify both the rules that should govern people's behavior and the "goods" that are worth seeking. Ethical decisions are guided by the underlying values of the individual. Values are principles of conduct such as caring, honesty, keeping of promises, pursuit of excellence, loyalty, fairness, integrity, respect for others, and responsible citizenship.

Most people would agree that all of these values are admirable guidelines for behavior. However, ethics becomes a more complicated issue when a situation dictates that one value overrule others. Ethics is the system of rules that governs the ordering of values.

An ethical issue is a situation, problem, or opportunity in which an individual must choose among several actions that must be evaluated as right or wrong. Ethical issues arise in every facet of life. We concern ourselves here with business ethics in particular. Business ethics comprises the moral principles and standards that guide behavior in the world of business.

Ethical Systems

Moral philosophy refers to the principles, rules, and values people use in deciding what is right or wrong. This is a simple definition in the abstract, but often terribly complex and difficult when facing real choices. How do you decide what is right and what is wrong? Do you know what criteria you apply, and how you apply them?

Ethics scholars point to various major ethical systems as guides. The first ethical system, universalism, states that individuals should uphold certain values, such as honesty, regardless of the immediate result. The important values are those that society needs to function. For instance, people should always be honest because otherwise communication would break down.

Teleology Teleology considers an act to be morally right or acceptable if it produces a desired result. The result can be anything desired by the person, including pleasure, personal growth, money, knowledge, or other self-interest. The key criterion to the consequences of the act, so teleology is sometimes referred to as consequentialism.

Two types of teleology are egoism and utilitarianism. Egoism defines acceptable behavior as that which maximizes consequences for the individual. "Doing the right thing," the focus of moral philosophy, is defined by egoism as "do the act that promotes the greatest good for oneself." If everyone follows this system, according to its proponents, the well-being of society as a whole should increase. This notion is similar to Adam Smith's concept of the Invisible hand in business. Smith argued that if every organization follows its own economic self-interest, the total wealth of society will be maximized.

Utilitarianism is also concerned with consequences, and as such is a teleological philosophy. But unlike egoism, utilitarianism seeks the greatest good for the greatest number of people. A utilitarian approach seeks to maximize total utility, achieving the greatest benefit for people affected by a decision.

Deontology Deontology focuses on the rights of individuals. Attention to individual rights ensures that equal respect is given to all persons. In this way, actions that maximize utility for many parties will be rejected if they do serious injustice to just one party. In contrast, utilitarianism might allow such an action in the spirit of maximizing overall consequences. Utilitarianism concentrates more on ends, and deontology more on means.

What criteria do you use? You may or may not be able at this point to choose the perspective that you use or would use in making tough decisions. But it should be clear that ethical issues can be evaluated for many different perspectives, that each perspective has a different basis for deciding right and wrong, and that people will disagree because they are assessing ethics by different ethical standards. 

Relativism Perhaps it seems clear that the individual makes ethical choices on a personal basis, applying personal perspectives. But this is not necessarily the case. Relativism defines ethical behavior based on the opinions and behaviors of relevant other people. This perspective acknowledges the existence of different ethical viewpoints, and turns to other people for advice, input, and opinions. Professional bodies provide guidelines to follow, and decision-makers can convene a group to share perspectives and derive conclusions. Group consensus is sought; a positive consensus signifies that an action is right, ethical, and acceptable.

Virtue ethics The moral philosophies just described apply different types of rules and reasoning. Virtue ethics is a perspective that goes beyond the conventional rules of society by suggesting that what is moral must also come from what a mature person with good moral character would deem right. Society's rules provide a moral minimum, and then moral individuals can transcend rules by applying their personal virtues such as faith, honesty, and integrity.

Individuals differ in this regard. Kohlberg's model of cognitive moral development classifies people into one of three categories based on their level of moral judgment. People in the preconventional stage make decisions based on concrete rewards and punishments and immediate self-interest. People in the conventional stage conform to the expectations of ethical behavior held by groups or institutions such as society, family, or peers. People in the principled stage take a broader perspective in which they see beyond authority, laws, and norms and follow their self-chosen ethical principles. Some people forever reside in the preconventional stage, some move into the conventional stage, and some develop further yet into the principled stage. Over time, and through education and experience, people may change their values and ethical behavior. 

These major ethical systems underlie personal moral choices and ethical decisions in business. 

