MANAGEMENT BY OBJECTIVES

WHAT IS MANAGEMENT BY OBJECTIVES? DESCRIPTION:
MBO is defining of objectives for each employee and compare and also direct their performance against the objectives which have been set. It is the aim of MBO to increase the performance of the organisation by matching the organizational goals with the objective of surbodinates through the organization. Ideally, employees receive strong input to identify their objectives, time lines for completion, etc.
It includes continuous tracking of the processes and provide feedback to reach the objectives.

WHO IS PETER DUCKER?
Peter Ducker was the first person to outline Management by Objectives in 1954 in his book `The practice of Management`. According to Drucker, managers should avoid `the activity trap`, getting so involved in their day to day activities that they forget their main purpose or objective. One of the concept of MBO was that instead of just a few top-managers, all managers of an oranization should be involved in strategic planning process, so that implementability of the plan can be improved. Another concept is that, managers should implement a range of performance systems, which are design to help the organization to function well. Management by Objective can be seen to be a predecessor of value based management.

PRINCIPLE OF MANAGEMENT BY OBJECTIVES

• Specific objective for each member.
• Participative decision making.
• Cascading of organizational goals and objectives.
• Explicit time period, and
• performance evaluation and provide feedback.

Management by Objectives also introduced the SMART method of checking the validity of the objectives, which should be SMART.

• Specific
• Measurable
• Achievable
• Realistic, and
• Time-related.

VALUE CHAIN FRAMEWORK

The value chain framework of Michael Porter is a model that helps to analyze specific activities through which firms can create value and competitive advantage.

 

THE ACTIVITIES OF THE VALUE CHAIN

·         Primary activities (line functions)

1.    Inbound logistics-Includes receiving, storing, inventory control, transportation planning.

2.    Operations- Includes machining, packaging, assembly, equipment maintenance, testing and all other value-creating activities that transform the input into the final product.

3.    Outbound logistics- These activities required to get the finished product at the customers: warehousing, order fulfilment, transportation, distribution management, etc.

4.    Service- The activity that maintain and enhance the product`s value, including customer support, repair service, installation, training, spare parts management, upgrading, etc.

 

·         Support activities (staff functions, overhead)

 

1.    Procurement: Procurement of raw materials, servicing, spare parts, buildings, machines, etc.

2.    Technology Development: Include technology development to support the value chain activities. Such as: Research and Development, Process automation, design, redesign.

3.    Human Resources Management: The activities associated with recruiting, development (education), retention and compensation of employees and managers.

4.    Firm Infrastructure: Includes general management, planning management, legal, finance, accounting, public affairs, quality management, etc.

CREATING A COST ADVANTAGE BASED ON THE VALUE CHAIN

A firm may create a cost advantage:

·         By reducing the cost of individual value chain activities, or

·         By reconfiguring the value chain

 

Note a cost advantage can be created by reducing the cost of primary activities, but also by reducing the cost of the support activities. Recently there have been many companies that achieve a cost advantage by the clever use of information Technology.

Once the value chain has been defined, a cost analysis can be performed by assigning cost to the value chain activities. Porter identified 10 cost drivers related to value chain activities:

1.    Learning.

2.    Economic of scale

3.    Linkage among activities.

4.    Capacity utilization.

5.    Interrelationship among business unit

6.    Timing of market entry.

7.    Degree of vertical integration.

8.    Geographic location.

9.    Firm`s policy of cost or differentiation.

10. Institution factors (Regulation, union activity, taxes, etc,).

A firm develops a cost advantage by controlling these drivers better than the competitors do. A cost advantage also can be pursued by “Reconfiguring” the value chain. “Reconfiguration” means structural changes such as: a new production process, new distribution channels, or different sales approach.

Normally, the value chain of a company is connected to other Value Chains and is part of a larger Value Chain. Developing a competitive advantage also depends on how efficiently you can analyze and manage the entire value chain and this is called Supply Chain Management. Some people use the word “Network” to describe the physical form of Value Chains: Value Networks.

Book: Michael E. Porter – Competitive Advantage.

 

TRANSFER PRICING

DEFINITION OF TRANSFER PRICING. DESCRIPTION

Transfer Pricing (TP) is the process and practice of pricing exchanges of goods and services amongst divisions of large multi-divisional organizations.

USAGE AND MANIPULATION OF TRANSFER PRICES.
Transfer prices can be used and also be misused for a number of reasons.:

• TP should be used in an attempt to allocate profits and losses for each division in such a way that the corporate strategy of the overall organization is supported in the optimal way.
• Sometimes transfer pricing can be a contentious political issue in organization and expecially among senior level executives. This is because the level at which transfer prices are set may negatively influence their division profits and as a result cause lower bonuses to accrue to the managers.
• Transfer Pricing can also be manipulated fo taxation reasons: by charging low transfer prices from a unit based in high-tax country that is selling to a unit in a low-tax country, a firm can record a low profit in the first country and high profit in second. For example the january 2013 issue of not paying an accurate tax in the UK.

