Module 1 Understanding Business

MODULE 1
Understanding
Business
Introduction 4
Purpose 4
Learning objectives 4
1. The role of modern business. 6

1.1 Learning objectives 6
1.2 Introduction 6
1.3 The role of business in society 6
1.4 Stakeholders 11
1.5 Key points 13
2. The changing business environment 16

2.2 Introduction 16
2.3 The three environments model 16
2.4 The micro-environment 17
2.5 Environmental change and instability: the micro-environment 21
2.6 The macro-environment 22
2.7 The internal environment 24
2.8 Environmental change and instability: the macro-environment 24
2.9 Key points 25
3. Managing resources and capabilities in the modern

business world 28
3.2 Introduction 28
3.3 The need for innovation 28
3.4 What is innovation? 30
3.5 Managing resources and capabilities for competitive advantage 33
3.6 Key points 38
4. How businesses implement modern-day strategies 40

4.2 Introduction 40
4.3 Deliberate and emergent strategies. 40
4.4 Organisational structure 41
4.5 Common types of organisational structure 44
4.6 What is culture? 50
4.7 Key points 53
References and Acknowledgements 56

Acknowledgements 57
ii
Introduction
INTRODUCTION
Introduction
Purpose
The purpose of the Understanding Business module is to help students
understand how modern companies operate in today’s business environment.
The workbook is broken down into four sessions that analyse:
• the roles that modern businesses play in society,
• the external environment within which they compete,
• how they manage their resources and capabilities to sustain
competitiveness, and the importance of innovation,
• how environmental change and contingency theory has influenced strategy
formulation and the structures and cultures of contemporary businesses.
The module draws on a broad range of theories from leading business writers
and academics, and includes four online tutorial activities (one per session)
that are designed to reinforce the student learning. Each session will also
contain a series of short questions to help students reflect upon the key
learning points.
Learning objectives
The aims of this module are to:
• understand the role of business in modern society,
• understand the external environment in which businesses compete and how
this has changed,
• identify and evaluate the resources and capabilities of an organisation, and
the role of innovation in enhancing performance,
• explain the meaning of contingency theory and how this has influenced
strategy, structure and culture in modern businesses.
After completing this module, students should be able to:
• understand and identify environmental issues and the level of control a
business can exert over these influences,
• appreciate the importance of resources, capabilities and innovation in
enhancing performance,
• understand the importance of structure, processes and culture in enhancing
or hindering organisational performance and implementing
strategic objectives.

The role of
modern business
Chapter THE ROLE OF MODERN BUSINESS
1. The role of modern business.
1.1 Learning objectives

This session is intended to help you to:
• develop an understanding of the changing attitudes to the role of business
in society,
• understand the importance of corporate governance and why it has evolved,
• evaluate the corporate social responsibility of organisations and the different
approaches that are used,
• undertake a stakeholder analysis and identify the most powerful and
influential stakeholders, and the potential for conflicts of interest.
1.2 Introduction
Session 1 of the module is designed to help you understand the different
schools of thought and perspectives that exist when defining the role of a
business in society. Changes have occurred in the way that stakeholders
view commercial organisations, leading to the development of powerful
pressure groups. Organisations have responded by adopting corporate social
responsibility policies that incorporate a broad range of marketing and public
relations tools. Moreover, corporate governance scandals on both sides of the
Atlantic have created increased stakeholder activism. The session will conclude
with an analysis of stakeholder power and influence, and how organisations
must manage these forces in order to protect their brand reputations and retain
customer loyalty.
1.3 The role of business in society

When defining the role of a business in society, there is an unending choice
of sources to choose from. However, in order to simplify the process the
definition that will be adopted for this module is taken from the Task Force on
Corporate Social Performance (1980). This defines a business as follows:
A business corporation exists primarily to produce goods and services

that society wants and needs. In order for the business to be sustainable
this objective must be achieved whilst making a profit. This is naturally
one of the key differentiators between a private sector organisation
and a public sector or not-for-profit organisation. (Cannon 1994)
According to Milton Friedman (1970), achieving profitability (or profit

maximisation) was the first and foremost responsibility of a private sector
corporation; if they were successful in this mission, they could not be
reasonably expected to assume others. This viewpoint became known as
‘Friedman’s [or stockholder] capitalism’, where businesses have only one
objective: to increase their profits. Provided a business conformed to the
law and ethical customs (normally accepted moral standards), the primary
responsibility of a business was to serve the goal of profit maximisation. The
professional manager performed the role of an agent who acted on behalf of

the principle or the shareholder(s) and their responsibility was to maximise returns
to the owners of the organisation. According to Friedman, someone must pay for
social responsibility, either shareholders in the form of lower dividends, customers in
higher prices or workers in lower wages. Moreover, Friedman concluded that business
people were not competent to decide on social needs and priorities. This was the
responsibility of the state and specialist providers, i.e. charitable organisations.
This view persisted throughout the 1970s and the 1980s, when multinational
corporations were becoming powerful forces that had tremendous influence over
the environment. As early as 1967, J.K. Galbraith (in his book The New Industrial
State) wrote about how the multinational corporations had become richer and more
powerful than many countries. More recently, a paper by Anderson and Cavanagh
(1996) claimed that the world’s largest 200 companies generated 28 per cent of
the world’s gross domestic product and in many instances the individual firms were
larger than many national economies. The 1960s and 1970s were also decades
when big was considered to be beautiful and large corporations dominated the
commercial landscape. Small business was not considered to be important or relevant
any more, since control of resources and economies of scale were key competitive
considerations (Curran et al., 1987).
An alternative view of the role of the business in society is based upon the
stakeholder theory of the modern corporation, or what is known as ‘Kantian
capitalism’. According to Immanuel Kant, each person has a right not to be treated as
a means to an end. Therefore stakeholder theory acknowledges that the shareholders
or owners of a corporation are a key stakeholder (those individuals or organisations
who have a stake in a business or are affected by it). However, the theory also states
that other stakeholders also have a claim on the firm in the form of basic rights and
these should not be subordinated to the rights of the owners. The stakeholders should
therefore not be used as a means to an end but should be an end unto themselves.
The stakeholder theory does not give primacy to one stakeholder group over another.
These stakeholder groups will have conflicting interests and it will be management’s
responsibility to keep the relationship among stakeholders in balance. Management
must act in the interests of the stakeholders as their agent and it must act in the
interests of the corporation to ensure the survival of the firm. This will then safeguard
the long-term stakes of each group.
Although a business enterprise must perform economic functions in order to survive,

at the same time the business’s long-term prosperity and survival depends upon
society providing the necessary resources such as people, raw materials, services
and infrastructure. Business can therefore be viewed from a systems perspective (see
Figure 1.1 below) in that they convert inputs from the environment into profitable goods
and services that are returned to the environment where they are sold. Businesses
therefore interact with their environment and are social institutions or open systems
as opposed to closed systems. Businesses are therefore expected to create wealth,
supply markets and generate employment, whereas society is expected to provide an
environment in which business can develop and prosper. It might therefore be said
that there is interdependence between business and society.

ENVIRONMENTAL BOUNDARY
Figure 1.1: Systems model
So if an organisation adopts Friedman’s capitalist approach of profit maximisation

without due regard for other stakeholders, this will have implications for the
organisation’s future sustainability. For example, if the business chooses to pay its
employees low wages and refuses to invest in their training and development, this
will ultimately result in low morale and motivation, and hence productivity. It will also
make it difficult for the organisation to recruit good employees in the future. Moreover,
if the business adopts an adversarial approach to its suppliers and uses its size
and economic power to negotiate very low cost inputs, this will impact upon the
sustainability of the supplier in the long-term – possibly forcing them out of business.
This will restrict the availability of quality inputs into the manufacturing or service
delivery process.
If the organisation pollutes the atmosphere and contributes significantly to global

warming then this will jeopardise the availability of key resources that are necessary
to produce goods and services; for example, the non-availability of cheap and plentiful
water for industrial and service processes and the absence of appropriate energy
supplies and key raw materials such as paper and cardboard. Finally, if a business is
able to use its multinational status to avoid paying corporation tax this may ultimately
result in insufficient government funds being available for critical infrastructure
such as schools, police forces, road and rail networks, sea and airports, and the
communications systems.
There has subsequently been a change in the attitude of a broad range of

stakeholders towards successful multinational corporations since the 1990s. As we
have moved from the capitalist era to the information age with increasing exposure
to the global media and the internet, stakeholders of organisations have become
increasingly knowledgeable of their commercial practices, resulting in the growth of
extremely powerful pressure groups such as Greenpeace and influential campaigns
such as the animal rights initiative SHAC (Stop Huntingdon Animal Cruelty), to name
just two examples.