*SOURCE: MANAGEMENT: THE NEW COMPETITIVE LANDSCAPE, 6TH ED., 2004, THOMAS S. BATEMAN & SCOTT A. SNELL, PGS. 138-140*

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Financial Review (The Podcast)

1st half: Conclusion of the analysis of The Alchemy of Finance with George Soros

 2nd half: Timely Top Stories in the World of Finance

Lamsonacare - Financial Review

Managing for Competitive Advantage (part 5)

Planning and Strategy

 by

 Charles Lamson

 Levels of Planning

 In an earlier post you learned about the three major types of managers: top level (strategic managers), middle-level (tactical managers), and frontline (operational managers). Because planning is an important management function, managers at all three levels use it. However, the scope and activities of the planning process at each level of the organization often differ. 

Strategic Planning

Strategic planning involves making decisions about the organization's long-term goals and strategies. Strategic plans have a strong external orientation and cover major portions of the organization. Senior executives are responsible for the development and execution of the strategic plan, although they usually do not formulate or implement the entire plan personally.

Strategic goals are major targets or end results that really relate to the long-term survival, value, and growth of the organization. Strategic managers---top-level managers---usually establish goals that reflect both effectiveness (providing appropriate outputs) and efficiency (a high ratio of outputs to inputs). Typical strategic goals include various measures of return to shareholders, profitability, quantity and quality of outputs, market share, productivity, and contribution to society.

A strategy is a pattern of actions and resource allocations designed to achieve the goals of the organization. The strategy an organization implements is an attempt to match the skills and resources of the organization to the opportunities found in the external environment; that is, every organization has certain strengths and weaknesses. The actions, or strategies, the organization implements should be directed toward building strength in the areas that satisfy the wants and needs of consumers and other key factors in the organization's external environment. Also, some organizations May Implement strategies that change or influence the external environment,.

Tactical and Operational Planning

Once the organization's strategic goals and plans are identified, they become the basis of planning done by middle-level and frontline managers. Goals and plans become more specific and involve shorter periods of time as planning moves from the strategic level to the operational level. Tactical planning translates broad strategic goals and plans into specific goals and plans that are relevant to a definite portion of the organization, often a functional area like marketing or human resources. Tactical plans focus on the major actions a unit must take to fulfill its part of the strategic plan.

Operational planning identifies the specific procedures and processes required at lower levels of the organization. Frontline managers usually develop plans for very short periods of time and focus on routine tasks such as production runs, delivery schedules, and human resources requirements. 

Linking Tactical, Operational, and Strategic Planning

The organization's strategic, tactical, and operational goals and plans must be consistent and mutually supportive. Whole Foods Market, for example, links its critical tactical and operational planning directly to its strategic planning. The firm describes itself on its website as a mission-driven company that aims to set the standards for excellence for food retailers. The firm measures its success in fulfilling its mission by "customer satisfaction, team member excellence and happiness, return on capital investment, improvement in the state of the environment, and local and larger community support."

Whole Foods' strategic goal is to sell the highest quality products that also offer high value for their customers. It's operational goals focus on ingredients freshness, taste, nutritive value, safety, and appearance that meet or exceed its customers expectations, including guaranteeing product satisfaction. Tactical goals include store environments that are "inviting, fun, unique, informed, comfortable, attractive, nurturing and educational" and safe and inviting work environment for its employees.


Whole Foods' operational goals focus on providing products that satisfy its customers,


Starbucks, has built its strategy of growth and profitability around the notion of excellent service and ambience. No longer is coffee just a morning ritual; it has evolved into something with a far more existential quality. "We are trying to create a third place for our customers," says former chairman Howard Schultz. A 'third place' is a place between home and work where people can come to get their own personal time out, their respite, meet with friends, have a sense of gathering."

A key tactical planning issue for Starbucks is linking its obsession with service and quality to a healthy bottom line. Excellent service attracts new customers and keeps loyal customers coming back. Excellent service and quality depend on highly efficient processes for brewing coffee and terrific customer relations. These process in turn are carried out by a dedicated and well trained workforce. According to Schultz, "We've never viewed coffee as a commodity. And we've never viewed our people as commodities. I think the foundation of our success is the passionate commitment we have to the quality of coffee that we buy and roast, and making sure that the people in our company are not simply a line item. We view our people as business partners." The company's "Bean Stock" program gives all employees the opportunity to own stock in the company and the company's commitment to training and benefits has established Starbucks as the employer of choice in the industry (its turnover rate is one-fifth that of others in the industry).