OBSERVABLE TRANSFER PRICES AND UNOBSERVABLE TRANSFER PRICES.
According Gox in an article (Gox, R.F, "Strategic Transfer Pricing, Absorption Costing and Observability". Management Accounting Research, 2000, vol. 11, p 327-348).

• In the first case it is better to charge a price above the marginal cost of the intermediate products. In this way managers of the firm are committed to act as a softer competitor of the final product market, because both firms intend to increase their prices strategically, there does an equilibrum price above the marginal costs of the intermediate product. Transfer pricing is a profitable choice in this case since this will be higher than profits attainable under marginal-cost based transfer pricing.
• However when tranfer pricing are not Observable there will not be an equilibrum with strategic transfer pricing used in the observable case. In the unobservable case it is optimal to use a transfer price equal to the marginal costs of the intermediate product. In this case neither of the two divisionalized companies is able to manipulate the strategic equilibrum of the othe company`s managers and as a result deviating from marginal costs as the transfer price will only cause suboptimum price setting by the manager him/herself.

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SWOT ANALYSIS

WHAT IS A SWOT ANALYSIS? DESCRIPTION

A SWOT analysis is a tool used in management and strategy formulation. It can help to identify the Strengths, Weaknesses, Opportunities and Threats of a particular company.

Strengths and Weakness are internal factors that create value or destroy value. These can include skills, assets, or resources that a company has at its disposal, compare to its competitors and this can be measured through internal assessment or external benchmarking.

Opportunities and threats are external factors that create value or destroy value. These emerge from either the competitive dynamics of the industry or from demographic, economic, political, technical, social, legal or cultural factors (PEST) and cannot be control by company.

Typical example of factors in a SWOT Analysis diagram:

Strength ·         Exclusive access to natural resources. ·         Specialist marketing expertise. ·         New, innovative product or services. ·         Patents ·         Strong brand or reputation. ·         Cost advantages through proprietary know-how	Weakness ·         Lack of marketing expertise. ·         Location of your company. ·         Damaged reputation. ·         Poor quality of goods and services. ·         Competitors have superior access to distribution channels.
Opportunities   ·         Developing market (China, the internet) ·         A new international market. ·         Loosening of regulations. ·         Removal of international trade barriers. ·         Moving into new attractive market segments. ·         Mergers, joint ventures or strategic alliance.	Threats     ·         Price war. ·         New regulations ·         Increased trade barriers. ·         A new competitor in your own home market. ·         A potential new taxation on your product or services.

 

Any organisation must try to create a fit with its external environment. The SWOT diagram is a very good tool for analyzing the internal strengths and weaknesses of an organisation and external opportunity and threats. However, this analysis is just the first step, to really create the fit with the external environment is often the most difficult work.

 

 

 

CONFRONTATION MATRIX

Confrontation Matrix is a tool used to combine the internal factors with the external factors.

	Opportunities	Threats
Strengths	Offensive                                                                            make the most of these	Defensive Restore strengths
Weaknesses	Strengths Watch competition closely	Survive   Turn around.

 

Often in reality the two columns of the SWOT diagram are pointing in opposite directions. Strategies must still deal with the paradox of creating alignment and this can be done through inside-out formulation (resources – driven) or Outside-in strategy formulation (market – driven strategy).

Note: You can also apply a SWOT analysis to competitors, often providing interesting new perspectives.

PEST ANALYSIS

WHAT IS PEST ANALYSIS? DESCRIPTION
The PEST analysis is a framework use to scan the external macro-environment in which a firm operates. PEST is an acronym for the following:

• Political
• Economic
• Social
• Technological.

PEST play a very important role in the value creation opportunities of a strategy, however they are usually outside the control of the corporation and must normally be considered as either threats or opportunity. PEST analysis should be performed per country as macro-economical factors can differ per continent, country or region. These are the example of each factors:

Political(incl. Legal)

• Environmental regulations and protection.
• Tax Policies.
• International trade regulations and restrictions.
• Contract enforcement law, consumer protection.
• Employment laws.
• Government organization/attitude.
• Competition regulations.
• Political stability.
• Safety Regulations.

Economic

• Economic growth
• interest rates &monetary policy.
• Government spending.
• unemployment policy.
• Taxation.
• Exchange rates.
• Inflation rates.
• stage of the business cycle.
• consumer confidence.