It has therefore become increasingly difficult for a modern business to pursue a

strategy based purely on profit maximisation without paying attention to their broader
stakeholder base. Failing to do this has often resulted in militant action against them
and a fall in the share price of the company. Modern businesses now have to expend
significant levels of resources protecting their corporate image and ensuring that
they are behaving as responsible corporate citizens. New forms of terminology have
therefore entered the business vocabulary such as corporate governance, corporate
social responsibility, green marketing and societal marketing, cause-related marketing,
Fair Trade, organic foods, carbon footprints, recycling, renewable energy, and ethical
consumers. We will now look at some of these key areas in more depth.
Corporate governance
In the late 1980s and early 1990s a series of scandals involving UK companies
(Maxwell, Guinness, Polly Peck and BCCI) led to the introduction of voluntary codes of
conduct for British Plcs following the publication of the Cadbury Report on corporate
governance. Its recommendations included splitting the roles of Chairman and Chief
Executive, as well as appointing non-executive directors and an audit committee.
This was designed to prevent too much power being vested in one individual and
to introduce an objectivity and external perspective on boardroom and auditing
procedures.
The Cadbury Report was followed by a number of other reports by leading British
business leaders, including Hampel (ICI), Greenbury (Marks & Spencer) and Higgs
(investment banking). This voluntary approach to boardroom control has been largely
successful and is in contrast to the approach adopted by the USA following the Enron
and WorldCom accounting scandals in 2001. The US response was to introduce
legislation to control senior executive greed with the passing of the Sarbanes Oxley
Act. This requires corporations with a listing on the US stock markets to undergo
expensive and bureaucratic auditing procedures. This has had a negative impact on
investment in the US, with many new public companies choosing to list in London due
to the lower flotation costs.
Green marketing and societal marketing

Green marketing acknowledges that marketing activity has an impact on the
environment and society as a whole. Marketing is therefore criticised for promoting
excessive consumption and materialism and therefore the over-exploitation of
natural resources for the production of goods and services for the consumer. Built-
in obsolescence and shorter product life cycles, excessive packaging, and the
transportation of goods over long distances have also been criticised, as has the non-
recyclable nature of some products.

Green marketing is therefore seen to address these issues and seek solutions that
may include various forms of recycling, reduction of organisations’ carbon footprint and
the use of renewable energy. Some examples of green marketing are as follows:
• McDonald’s decided to recycle all the cooking oil from its restaurants in the UK and
use it to fuel its fleet of in-house delivery vehicles.
• The Co-operative Bank has wind turbines installed on the roof of its Manchester
headquarters in order to exploit the advantages of renewable energy.
• The Waitrose supermarket group has a policy of sourcing only locally produced
food products in order to reduce travelling and thereby reduce CO2 emissions.
Cause-related marketing
Cause-related marketing is a commercial activity by which businesses or charities
form a partnership with each other to market an image, product or service for mutual
benefit. A famous example of this was Tesco’s ‘computers for schools’ initiative.
Another high profile but less successful programme involved Starbucks and Oxfam,
where Starbucks contributed £100,000 to Oxfam’s rural development programme in
Ethiopia. This was designed to create an exchange of expertise to achieve sustainable
coffee supplies.
Fairtrade
The Fairtrade initiative has attracted considerable interest following the heavy criticism
levelled at multinational corporations for exploiting Third World producers in order
to maximise their profits. Fairtrade seeks to overcome this problem by requiring
companies to pay above market prices. This is designed to address the injustices of
conventional trade, which discriminates against the poorest and weakest producers.
Companies that participate in the programme gain the right to display the Fairtrade
logo on their products. The Fairtrade mark appears on more than 1500 products
(mainly food- and drink-related) and Nestlé was the first of the four global coffee
companies to launch a product with the Fairtrade label.
Ethical consumers
These are customers who are only interested in buying good and services from
organisations that set genuinely high standards of corporate social responsibility:
Customers increasingly look for a company with a genuinely moral stance

… a company that hypes its ethics and fails to live up to its promises is
not marketing effectively, nor is it behaving morally. (Anonymous 2005)
In the early days of increasing social and environmental awareness, many companies
used ethical consumerism as a means of differentiating their brand from other
companies. However, many of the claims made by the organisation were not upheld
in reality. For example, BP rebranded itself as an environmentally caring organisation
with a new sunflower logo and the strap line ‘Beyond Petroleum’. This rebranding
exercise has been followed by a series of accidents and oil spills in the US and
Alaska respectively, caused by a lack of any proper preventative maintenance. At the
other end of the continuum there are the genuine pro-active companies where ethical
10 behaviour is standard policy and the company ‘walks the talk’. The Co-operative’s
financial services and retail divisions are an excellent example of this.
Corporate social responsibility

All of the developments that we have discussed so far can be incorporated under the
term corporate social responsibility (CSR). CSR is an expression used to describe
what some see as a company’s obligation to be sensitive to the needs of all of its
stakeholders in its business operations (i.e. Kantian capitalism). The principle is closely
linked with the imperative of ensuring that these operations are ‘sustainable’ and that
it is recognised that it is necessary to take account not only of the financial/economic
dimension in decision-making, but also the social and environmental consequences:
‘sustainable development’. This is sometimes referred to as the triple bottom line,
consisting of economic, ethical and equitable factors:
• The economic bottom line is concerned with financial profit,
• The equitable bottom line is concerned with the equal and fair treatment of
employees and other stakeholders,
• The ethical bottom line is concerned with the extent to which the business is
behaving in a morally acceptable manner.
1.4 Stakeholders
A company’s stakeholders are all those people or groups who are influenced by
and/or can influence a company’s decisions and actions, both locally and globally.
These include (but are not limited to) employees, customers, suppliers, community
organisations, subsidiaries and affiliates, joint venture partners, local neighbourhoods,
investors, and shareholders (see Figure 1.2 below). Society now expects many things
from its corporate sector, so some firms use stakeholder analysis to identify and
classify these expectations.
11 Figure 1.2: Stakeholder diagram

The concept of stakeholders is important for two reasons:

• Most stakeholders contribute some kind of resource to the organisation or they
can influence those that are actually contributing resources, e.g. employees
contribute their labour, suppliers contribute goods, raw materials and components,
while customers contribute orders and sales. Pressure groups meanwhile can
dissuade suppliers and customers from transacting business with an organisation
or employees from working with them if their interests are ignored, e.g. Huntingdon
Life Sciences and animal rights activists.
• Conflicts of interest between stakeholders are inevitable. For example, customers
want high quality and low prices, while shareholders are interested in minimising
costs and maximising profits. The same type of problem will occur when
managers pay themselves high salaries and bonuses that are unrelated to overall
improvements in corporate performance. This has led to considerable shareholder
activism and high profile publicity, e.g. the ‘fat cat’ pay disputes.
The analysis of stakeholders therefore involves identifying who they are (using the
stakeholder diagram in Figure 1.2) and considering their power and interest so that
their expectations and interests can be managed effectively. Once identified, the
relative power and interest of the stakeholders can be mapped onto a power and
interest matrix (see Figure 1.3 below).
Power
Figure 1.3: Power and interest matrix (Johnson et al. 2007)
We will now analyse each individual quadrant of the power and interest matrix:
• Category D: stakeholders with high power and high interest. These stakeholders
are key players in the organisation and are often involved in managing the
organisation and its future. If the key players are not directly involved in managing
the organisation it is vital that they are given serious consideration in developing
its long-term plans and the future direction, because they have the power to block
proposed plans and implement their own alternative agenda.
• Category C: stakeholders with high power and low interest. These stakeholders
must be kept satisfied and would normally include institutional shareholders.
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Institutional shareholders will often remain compliant while they receive acceptable
returns on their investment and are pleased with the organisation’s management
and activities. However, the ability of the Category C stakeholders to reposition
themselves on the power and interest matrix into Category D and become
stakeholders with continuing a high degree of power and an increase in their
level of interest should not be under-estimated. This occurs when Category C
shareholders are not kept satisfied and feel that their interests are not being best
served. The shift in position of unsatisfied Category C stakeholders may impede an
organisation’s plans and prevent the expectations of key players from being met.
For example, when Shell decided to dispose of its North Sea oil rigs by sinking
them into the sea, Greenpeace moved from Category C to Category D
with measures that included attacks on Shell’s petrol stations.
• Category B: stakeholders with low power and high interest. These stakeholders
are not able to exert any real power in influencing the organisation and its actions.
However, they have a high level of interest in the organisation and will voice their
concerns if their interests aren’t being considered in a suitable manner. If Category
B stakeholders voice their concerns loudly enough and in the right way (e.g. via
lobbying or petitions), they may be able to influence one of the powerful group[s]
of stakeholders in either Category C or D and affect their behaviour. Therefore,
organisations need to keep Category B stakeholders informed of the organisation’s
activities and decisions, and in doing so, convince them that their interests are
being taken into account and considered seriously.
• Category A: stakeholders with low power and interest. These stakeholders only
require the minimum amount of effort to be allocated to them. However, Category A
stakeholders should not be ignored as they may acquire a stake in the organisation
by becoming a customer, supplier or competitor, which will mean an increased level
of interest and/or power.
1.5 Key points