One method for linking strategic and operational planning at Starbucks is the balanced scorecard. Figure 1 shows how the balanced scorecard works. There are four primary cells: financial, customer, process, and people/learning. In each cell, Starbucks would identify the key drivers that help translate strategic goals to operational issues. Each of those goals would also have a set of metrics. For example, on your customer metrics, Starbucks might look at percentage of repeat customers, number of new customers, growth rate, and the like. Under people/learning, managers might measure the number of suggestions provided by employees, participation in the Bean Stock program, employee turnover, training hours spent, and the like.

FIGURE 1
Applying the Balanced Scorecard for Planning

Each of these cells links vertically. People management issues such as rewards, training, suggestions, and the like, can be linked to efficient processes (brewing the perfect cup, customer service, etc.). These processes then lead to better customer loyalty and growth. Growth and customer loyalty in turn lead to higher profitability and market value. As shown in table 1, the balanced scorecard can be used to develop measures and standards for each of these operational areas. And when implemented in this way, it helps translate strategic and tactical issues into operational criteria. 

TABLE 1
Using the Balanced Scorecard for Planning

1. Clarify the vision: Executive team and middle managers use the balanced scorecard to translate a generic vision into a strategy that is understood and communicated.

2. Develop business unit score cards: Each business unit develops its own scorecard that translates strategic goals into tactical and operational goals.

3. Review business unit scorecards: The CEO and this executive team review the business unit scorecards. This review identifies cross-business issues that are used to revise the strategic plan.

4. Communicate the scorecard to the entire company: Managers and employees develop individual score cards that link strategic and tactical plans to operational issues relevant to them. Individual objectives and rewards are linked to the scorecards.

5. Conduct annual strategy reviews: The previous year's performance is reviewed, and strategies are updated. Each business unit is asked to develop a position on each issue as a prelude to strategic planning.

*SOURCE: MANAGEMENT: THE NEW COMPETITIVE LANDSCAPE, 6TH ED., 2006, THOMAS S. BATEMAN & SCOTT A. SNELL, PGS. 111-114*

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1. Clarify the vision: Executive team and middle managers use the balanced scorecard to translate a generic vision into a strategy that is understood and communicated.

2. Develop business unit score cards: Each business unit develops its own scorecard that translates strategic goals into tactical and operational goals.

3. Review business unit scorecards: The CEO and this executive team review the business unit scorecards. This review identifies cross-business issues that are used to revise the strategic plan.

4. Communicate the scorecard to the entire company: Managers and employees develop individual score cards that link strategic and tactical plans to operational issues relevant to them. Individual objectives and rewards are linked to the scorecards.

5. Conduct annual strategy reviews: The previous year's performance is reviewed, and strategies are updated. Each business unit is asked to develop a position on each issue as a prelude to strategic planning. 

Managing for Competitive Advantage (part 4)

Managerial Decision Making

 by

 Charles Lamson

 The Stages of Decision Making

 The ideal decision making process moves through six stages at companies that have institutionalized the process, these stages are intended to answer the following questions: What do we want change? What's preventing us from reaching the desired state? How could we make the change? What's the best way to do it? Are we following the plan? and How well did it work out?

More formally, as Figure 1 illustrates, decision makers should (1) identify and diagnose the problem, (2) generate alternative solutions, (3) evaluate alternatives, (4) make the choice, (5) implement the decision, and (6) evaluate the decision.

FIGURE 1

The Stages of Decision Making

Identifying and Diagnosing the Problem

The first stage in the decision-making process is to recognize that a problem exists and must be solved. Typically, a manager realizes some discrepancy between the current state (the way things are) and the desired state (the way things ought to be). Such discrepancies---say, in organizational or unit performance---may be detected by comparing current performance against (1) past performance, (2) the current performance of other organizations or units, or (3) future expected performance as determined by plans and forecasts.

Recognizing that a problem exists is only the beginning of this stage. The decision maker also must want to do something about it and must believe that the resources and abilities necessary for solving the problem exist. Then the decision maker must dig in deeper and attempt to diagnose the true cause of the problem symptoms that surfaced.

For example, a sales manager knows that sales have dropped drastically. If he is leaving the company soon or believes the decreased sales value is due to the economy which he cannot do anything about, he will not take action. But if he does try to solve the problem, he should not automatically reprimand his sales staff, add new people, or increase the advertising budget. He must analyze why sales are down and then develop a solution appropriate to his analysis. Asking why, of yourself and others, is essential to understanding the real problem.