Social

• Income distribution.
• Demographics, Population growth rates, Age distribution.
• Labor/social mobility.
• Lifestyle changes.
• Work/career and leisure attitides.Enterpreneurial spirit.
• Education.
• fashion.
• Living conditions.

Technological

• Government research spending.
• Industry focus on technological effort.
• New inventions and development.
• Rate of technology transfer.
• life cycle and speed of technological obsolescene
• energy use and cost.
• changes in information technology.
• changes in internet.

To complete a PEST analysis is relatively simple and can be done using brainstorming techniques via workshops. Usage of PEST analysis can be vary from company and strategic planning, business and product development, marketing planning and research reports.

VARIANTS OF PEST ANALYSIS
Sometimes extended forms are used, likeSTEEPLE Analysis: social,demographic,Technological,Economic, Environmental, Legal and Ethical factors or SLEPT Analysis (plus Legal)

SCIENTIFIC MANAGEMENT

According to Frederick Winslow Taylor in 1911, Scientific management is improving labor productivity by scientifically analyzing and establishing optimal workflow processes.

WHAT IS SCIENTIFIC MANAGEMENT? DESCRIPTION
At the end of 19th century Frederick Winslow Taylor deviced the Scientific Management approach to improve labour productivity by analyzing and establishing workflow processes. Taylor thought the "One Best Way" to perform a task could be found by analyzing work in scientific manner.
Taylor had a pragmatic and even good motives to free up the good worker (Schmidt) of one half of his work, who was carrying pig iron at Bethlehem steel and at the same time he wanted to alleviate poverty and eliminate waste of time, energy and human ability but his method were very hard and sometimes had the opposite effect when they fell into the hands of ruthless exploiters of workers and this is why Scientific Management is often referred to disparagingly as Taylorism.

FREDERICK WINSLOW TAYLOR - FATHER OF SCIENTIFIC MANAGEMENT. BIOGRAPHY
Frederick Winslow Taylor was born to a wealthy Quaker family in Philadelphia in 1856. He join Enterprise Hydraulics Works in 1874 as an apprentice patternmaker and machinist gainning shop-floor expertise. In 1878 he took up an unskilled job at Midvale Steel Works where he does his first experiments. He gains a master degree in mechanical engineering in 1881, he was appointed as general manager of manufacturing investment company (MIC) in 1890. During the life of Taylor the circumstances were quite different, there had been a series of depressions and production methods at the time were very inefficient and also there was a need to employ many immigrants into the US so that the living standard can be raised and also the rising demand of every sort of goods can be met. All these influences Taylor to publish The Principle of Scientific Management in 1911. He dies in 1915.

USAGE OF SCIENTIFIC MANAGEMENT. APPLICATIONS

• It serves as inspiration for many later management philosophies, this include Operation Research, Management by Objectives, Just-in time, Lean manufacturing, Total Quality Management, six sigma and Business Process Reengineering.
• Old-fashioned,inefficient industrial environments.
• As a contrast to modern business or management methods.
• Taylor was a strong advocate of Learning-by-Doing. Contrary to today theorizing, hypothesis formation and testing, the One Best Way came from the workers, not from the managers or owners(Spender and Kijne, 1996). According to Peter Drucker, Taylor was the creator of knowledge management because the aim of scientific management is to produce knowledge about how to improve work processes.

STEPS IN SCIENTIFIC MANAGEMENT. PROCESS - IT CONSIST FOUR PRINCIPLES

1. Select, train, teach and develop the most suitable person for the job, again scientifically, rather than passively leaving them to train themselves.
2. Managers must provide detail instructions and supervision to each worker to ensure the job is done in a scientific way.
3. Replace rule of thumb work methods with methods based on scientific study of the task.
4. Divide work between managers and workers. The managers apply scientific management principles to planning and supervising the work, and the workers carry out the tasks.

STRENGHT OF SCIENTIFIC MANAGEMENT. BENEFIT.

•  Focus on the individual task and worker level.
• Contribution to efficient production methods, leading to a major global increase of living standard.
• Direct reward mechanism rather than pointless end-of-year profit sharing scheme.
• One of the first formal division between workers and managers.
• Emphasis on measuring. Measurement enables improvement.
• Systematic. Early proponent of quality standards.

LIMITATINS OF SCIENTIFIC MANAGEMENT. DISADVANTAGES

• Overemphasis on measuring. No attention for soft factors.
• Not useful to deal with groups or teams.
• Taylorism can easily be abused to exploit human beings. Conflict with labour unions.
• Separation of planning function and doing.
• Mechanistic. Treating people as machine.
• Leaves no room for individual preferences or initiative.

Book: Taylor, Frederick Winslow - The principle of Scientific Management, 1911
Book: Spender, J.C and Kijne, H. (Eds) - Scientific Management: Frederick Winslow Taylor`s Gift to the world? 1996