The important points that this session has covered include:
• two opposing theories concerning the role of business in society (Friedman and
Kant),
• organisational responses to stakeholder pressure,
• the reasons behind the development of CSR, corporate governance and other
green and humanitarian initiatives,
• the importance of identifying key stakeholders and being able to analyse their
power and influence.
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Activity 1.1
Using an internet search facility or another source of information, select an
organisation of your choice and answer the following questions:
1. What level of CSR is this organisation trying to achieve? What advantages and
disadvantages might accrue from this stance?
2. Is this a position that might be adopted by other organisations or not? Give your
reasons.
3. What voluntary standards has the organisation set for itself?
4. Using a stakeholder analysis (power-interest matrix), how might different
stakeholders view the organisation’s stance on CSR?
5. Do you have any recommendations or ideas for improvement?
Your answers to the above questions will form the basis of an online discussion and
should be posted on the tutor group forum, along with a brief summary of your chosen
organisation. Once you have submitted your written answers you should read and
comment on at least one of the contributions of another member of the group.
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The changing
business environment
Chapter THE CHANGING BUSINESS ENVIRONMENT
2. The changing business environment

• understand how the external environment of an organisation is structured,
• critically evaluate the level of influence between the three environments,
• learn how to scan the environment and identify likely changes or trends,
• understand how environmental change has caused high levels of instability
and the implications this has for modern businesses.
2.2 Introduction
In Session 2 we will be analysing the external environment of the modern
organisation and how it is structured. Considerable change has occurred in
the external environment during the last fifteen to twenty years, resulting in an
increasingly high level of instability and volatility. We will therefore be analysing
the source of this change using the three environments model as well as the
implications of these changes for the modern business.
2.3 The three environments model

Generally speaking the business environment can be divided into two
areas: the external environment and the internal environment. The external
environment is concerned with everything that takes place outside the
organisation and the internal environment is concerned with everything
that happens within the organisation. A common mistake made by many
organisations is that they spend too much attention on managing the internal
environment and not the external changes that are taking place in the external
environment. However, both environments are important.
There are two basic approaches to dealing with environmental forces: reactive
and proactive. The reactive organisation regards environmental factors as
being uncontrollable and will therefore tend to adjust their business plans to
fit the environmental changes that occur. Proactive organisations such as
entrepreneurial technology companies, however, look for ways to change
the organisation’s environment in the belief that many (if not most) of the
environmental factors can be controlled or influenced in some way. For
example, the business writer Tom Peters spoke about the Silicon Valley
entrepreneurs who wanted to change the world through technology; companies
such as Intel, Microsoft, Apple, eBay, Amazon and Google have certainly done
that.
The external environment consists of two further divisions called the micro-
environment and the macro-environment. Combined with the internal
environment of an organisation this creates what is known as the three
environments model (see Figure 2.1).
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Figure 2.1: The three environments model (source: Blythe, 2001, p.18, Figure 2.1)
2.4 The micro-environment

We will start by looking at the micro-environment which is made up of those factors
that impact closely on the organisation and typically consists of the following elements:
• competitors
• customers
• suppliers
• intermediaries
• some publics
Competitors
A common mistake that firms make is failing to recognise who their competitors
are. Many companies define their competition too narrowly and often ignore indirect
competitors. For example, a high street retailer might focus on competition from other
high street retailers and not recognise a dot.com company as being competition for
the consumer’s limited expenditure. Companies therefore need to determine which
competitors offer the closest substitutes in terms of meeting the consumers’ needs.
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At the extreme, all businesses compete with one another for consumers’ money
and consumers have only a fixed amount to spend. For example, a consumer who
chooses to buy an expensive house may also be choosing not to have any expensive
holidays for the next two years. Competitors can therefore be either firms supplying
similar products or firms competing for the consumer’s hard-earned money.
Michael Porter’s five forces model (1990) offers a useful approach to competitor
analysis and consists of the following:
1. The bargaining power of suppliers: if this is strong then the competitive pressure
will also be greater.
2. The bargaining power of customers: as above, the stronger the bargaining power
the greater the competitive pressures.
3. The threat of new entrants: barriers to market entry can make this difficult.
4. The threat of substitute products and services: this is often not identified until it is
too late.
5. The rivalry among current competitors: this can be concentrated (involving a small
number of large firms) or fragmented (involving a large number of small firms).
The main strength of Porter’s model is that it broadens the concept of competition and
enables businesses to look at the wider picture.
Figure 2.2: Porter’s five forces framework (1990)
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Customers
Confusion often occurs between the use of the terms ‘consumer’ and ‘customer’. A
consumer is someone who ultimately uses a product or service, whereas the customer
is someone who performs the function of buying the product or service. The customer
may also be the consumer, since they buy and use the product/service. Small children
are consumers of sweets and toy although it is often their parents who are the
customers who purchase and pay for them.
Customers may change their needs or may even disappear altogether. Increased
competition for customers and the availability of more information relating to current
offerings through the internet has also resulted in declining customer loyalty and
promiscuous consumer behaviour.
Suppliers
Supplier behaviour impacts closely on organisational performance. A poor supplier
can cause problems by supplying poor-quality goods or materials, or failing to meet
delivery dates that eventually impacts on the firm’s customers. This is obviously of
greater importance for manufacturers and retailers, as opposed to professional service
companies who only purchase consumable items. The competition to secure good
suppliers can therefore be almost as intense as the rivalry to win customers.
Current thinking and trends in purchasing and supply is that the relationship between
suppliers and their customers should be partnership based with a high level of
information exchange. For example, rather than playing suppliers off against one
another and pushing the costs onto another member of the supply chain, partnership
approaches are designed to remove costs from the supply chain through joint co-
operation. This philosophy relies on the supplier and purchaser integrating their
activities and developing a mutual understanding of each other’s problems.
Intermediaries
Intermediaries include retailers, wholesalers, agents and others who distribute the
firm’s goods. Intermediaries may also include marketing services providers such as
research agencies, advertising agencies, distribution companies providing transport,
and warehousing and exhibition organisers, etc. Intermediaries are therefore any
individuals or organisations that stand between the company and the consumer and
help to distribute goods and services. As with suppliers, good relationships based
on information-sharing and good communication are very important for effective
performance.
Publics
A company’s publics also form part of the micro-environment. ‘Publics’ is a generic
term for all groups that have actual or potential impact on the company. The range
of publics can include financial publics, local publics, governmental publics, media
publics, citizen action publics and many others. The marketing activity concerned with
these publics is called public relations.
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Financial publics are likely to include banks and shareholders who control the
company’s finances and can pressure the firm to behave in certain ways. These
pressures are often strong and can threaten the firm’s existence.
Local publics consist mainly of local organisations and individuals who pressure
the organisation to take certain actions such as cleaning up pollution or sponsoring
local charities. For example, when Anita Roddick was establishing The Body Shop
retail network, her franchisees were expected (as part of their franchise agreement)
to participate in local community projects raising funds for local charities or setting
up play areas, etc. The activities helped to improve the image of the company and
generate positive feelings amongst the employees of the organisation.
Porter’s five forces framework is based upon the American business model. This
means that organisations seek monopolistic power and try to restrict the number
of players (or industry rivals) by creating barriers to entry to the market. Barriers to
entry can be created through large economies of scale that make it impossible for
small businesses to compete. The large capital costs needed to establish a firm and
enter the market are another barrier to entry. Moreover, competitor retaliation and
government restrictions also cause problems to new entrants. For example, when
Freddie Laker established his low-cost airline Skytrain in the late 1970s he was forced
out of business by the predatory pricing of the major national carriers. Virgin Atlantic
was also the victim of a dirty tricks campaign from British Airways when it entered the
transatlantic market for air travel.
Government barriers to market entry are often overcome by the formation of joint
ventures between local and foreign multinationals. These barriers are designed to
help locally-based companies gain skills and knowledge of production techniques.
Meanwhile, branding can also act as a barrier to entry by differentiating a firm’s
product or service from potential competitors. Finally, a firm can gain a first mover
advantage into an industry during which time they build up a large market share and
asset base, and an established reputation or brand. This absolute cost and reputation
advantage can often be difficult to usurp, e.g. eBay’s competitive advantage in online
auctions.
Once barriers to entry have been established, the firm can build up large market
share and economies of scale. This increases the company’s bargaining power when
negotiating with suppliers as well as customers, thereby increasing profit margins.
In terms of substitute products, these may be copied by existing rivals (patent
rights permitting) or the companies offering the substitute product or service may
be acquired. The industry rivalry can be concentrated, involving a small number of
large firms (duopolies or oligopolies) or it can be fragmented with a large number
of small firms. In fragmented markets, the barriers to entry are usually low and will
be populated by small and medium-sized enterprises (SMEs). Where markets are
concentrated, the barriers to entry will be high and access will probably require
an innovative product or service that becomes a substitute of existing products or
services. The recent trend in downloadable music is an example of a substitute
product. This is what is known as a disruptive or discontinuous technology that can
make existing products obsolete or marginalised. (This will be discussed further in
Session 3 when we look at innovation.) Companies with high economies of scale and
established brand reputations may also enter concentrated markets from adjacent
industries. For example, Google (search engines) and Nokia (mobile phones) are
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currently planning an assault on the downloadable music market and the Apple
iPhone.
2.5 Environmental change and instability: the micro-environment