Useful questions to ask and answer in this stage include:

• Is there a difference between what is actually happening and what should be happening?
• How can you describe the deviation, as specifically as possible?
• What is/are the cause(s) of the deviation?
• What specific goals should be met?
• Which of these goals are absolutely critical to the success of the decision?

Generating Alternative Solutions

In the second stage, problem diagnosis is linked to the development of alternative courses of action aimed at solving the problem. Managers generate at least some alternative solutions based on past experiences.

Solutions range from ready-made to custom-made. Decision-makers who search for ready-made solutions use ideas they have tried before or follow the advice of others who have faced similar problems. Custom-made solutions, by contrast, must be designed for specific problems. This technique requires combining ideas into new, creative solutions. For example, the Sony Walkman was created by combining two existing products: earphones and a tape player. Potentially, custom-made solutions can be devised for any challenge. In later posts, we will discuss how to generate creative ideas.

Importantly, there are potentially many more alternatives available than managers may realize. For example, what would you do if one of your competitors reduced profit prices? An obvious choice would be to reduce your own prices. But when American Airlines, Northwest Airlines, and other carriers engaged in fare wars in the early 1990s, the result was a record volume of air travel and record losses for the industry. 

Fortunately, cutting prices in response to a competitor's price cuts is not the only alternative available. Although sometimes it is assumed to be. If one of your competitors cuts prices, do not automatically respond with the initial, obvious response. Generate multiple options, and thoroughly forecast the consequences of these different options. Options other than price cuts include nonprice responses such as emphasizing consumer risks to low-priced products, building awareness of your product's features and overall quality, and communicating your cost advantage to your competitors so they realize that they cannot win a price war. Winn-Dixie used that last strategy to its advantage against Food Lion, and the stores stopped competing on price. If you do decide to cut your price and as a last resort, do it fast---if you do it slowly, your competitors will gain sales in the meantime, and it may embolden them to employ the same tactic again in the future. 

Evaluating Alternatives

The third stage involves determining the value or adequacy of the alternatives that were generated. Which solution will be the best?

Too often, alternatives are evaluated with little thought or logic. Fundamental to this process is to predict the consequences that will occur if the various options are put into effect.

Managers should consider several types of consequences. Of course, they must attempt to predict the effect on financial or other performance measures. But there are other, less clear-cut consequences to address. Decisions set a precedent; will this precedent be a help or a hindrance in the future? Also, the success or failure of the decision will go into the track records of those involved in making it.

Refer again to your original goals defined in the first stage. Which goals does each alternative meet and fail to meet? Which alternatives are most acceptable to you and to other important stakeholders? If several alternatives may solve the problem, which can be implemented at the lowest cost? If no alternative achieves all your goals, perhaps you can combine two or more of the best ones.

Key questions are:

• Is our information about alternatives complete and current? If not, can we get more and better information?
• Does the alternative meet our primary objectives?
• What problem could we have if we implement the alternative?

Of course, results cannot be forecast with perfect accuracy. But sometimes decision-makers can build in safeguards against an uncertain future by considering the potential consequences of several different scenarios. Then they generate contingency plans---alternative courses of action that can be implemented based on how the future unfolds.

For example, scenario planners making decisions about the future might consider four alternative views of the future state of the U.S. economy: (1) An economic boom with 5 to 6 percent annual growth and the United States much stronger than its global competitors; (2) a moderately strong economy with two to three percent growth and the United States pulling out of a recession; (3) a pessimistic outlook with no growth, rising unemployment, and recession; or (4) a worst-case scenario with global depression, massive unemployment, and widespread social unrest.

Some scenarios will seem more likely than others, and some may seem highly improbable. Ultimately, one of the scenarios will prove to be more accurate than the others. The process of considering multiple scenarios raises important what if questions for decision-makers and highlights the need for preparedness and contingency plans.

As you read this, what economic scenario is unfolding? What are the important current events and trends? What scenarios could evolve six or eight years from now? How will you prepare?

Making the Choice 

Once you have considered the possible consequences of your options, it is time to make your decision. Important concepts here are maximizing, satisficing, and optimizing.

Maximizing is making the best possible decision. The maximizing decision realizes the greatest possible consequences and the fewest negative consequences. In other words maximizing results in the greatest benefit at the lowest cost, with the largest expected total return. Maximizing requires searching thoroughly for a complete range of alternatives, carefully assessing each alternative, comparing one to another, and then choosing or creating the very best.