The micro-environment of the modern business has changed quite dramatically in
recent years. Due to globalisation, more foreign companies are now entering markets
through mergers and acquisitions or through organic development (often from adjacent
industries which have similar resources and capabilities). The number of substitute
products and processes is also increasing due to technological developments driven
by digitisation and the internet. This is where smaller entrepreneurial business can
enter concentrated markets with disruptive technologies.
The rivalry between industry competitors and suppliers is also intensifying due to
increased competition from more players but also due to the increasing power of the
buyers or customers. Customers now have access to a vast range of information on
the internet. Specialist websites that compare products and services have resulted
in customers becoming very knowledgeable and sophisticated buyers. In addition,
due to increased global competition, there is now a broader range of goods and
services available, leading to increased customer expectations. In order to meet these
increased expectations and still make a profit, companies have been forced to employ
more intermediaries. For example, outsourcing support services to specialist providers
in order to reduce overall costs and forming production and marketing alliances to
share resources and risks have become major growth areas. The implications of
this increased commercial activity have been the need to manage public stakeholder
expectations so as not to damage the brand reputation of the firm. This involves
keeping financial stakeholders happy but also a wider range of publics. The methods
discussed in Session 1 provide some examples of how companies have addressed
some of these issues.
It can therefore be seen from this analysis of the micro-environment that not only
have there been considerable amounts of change but that this has also resulted in
increasing levels of environmental instability. Increased competition and technological
innovation has made customer retention and sales forecasting more difficult. There
has also been a marked reduction in the length of both business and product/service
life cycles (that is, how long it takes a product or business to progress through various
stages from introduction and growth to maturity and decline). Planning has become
more difficult to execute and the implications of these changes for the resources
and capabilities of the firm and its structure, systems, processes and culture will be
discussed further in Sessions 3 and 4.
21
2.6 The macro-environment

The next external layer consists of what is known as the macro-environment. This
includes the major forces that impact on the micro-environment and all the elements
within it. It is therefore harder to influence the macro-environment, although large
and powerful multinationals are able to make a significant impact. The main elements
of the macro-environment can be classified as STEEP factors, which represent the
following (see Figure 2.3 below):
• social
• technological
• economic
• environmental
• political.
Figure 2.3: STEEP model (adapted from Johnson et al. 2007)
Social factors
Social factors include the demographics (population characteristics) of a society, the
prevailing culture (beliefs and attitudes), and subsequently, the buyer behaviour trends
that emanate from these. These factors are important to a company’s marketing
department since the demographic data will be used to divide the market into specific
customer segments. The social environment must also be scanned to identify any
changes in buying patterns resulting from changes in demographics and socio-
economic factors, e.g. a more mature and wealthier population will result in a demand
for different types of products and services.
22
Technological factors
The technological environment consists of all the innovations and new technologies
that are currently being developed and launched in the marketplace. Information
communication technology has been a very important development in terms of its
impact on modern businesses. For example, the microprocessor, personal computer,
internet, digitisation and fibre-optic cable have all had a major impact on how
businesses run and configure their operations, and how consumers now purchase
products and services, e.g. downloading music and buying airline tickets via the
internet.
Economic environment
The economic environment is concerned with the state of the national and global
economies within which the company competes and undertakes its activities. Key
variables that have to be monitored include interest rates, inflation, gross domestic
product and disposable incomes. These factors, plus the health of the national and
global economies (i.e. are they expanding or retracting?), will determine the level of
demand for a product or service.
Environmental factors
This tries to address the problems of global warming caused by increased levels of
industrialisation and consumerism leading to global warming. Current issues facing
organisations include carbon footprints, recycling and renewable energy. Green
marketing and CSR have therefore evolved in response to these developments (see
Session 1).
Political factors
The political environment is concerned with the regulation and legislation that is
imposed on organisations by governments and trade bodies. It is also covers the
areas of government versus private ownership. Global trends have seen a move
away from government ownership of assets towards increased private ownership of
organisations, e.g. utilities companies and national airlines, etc.
Large multinational corporations allocate considerable resources to lobbying political

parties and politicians through special corporate affairs departments, and make large
donations to political parties and US presidential candidates.
Finally, it is important to remember that the STEEP factors will normally interact and
act as a system. For example, a change in the economic environment will influence
the social environment. An expanding economy that produces more employment
and wealth will create more affluent consumers, who will buy more goods – and the
reverse will happen in the event of a recession. New technology will also influence
both the economic and social environments: the internet has changed the economics
of many business sectors such as financial services by reducing labour costs and
enhancing productivity. It has also changed consumer buying behaviour by making
them better informed consumers who can compare products and services using online
software and websites.
23
2.7 The internal environment

The internal publics are the employees of the organisation. Although employees
are part of the internal environment of the organisation, they live in the external
environment and this will subsequently influence their attitudes towards the work
environment. However, organisations also develop their own corporate cultures with
their own language, customs, political agendas and pressure groups.
The members of the organisation can give a positive or negative image of the firm
after they leave work for the day. The employees therefore constitute a market in their
own right and the organisation needs their loyalty and commitment. Internal marketing
is needed to ensure positive attitudes are engendered. The days are long gone when
the loyalty of staff could be guaranteed and giving orders was all that was necessary
to ensure obedience.
2.8 Environmental change and instability: the macro-environment

Considerable change has occurred in the macro-environment that has impacted upon
the way companies do business. In terms of the political environment, a number of
major changes occurred at the end of the 1980s and the beginning of the 1990s. The
end of the Cold War between Russia and the West and the bringing down of the Iron
Curtain in 1989 opened up a vast area of the world for commercial exploitation by
private corporations. At the same time, China and India were opening up their doors
to foreign direct investment and moving towards market-based economies. The UK
business model – the Thatcherite privatisations and the move towards supply-side
economics – was now being emulated by other countries and governments across the
world. In addition to these developments, the Single European Market was formed in
1993 and the North American Free Trade Association (NAFTA) was established in the
same year. This move towards deregulation and market-based economies was to have
a significant impact upon the business environment over the next few years.
The late 1980s and the 1990s also saw major developments taking place in the
technological environment, particularly information communication technology (ICT).
This involved merging computer and telecommunications technologies to form the
internet. This was made possible by the widespread ownership of personal computers
that used a compatible industry standard (Wintel) to transfer data using digital
technology through fibre-optic cables and via satellites. This made it possible for
companies to relocate their operations in foreign countries (to utilise sources of lower
cost labour and to sell products and services) and to manage and co-ordinate these
operations using electronic communication. This was one of the major reasons for the
birth of business process outsourcing (or offshoring) to foreign countries. This will be
discussed in more detail in Session 3.
This was also an era of high economic growth. Following the world recession in early
1990s, the USA experienced its longest period of sustained economic growth since
the 1960s. This was replicated in the UK and many other European countries i.e.
the Republic of Ireland. This period also saw the emergence of the Asian Tigers and
the new emerging economies sometimes referred to as the BRICs: Brazil, Russia,
India and China. The economic environment was therefore a major driver of change
in the technological, social and physical environments. Increased disposable incomes
and the falling cost of computers (Moore’s Law) enabled citizens across the world to
24
gain access the internet, resulting in a greater awareness of global brands. One of
the results of this combined activity has been its impact on the physical environment,
with signs of increased ozone depletion and serious pollution in emerging economies
such as China. This has placed considerable pressure on businesses resulting in the
adoption of a broad range of measures discussed in Session 1.
In terms of the social environment, access to global media such as the internet has
created a demand for Western brands and seen the emergence of new middle classes
in the BRICs and Asian Tiger countries. This has impacted on the near environment,
resulting in intense competition (Porter’s five forces framework) for these markets. The
impact this has had on the configuration of the resources and capabilities of modern
corporations, as well as their structures and processes, will be discussed at length in
Session 3 and Session 4.
The overall impact of this change has been to increase the volatility and instability of
both the macro- and micro-environments within which modern corporations operate
and compete. The economic instability began a number of years earlier in the early
1970s when US President Richard Nixon removed the gold standard that was used
to support the US currency. The gold standard required any future printing of money
to be backed up by deposits of gold in the central bank of the country concerned.
Currencies were now allowed to float freely, leading to the development of global
currency markets where money was traded on a worldwide scale. This removed the
former currency stability that existed, with high levels of speculation exacerbating this.
In addition to the currency instability, two oil shocks also occurred in 1973 and 1979.
In 1973, the Arab Israeli war and oil embargo occurred while the Saudi Arabians and
other members of the OPEC cartel decided to increase the price of crude oil fourfold.
In 1979, the war between Iran and Iraq placed further pressure on oil prices that had
already resulted in high levels of world inflation.
More recently, the increased competition for customers due to world markets opening
up and the increasing expectations of customers (who now have greater choice) has
made buying patterns and trends less predictable. This problem has been exacerbated
by new technologies that make existing products obsolete or undesirable (built-in
obsolescence) and reduce customer loyalty. This environmental instability has had
serious implications with regards to how modern businesses are run. Sessions 3 and
4 of this module will now look at how business organisations have had to change the
way they manage their resources and capabilities, and the structures, systems and
processes that they have in place in order to compete in this new environment.
2.9 Key points

• a detailed overview of the three environments of a modern business,
• an understanding of how changes in one environment (macro) can influence the
others (micro and internal),
• an illustration of how environmental change creates instability,
• the provision of analytical tools for scanning the external environment.
25
Activity 2
Using the same organisation that you selected for your CSR analysis in Activity 1,
Session 1, carry out an appraisal of the organisation’s macro environment based on
the following criteria:
1. Complete a STEEP analysis for your chosen organisation.

2. Consider which elements of the organisation’s environment have the greatest
impact and therefore require the most attention.
3. What opportunities and threats do the issues you have identified pose for the
organisation?
4. Do you have any recommendations for future action?
Your completed STEEP model and answers to items 2–4 should be posted on the
Tutor Group Forum (TGF) for group analysis and discussion. Once you have submitted
your written answers, you should comment on a minimum of one contribution from
another member of the group.
26

Managing resources and
capabilities in the modern
business world
Chapter MANAGING RESOURCES AND CAPABILITIES IN THE MODERN BUSINESS WORLD
3. Managing resources and capabilities

in the modern business world
• define and clarify the meaning of innovation,
• understand the meaning of resources and capabilities and the levels of
tangibility and intangibility,
• appreciate the implications of innovation for the resource configuration of a
modern business,
• understand the need for outsourcing, co-operative strategies and the
development of organisational knowledge.
3.2 Introduction
In Session 3, we undertake a detailed analysis of the resources and
capabilities of the modern organisation and how innovation can be applied to
enhance its competitive advantage. The increasing competitive pressures and
customer expectations discussed in Session 2 have created cost and resource
issues for modern companies that have resulted in co-operative strategies and
outsourcing on a large scale.
3.3 The need for innovation

In Session 2 we analysed the modern external environment in which
organisations have to compete for success in order to survive. It was apparent
from this analysis that the external environment has become increasingly
volatile and competitive. One of the reasons for this enhanced volatility has
been the changes that have occurred in the technological environment,
particularly in the field of ICT. Merging computer and telecommunications
technology has resulted in the development of the information superhighway,
heralding the end of the capitalist era and the advent of the information age.
Business writer Peter Drucker coined the phrase (1968) ‘the knowledge
worker’ to describe the new role that employees now played in modern service
economies. As Western economies lost their competitiveness in traditional
manufacturing industries to emerging countries in the Far East and Central
Europe, new industries and jobs were created in services. Major company
restructuring known as downsizing and delayering took place in the 1980s
and 1990s, involving techniques such as business process reengineering
(BPR). This will be discussed in more detail in Session 4 when we look at
organisational structures and contingency theory.
According to the writer Alvin Toffler (1984), developing nations pass through
three phases or waves of change as they grow (see Figure 3.1 below).
28
Figure 3.1: Toffler’s waves of change (1984)
Michael Porter (1985) of Harvard University said that this was a natural development
and there was nothing wrong with a modern economy losing its manufacturing jobs
to the newly industrialised countries (NICs) provided they moved up the value chain
of work into higher value services such as R&D, consultancy, finance, computing,
telecommunications, software, and biotechnology, etc. The margins in these new
service industries were much higher than in traditional commoditised manufacturing
such as iron, steel, textiles and shipbuilding, where price competition had eroded
profitability. Moreover, Western economies were also able to remain competitive in
higher-value manufacturing industries such as defence, pharmaceuticals, machine
tools and medical instruments, where high levels of R&D were required or high levels
of automation removed the competitive threat of lower wages. Reinforcing Michael
Porter’s comments and adding fuel to the flames, Alan Greenspan (2000), head of the
US Federal Reserve, said that companies must be ready to re-invent themselves in
order to survive in the global business environment.
There have been significant developments in Toffler’s model since the early 1990s.
China has now become established as a major manufacturing power and in many
instances the new workshop of the world. However, India has taken a slightly different
route; instead of following the traditional path laid down in Toffler’s model and
becoming an industrial manufacturing power, it has moved primarily into services with
high levels of IT software expertise and research capabilities (including generic drugs).
Brazil remains a strong force in agriculture, while Russia is generating huge amounts
of wealth from its mining and energy resources.
The competitive threats from the BRICs has placed increased competitive pressure
on the mature Western economies and hence businesses in these countries have
had to look at their current resources, capabilities and strategies, and devise new
business models or ways of competing in the increasingly volatile environment.
This has subsequently created a need for re-invention or innovation and this will be
discussed in greater depth in relation to the resources and capabilities of the modern
firm. However, before we consider the resources and capabilities of the modern
organisation we will start by defining what is meant by innovation and the different
types of innovation that exist.
29
3.4 What is innovation?