Satisficing is choosing the first option that is minimally acceptable or adequate; the choice appears to meet a targeted goal or criterion. When you satisfice, you compare your choice against your goal, not against other options. Satisficing means that a search for alternatives stops at the first one that is okay. Commonly, people do not expend the time or energy to gather more information. Instead, they make the expedient decision based on readily available information. Satisficing is sometimes a result of laziness; other times, there is no other option because time is short, information is unavailable, or other constraints make it impossible to maximize.

Let's say you are purchasing new equipment and your goal is to avoid spending too much money. You would be maximizing if you checked out all your options and their prices, and then bought the cheapest one that met your performance requirements. But you would be satisficing if you bought the first one you found that was within your budget and failed to look for less expensive options.

Optimizing means that you achieved the best possible balance among several goals. Perhaps, in purchasing equipment, you are interested in quality and durability as well as price. So, instead of buying the cheapest piece of equipment that works, you buy the one with the combination of attributes, even though there may be options that are better on the price criterion and others that are better on the price criterion and others that are better on the quality and durability criteria.

The same idea applies to achieving business goals: One marketing strategy could maximize sales, while a different strategy might maximize profit. An optimizing strategy is the one that achieves the best balance among multiple goals.

Implementing the Decision

The decision-making process does not end once a choice is made. The chosen alternative must be implemented. Sometimes the people involved in making the choice must put it into effect. At other times, they delegate the responsibility for implementation to others, such as when a top management team changes a policy or operating procedure and has operational managers carry out the change.

Those who implement the decision must understand the choice and why it was made. They also must be committed to its successful implementation. These needs can be met by involving those people in the early stages of the decision process. At Steelcase, the world's largest manufacturer of office furniture, new product ideas are put through simultaneous design, engineering, and marketing scrutiny. This is in contrast to an approach in which designers design and the concept is later relayed to other departments for implementation. In the latter case, full understanding and total commitment of all departments are less likely.

Managers should plan implementation carefully. Adequate planning requires several steps:

1. Determine how things will look when the decision is fully operational.
2.  Chronologically order, perhaps with a flow diagram, the steps necessary to achieve a fully operational decision.
3.  List the resources and activities required to implement each step.
4.  Estimate the time needed for each step.
5.  Assign responsibility for each step to specific individuals.

Decision makers should assume that things will not go smoothly during implementation. It is very useful to take a little extra time to identify potential problems and identify potential opportunities. Then you can take actions to prevent problems and also be ready to seize on unexpected opportunities. Useful questions are:

• What problems could this action cause?
•  What can we do to prevent the problems?
•  What unintended benefits or opportunities could arise?
•  How can we make sure they happened?
•  How can we be ready to act when the opportunities come?

Much of this analysis is concerned with implementation issues: how to implement strategy, allocate resources, organize for results, lead and motivate people, manage change, and so on. View these upcoming posts from that perspective, and learn as much as you can about how to implement properly.

Evaluating the Decision

The final stage in the decision-making process is evaluating the decision. This means collecting information on how well the decision is working. quantifiable goals---a 20 percent increase in sales, a 95 percent reduction in accidents, 100 percent on-time deliveries can be set before the solution to the problem is implemented. Then objective data can be gathered to accurately determine the success or failure of the decision.

Decision evaluation is useful whether the feedback is positive or negative. Feedback that suggests the decision is working implies that the decision should be continued and perhaps applied elsewhere in the organization. Negative feedback, indicating failure, means that either (1) implementation will require more time, resources, effort, or thought or (2) the decision was a bad one.

If the decision appears inappropriate, it's back to the drawing board. Then the process cycles back to the first stage redefinition of the problem. The decision-making process begins anew, preferably with more information, new suggestions, and an approach that attempts to eliminate the mistakes made the first time around. 

*SOURCE: MANAGEMENT: THE NEW COMPETITIVE LANDSCAPE, 6TH ED., 2004, THOMAS A. BATEMAN, SCOTT A. SNELL, PGS. 70-74*

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Conclusion of Public Relations: An Economic Perspective (part 5 - The Podcast)

1st half: Seance/Summoning ritual with the spirit of George Soros in this analysis of his work The Alchemy of Finance
 2nd half: Wrap-up of discussion on public relations, followed by in-depth analysis of Mark Zuckerberg's Congessional testimoney.

The Rant - Public Relations: An Economic Perspective (part 5 - The Concl...

Public Relations: An Economic Perspective (part 4 - The Podcast)

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