‘Innovation’ has become a popular word in business over recent years due largely
to the changes that we have discussed earlier in the session. However, like any
commonly used word, it is often misunderstood or misconceptions often occur. It
is therefore important to define what we mean be innovation and at the same time
remove any misconceptions that may have developed.
One of the first misconceptions when defining ‘innovation’ is that the term is often
used interchangeably with the word ‘invention’, when in fact the two concepts are
different. Most people associate an invention with something that is tangible and new.
Inventions use new knowledge to create something new such as an artefact, service
or piece of equipment. Inventions are useful if they have the potential to enable people
to do things better and differently, and thereby confer some form of benefit or satisfy
a need or desire that would otherwise go unmet. However, inventions cannot always
be put to immediate beneficial use. In fact, inventions can only confer benefits if they
are useful in helping individuals and organisations to achieve their purposes and
objectives. The concept of invention implies that the application of knowledge creates
something new, but an invention can only lead to an innovation when it serves some
form of useful purpose.
The concept of innovation therefore implies that benefit must be derived from the
application of new market or technological knowledge. In 1990, Michael Porter also
stated the need to distinguish between invention and innovation when he defined
innovation as ‘a new way of doing things that is commercialised’. From Porter’s
strategic perspective, inventions need not result in something tangible since ‘a new
way of doing things’ need not be the result of a new piece of equipment.
To help clarify our understanding of the concept of innovation, we will now look at four
common misconceptions that often blur our understanding.
• Misinterpretation 1: innovation = invention. As we have already noted, an
invention is essentially a creative idea, whereas innovation takes that idea and puts
it to work. Innovative activity encourages the development of new ideas but it also
turns them into useful products or services that customers need.
• Misinterpretation 2: innovation = new products or services only. Innovation
may result in new products or services but it is not solely confined to these
developments. For example, the Austrian economist Joseph Schumpeter (1934)
identified five ways in which an entrepreneur causes distinct changes in the market
through the introduction of innovations:
1. Introducing new products or services. This may involve radical or
incremental innovation. The most publicised innovations are usually related
to new product development. For example, small companies have become
international giants through successful product innovation, e.g. Microsoft
(MS-DOS), Intel (microprocessors) and Apple (Macintosh computer).
2. Introducing new methods of production (process innovation)
e.g. Henry Ford’s moving assembly line, containerisation in
shipping and Pilkington’s float glass technology.
3. Opening a new market. This involves taking existing products or services and
30
selling them into new markets. Small business often innovates in this way,
spotting a geographic market overlooked by larger companies or using an
idea from another industry. New marketing methods may also be a source of
innovation, e.g. the way that the product is marketed to the customer. Music
and video downloads are examples of this, creating a new business model
and causing serious problems for many high street music retail chains.
4. The conquest of a new source of supply of raw materials or half-
manufactured goods (and more recently low-cost labour), e.g. business
process outsourcing (BPO) and offshoring (outsourcing overseas).
5. Carrying out the new organisation of any industry e.g. business process
re-engineering (BPR).
• Misinterpretation 3: innovation = original. Innovation does not take place in a
vacuum. New ideas always have roots in the past: they start with what already
exists and become original from the unique way in which they combine or connect
with existing ideas and knowledge. In other words, a new idea is very often the
meeting of two old ideas for the first time.
• Misinterpretation 4: innovation = one-off inspiration. Innovation does not rely
on a sudden flash of inspiration but is normally a gradual process that builds into
something new and worthwhile over a period of time. Thomas Edison, the inventor
of the electric light bulb, once said that ‘creativity is 1 per cent inspiration and 99
per cent perspiration’. Considerable resources such as time and/or money are
therefore required.
We will conclude our analysis of innovation by considering the different approaches to
the development and implementation of ideas in business and why they are important.
There are three basic approaches to innovation:
• incremental innovation,
• radical or big bang innovation,
• technology-push or market-pull innovation.
Most business innovations are incremental and result from deliberate small step
changes to products or processes. Most successful new products or services emerge
gradually from modifications and improvements of existing ideas and technology
– from putting together familiar things in a slightly different way. For example, the
emergence of jeans and trainers as fashion apparel from their humble origins as
working clothes; or the evolution of vinyl records into music CDs and then into
DVDs. This is sometimes called continuous or incremental innovation which can be
contrasted with radical, discontinuous, ‘one step’/‘big bang’ innovation.
Radical innovation is often referred to as being discontinuous or disruptive because

it makes existing product/service offerings and processes obsolete. For example, the
incremental development of music (mentioned earlier) from vinyl records to CDs and
DVDs is now being threatened by digital technology and downloadable music. This
form of innovation is also sometimes referred to as ‘one step’ or ‘big bang’ particularly
if it involves new processes. Henry Ford’s introduction of the car assembly production
line, Pilkington’s Float glass manufacturing process and the advent of containerisation
all made previous processes obsolete and set technology development on a new
incremental path.
31
A more recent example is the microprocessor. This was a radical innovation that
drove the development of the personal computer. However, once the ‘big bang’
had occurred, future development of the technology was incremental. The Intel
microprocessor developed in size and power (Moore’s Law) in incremental stages, i.e.
the 486 chip and then the Pentium 1, 2, 3 and 4 microprocessors, and now the Core
Duo chips. Operations and applications software also developed incrementally in terms
of functionality and size along a similar growth path.
Another contrast in approaches to innovation is whether it is a planned and structured

process or the result of a sudden or gradual recognition of the market potential of
the innovation. The structured approach is also sometimes called the technology-
push approach in contrast with the opportunistic market-pull (or customer-pull)
approach. The planned and structured approach is often associated with technology
developments where heavy investment capital may be required. Recognising a market
opportunity or the ‘inspired guess’ approach often flows from a strong awareness of
customers and their needs. In many instances, a hybrid position may exist where both
approaches are applied. The entrepreneur knows on the basis of intuition and gut
feeling that there is a market for their product but no such innovation has previously
been marketed. For example, when Henry Ford was asked about his opinion of market
research his reply was that if he had researched customer needs and wants prior to
the launch of the Model T the only response he would have received would have been
a request for faster horses.
If we return to the writings of Joseph Schumpeter that we mentioned earlier,

Schumpeter was a pioneer who saw innovation as playing a central role in economic
development. He took a business-cycle approach, believing that during economic
downturns or crises, old-fashioned and inefficient firms would be removed by gales of
destruction to be replaced by more competitive and innovative firms. Entrepreneurs
were also seen as the spur to innovation, which was crucial to business success.
The central feature of Schumpeter’s development theory is that the entrepreneur is the
vehicle for the diffusion of technology through innovation. This places the entrepreneur
at the heart of modern-day economic development. Taking this idea forward, Roy
Rothwell (1993) has moved on from Schumpeter’s model and offers a more complex
continuum of five models or ‘generations’ of innovation. These are innovations that are:
• pushed by technological discoveries,
• pulled by market or consumer demand,
• as an iterative process of both technological-push and market-pull,
• as an integrated management process, an integral part of how the firm operates (a
sort of total quality management model that supports creativity inside the firm),
• a networked management approach and cooperation, making use of the
communication benefits of ICT, to make use of shared planning in response to
multiple market opportunities.
These ideas are very important and are currently influencing public policy and
business strategies. Nowadays, new methods of gathering market information,
financing and distribution would be regarded as innovative, especially those making
use of ICT. New forms of organisation are also appearing, with the emergence of ICT-
32
supported business networks and clusters.
We will now look at the implications of environmental change and innovation for the
management of the internal resources and capabilities of the organisation.
3.5 Managing resources and capabilities for

competitive advantage
In order to fully understand the role and importance of resources and capabilities in
achieving organisational success, we will start by defining what is actually meant by
the terms ‘resources’ and ‘capabilities’.
Resources comprise the tangible and intangible assets of the firm. Capabilities are
the processes through which resources are combined and coordinated. Tangible
assets include physical assets such as buildings and equipment as well as financial
assets. Intangible assets include the organisation’s reputation, its brand and even
its organisational culture. The capabilities of the organisation are its capacity for
undertaking a particular productive activity. An organisation’s capabilities combine
and coordinate its resources through its functional capabilities such as marketing,
operations and distribution, etc.
In Session 2 we identified the major changes that had occurred in the environment
since the 1980s, resulting in increased customer expectations. Modern customers now
have access to considerable sources of information on the internet and can carry out
extensive information searches quickly and easily before making a purchase. This
means that customers now require products and services that are of an acceptable
quality, inexpensively priced and available now. In the post-war years of the 1950s,
customers had to make a trade-off between price and quality: if you wanted quality
and service, you had to pay a higher price; if you could only afford to pay a low
price, you received low quality and service. Nowadays, as more companies compete
for customers on a global scale, the bargaining power of the buyers (Porter 1985) is
paramount.
In addition to these changes to consumer preferences and power, there has also
been a change in the nature of competition in global markets. In the late 1960s and
early 1970s there was a general consensus of opinion that small firms were irrelevant
since economies of scale, R&D capability, and access to international marketing and
distribution networks were critical to success. Big was beautiful and the small firm in
Western markets was dead. In the UK, this led to a Committee of Inquiry on small
firms in 1969 and the publication of the Bolton Report of 1971. The report recognised
that small enterprises made a special contribution to the health of the economy and
performed eight important roles. One of these roles included the ability to produce
new and innovative products, services and processes. A small firm revival also took
place during the ensuing three decades, as well as the development of an enterprise
culture. During the era of corporate downsizing in the 1980s and early 1990s, Peter
Drucker (1995) commented on how traditional management normally associated with
large multinational corporations was being replaced by a entrepreneurial management
as Western economies and companies restructured and new technology companies
and industries emerged.
33
The culmination of all these changes has to put considerable pressure on modern
corporations in a number of key strategic areas:
• Cost reduction: Due to increased global competition and the downward pressure
on prices, companies have had to look seriously at ways in which they can reduce
costs in order to compete.
• Resource constraints: Increasing customer expectations for quality, service and
variety (as well as low prices), resulting in a need to access a broader range of
resources and capabilities in order to meet customer needs. For example, the
manufacture of a modern mobile phone now requires resources and capabilities
relating to several different industries, i.e. telecommunications, computing,
consumer electronics and media entertainment (content).
• An ability to innovate: Due to increased competition from entrepreneurial technology
companies, product life cycles have shrunk in duration, resulting in a need for
organisations to produce new products and services more often and at a faster
pace.
To recall the reference made earlier in this section by Alan Greenspan (former Head
of the Federal Reserve), companies now have to reinvent themselves in order to
compete in the modern business world. We will now analyse this statement using a
resource-based view of the organisation to see how modern corporations have been
able to address the three strategic issues of cost reduction, resource constraints and
the ability to innovate.
Cost reduction
In order to reduce costs and remain competitive, companies have had to review their
current way of doing things and ask fundamental questions such as:
• What activities does the organisation carry out and what value do these activities
add?
• Does the activity need to be carried out in-house or could it be performed more
cheaply elsewhere?
• Does the organisation have to own the resources it needs or does it just need to
be able to control them and access them?
One way of identifying and analysing the resources of an organisation is to produce a
value chain, as shown in Figure 3.2.
Figure 3.2: Porter’s value chain
34
Porter’s value chain highlights the different value-adding activities of an organisation.

Primary activities contribute to the provision of goods and services for customers,
while support activities allow the primary activities to take place – such as the role
of infrastructure, human resources and IT/technology. Put simply, the value chain
provides a framework for the analysis of a firm’s capabilities. It permits consideration
of which functional activities add value relative to others and/or which might be
considered core to the firm.
A value chain can be a very helpful tool for understanding the difference between
two organisations that appear to be functioning in similar ways in a similar sector.
Organisations can also construct their value chains in very different ways. For
example, the value chain featured in Figure 3.2 is for a manufacturing company. If
this were to be redrawn using a service company as a template, it would look very
different.
Another approach is to use a transformation model that features the inputs, processes
and outputs involved in a service or manufacturing operation. If we go back to Session
1 and look at Figure 1.1, this is a transformation model with a boundary drawn around
the outside to create a systems model. All the activities that take place inside the
boundary line are in-house activities performed by the organisation. If all the activities
are carried in house, this means that there is a high level of vertical integration within
the firm. Early industrial organisations were vertically integrated due to the unreliability
of supply caused by slow communication and transportation. For example, Henry
Ford’s first manufacturing assembly plant at River Rouge even had its own steel mill
to produce all the metal parts for his Model T automobiles. Even the Michelin tyre
company was located at the same site.
Improvements in communication and transport mean that supply chains have become
much more reliable. Moreover, following the removal of political barriers to trade and
the development of ecommerce, organisations no longer have to operate vertically
integrated resource configurations. The major trend has therefore been to exploit
opportunities in newly accessible countries to reduce the cost of production. This
has been achieved through the strategic outsourcing of a broad range of functions
and activities. This is known as business process outsourcing (BPO) or offshoring.
Important resources and capabilities exist outside the organisational boundary and
are rarely owned by the organisation that is sourcing them. However, access and
control rather than ownership are critical success factors in such circumstances.
Companies such as Nike and Reebok outsource all their manufacturing activities to
countries with low-cost labour forces and then focus upon their primary activities of
R&D, marketing and design. This is what is known as an open system, where there is
considerable interaction between the firm and its external environment, whereas Henry
Ford operated a relatively closed system approach, with little interaction with the wider
environment.
China and India have become major outsourcing destinations for multinational
corporations seeking to reduce costs. Since labour is still the highest cost in most
companies, the attraction of a low-cost labour force needs little explanation. The
financial service industry has been a major player in BPO and offshoring. The advent
of digital technology has made it possible to transfer data along fibre-optic cables to
countries such as India where processing takes place overnight (UK time) and the
information created is transferred back to the relevant Western institution the next
35 morning at a fifth of the normal cost. Low cost and highly skilled computer personnel
make this possible in India. Outsourcing back office services has now been extended
to include front office services such as call centres and also research.
Outsourcing has therefore been a critical area in which multinational corporations have
been able to reduce costs and gain a competitive advantage. It also demonstrates that
resources and capabilities do not have to be owned by the organisation concerned,
although accessibility and control are still extremely important. The bargaining power
of the large multinationals obviously places them in a strong position with regards to
such a relationship.
Resource constraints
The mobile phone industry provides a good example of how a single organisation
cannot hope to produce a product that meets customer expectations based solely on
the utilisation of their own internal resources. The fact that producing a modern mobile
phone requires inputs from at least four industries illustrates the need for organisations
to adopt cooperative strategies.
A cooperative strategy between firms involves sharing resources and capabilities in

order to meet consumer needs. Examples of cooperative strategies are as follows:
• A joint venture involves the formation of a new company where both risk and
control are shared by both parties.
• An alliance can be either equity or non-equity based, and exists when two or
more independent organisations co-operate in developing, manufacturing or selling
products or services (Hennart 1988).
• A consortium is an interconnecting set of relationships between a variety of
organisations primarily concerned with bidding for very large and complex projects
(e.g. the Caspian Pipeline Consortium) or to gain economies of scale from
aggregated purchasing (e.g. the Spar franchise for independent grocers).
In Japan, consortia are known as keiretsus and exist on a much more formalised
basis than consortia. Typically a keiretsu would involve up to fifty different firms joined
together around a large trading company or bank and whose performance is controlled
by interlocking directorates. This formalisation permits the keiretsu to benefit from cost-
sharing and/or economies of scale, and enables it to take advantage of a wide range
of market opportunities. Some examples of Japanese keiretsus are Mitsubishi and
Mitsui. In South Korea, the keiretsus are known as chaebols and include organisations
such as Daewoo.
Alliances have become a large growth area due to the need to access better
resources and capabilities in order to meet higher customer expectations. The benefits
that can be achieved through an alliance from a resource and capability perspective
include access to funding, skills, know-how, rights, technology, markets, raw materials
and synergies through blending complementary assets plus facilitated learning and
capability building.
36
Ability to innovate
The firm’s ability to innovate is influenced by many factors including structure, systems
processes and culture. It is important that an innovation-friendly environment or climate
is created – this aspect of innovation will be discussed in more detail in Session 4.
Our concern at this stage is how a resource-based approach can be used to facilitate
the creation of an innovative organisation.
One approach is for the company to adopt a knowledge-based view (KBV) derived
from the resource-based perspective. Since most business innovation involves
technology and the basis of technology inherently involves knowledge, then knowledge
is considered to be the principal source of value in the organisation and the
organisation’s most valuable strategic asset. Whereas the resource-based view (RBV)
considers organisational capabilities to underlie competitive advantage, knowledge-
based theories argue that the true source of competitive advantage is the knowledge
that underlies those capabilities (Spender 1996).
Individuals are therefore assumed to be the ultimate source of all knowledge creation
in an organisation. However, problems occur because knowledge is not always
tangible or explicit but is more often tacit and intangible or implicit. Tacit knowledge
is embedded in work routines and relationships, and is rarely codified or placed in
training or procedure manuals. Moreover, the critical distinction between tacit and
explicit knowledge is the transferability of knowledge. Tacit knowledge is only revealed
through its application and even if it is codified or documented it can still be difficult to
transfer. For example, if one person is given detailed instructions of how to build a car
engine, it does not mean that the person will be able to successfully execute the task.
We can now start to understand why employees in innovative technology firms are
frequently described as ‘assets walking around on legs’ and why key teams often
leave or are poached by rivals. If these staff leave the organisation, the company also
loses important expertise and knowledge. Since we are now in the information age
and most employees are probably knowledge workers (Drucker 1968), the more reliant
organisations will be on the tacit knowledge of their employees.
The outcome of this is that there is greater potential for the organisation to lose its
expertise within the organisation and subsequently valuable contributions to innovation.
This explains the growing emphasis on developing knowledge management systems
i.e. information systems to capture, store and ultimately transfer knowledge within
organisations. Some service firms go to great lengths to develop internal systems
and procedures for storing, reproducing and making implicit knowledge explicit. Their
manuals are updated continually to disseminate best-practice across the firm. In effect,
they are aiming to create a store or memory of the organisation’s learning to date.
37
3.6 Key points

• the role of innovation in creating a competitive advantage,
• how resource and capability requirements have changed in Western economies
based on Toffler’s ‘three waves’ framework,
• the important benefits that can be achieved through cooperative strategies and the
application of strategic outsourcing,
• how knowledge underpins organisational capabilities in modern innovative
companies.
Activity 3
Select an organisation with which you are familiar (this could be your current
employer). Draw a value chain (Porter) or transformation model (input-process-
output) to represent the activities that the organisation currently carries out and/or the
resources that it presently uses.
Now answer the following questions:
1. How effective is the organisation in adding value through the performance of its
activities and its resource utilisation?
2. What type of innovation (if any) does your chosen organisation exhibit and what
recommendations would you make?
3. Can you provide any examples of any co-operative strategies? If so, what is the
reason for these and how effective are they?
Post your answers to the above questions on the Tutor Group Forum (TGF). When
you have done this, compare and contrast your own organisational analysis with the
contributions made by other group members – particularly if someone has selected
the same organisation and drawn different conclusions.
38

How businesses implement
modern-day strategies
Chapter HOW BUSINESSES IMPLEMENT MODERN-DAY STRATEGIES
4. How businesses implement modern-day strategies

• understand the meaning of ‘contingency theory’ and why companies need
to respond to environmental change,
• appreciate how the strategy formulation process has changed,
• understand the different types of organisational structures and cultures, and
how they are inter-related,
• critically evaluate the structural changes that have occurred in multinational
companies and the new organisational forms that have replaced them,
• appreciate what is meant by an innovation-friendly environment or climate.
4.2 Introduction
In Session 2 we analysed the external environment and the changes that have
occurred in the macro- and micro-environments. The increased environmental
instability that was identified has had implications not only for the management
of a company’s resources and capabilities (Session 3) but also for the
process of strategy formulation, organisational structures, processes, systems
and cultures. Modern business organisations have therefore undergone
radical change in order to adjust to their external environments and remain
competitive. This session will look at the changes in strategy, structure,
processes, systems and cultures that have been implemented, and how an
innovation-friendly environment (or climate) can be created.
4.3 Deliberate and emergent strategies.

The traditional or classical approach to strategy involved a process of long-
term strategic planning carried out by the company’s senior executives. The
role of the middle manager was to act as an implementer of the strategies
that would be cascaded down to them. This was a top-down approach that
ignored valuable information that might have been extracted from other areas
of the company using bottom-up methods of information processing. Strategy
formulation and implementation were subsequently separate activities and
the process was very slow and inflexible. For example, the different stages
of strategic analysis, strategic choice and strategic implementation would be
carried out separately and sequentially in a linear fashion, i.e. one couldn’t
start a lower order stage such as strategic choice until the previous stage
(strategic analysis) was complete.
In the 1960s and 1970s, the large Western multinationals had developed
large corporate strategic planning departments at their headquarters that
produced complex and inflexible long-range corporate plans. This approach
to planning had worked reasonably well when the external environment was
stable. However, as the environment changed and became unstable during the
1970s due to the oil shocks, floating and fluctuating currencies, high inflation,
and high interest rates, the classical approach to planning was no longer
appropriate. Corporate plans would often take up to six months to prepare and
40
formulate – and in a volatile, fast-changing environment, these plans were out of date
before they could even be implemented.
These planning departments were later disbanded during the era of corporate
downsizing. However, a new approach to the formulation of strategy was required
that was both flexible and responsive to environmental change. In 1985, Mintzberg
and Waters published an article in the Strategic Management Journal that highlighted
a shift in strategic management thought away from the classical planning school.
This became known as the process school of strategy where Mintzberg and Waters
identified a gap between leadership plans and intentions (intended strategy) and what
organisations actually did (realised strategy) – see Figure 4.1. Mintzberg and Waters
further defined strategies as either deliberate or emergent. Deliberate strategies are
those that are realised (implemented) as intended; emergent strategies are those that
are realised despite the existence of an intended strategy or in the absence of any
managerial or organisational intention. This clearly illustrates that there was no best
way to formulate or implement strategy.
Figure 4.1: Deliberate and emergent strategies - Mintzberg and Waters (1985)
Put simply, managers interpret messages from the external and internal environments
of their organisations and respond to these messages by adapting their strategies
in various ways. In this respect, strategy-making corresponds more closely to
a continuous and adaptive process where formulation and implantation interact
continuously rather than being linear and separate. The concept of emergent strategy
therefore opens up the strategy process to the notion of learning, i.e. responding to
contexts as they evolve.
Mintzberg and Waters also developed a range of strategies that were placed on
a continuum with deliberate strategies at one end and emergent strategies at the
other. Along this continuum there were varying degrees of ‘deliberateness’ and
‘emergentness’, including a planned strategy, entrepreneurial strategy, ideological
strategy, umbrella strategy, process strategy, unconnected strategy, consensus strategy
and imposed strategies.
4.4 Organisational structure

Organisational structures play an important role in facilitating the implementation of
organisational strategies. According to Alfred Chandler (1962), structure should always
follow strategy, meaning that an organisational strategy will never be successfully
implemented if the wrong structure is in place. In fact, many structures act as mobility
barriers to organisations that want to change strategic direction.
41
A strategy to become an innovative company and technology leader will not be

realised if the company is a multi-layered bureaucracy with a narrow division of
labour (job specialisation). In the early 1980s this was a problem that was being
experienced by large Western multinational companies. Leading US and European
corporations found that they were losing large amounts of market share in a broad
range of industrial sectors to Japanese companies. One of the reasons for this was
that the Japanese had developed superior product quality but another reason was that
the American and European firms had become bloated bureaucracies and had lost
the ability to innovate. These organisations had pyramid structures often consisting
of 22 to 29 layers. Not only were these structures costly to maintain but they were
also inflexible and slow to respond to changes that were occurring in the external
environment.
According to Burns and Stalker (1961), these structures were ‘mechanistic’ and
inappropriate for the environment in which they competed. When these bureaucratic
structures were developed (Weber 1964) the environment was stable and slow to
change and therefore a ‘mechanistic’ structure was appropriate. Burns and Stalker
said that the most appropriate structure for an organisation was contingent upon
the type of environment in which the firm operated. This has become known as
contingency theory, i.e. the type of organisational structure should be contingent upon
the type of external environment. This means that in a volatile unstable environment
an ‘organismic’ or ‘organic’ structure is more appropriate. These structures are flat in
comparison (see Figure 4.2) to the tall pyramid structures (see Figure 4.3) of the early
1980s and can range any where from two levels to seven (typically four).
Figure 4.2: Flat structure
When Jack Welch became the CEO of General Electric in 1980, he inherited a
company with 22 layers. General Motors had 29 layers and IBM employed nearly half
a million people. This led to the restructuring of multinational corporations during the
1980s and early 1990s. Techniques such as business process re-engineering and
downsizing were used to delayer these companies. ICT replaced layers of middle
managers by using networked computers as a substitute for the old manual reporting
systems. For example, instead of hard copy reports being passed up and down the
scalar chain in a vertical manner, managers could now access information online
via intranets and were empowered to make their own decisions without waiting for a
report from a higher authority to activate the decision-making process. This type of
structure was much more flexible and responsive to environmental change – and was
also much cheaper to maintain.
42
These developments were taken a stage further by

Charles Handy (1985) and Atkinson & Meager (1986),
who recognised the importance of flexible firms that
could expand and contract to meet varying levels of
demand from customers. For example, due to the
difficulties of producing accurate sales forecasts caused
by unpredictable customer demand, organisations
ran the risk of ending up with excess capacity if
they overestimated orders or lost customers if they
underestimated future sales. In order to combat this
problem, the flexible firm (or shamrock/cloverleaf)
structure was conceived. Handy breaks the organisation
down into three parts or elements: in one part of the
organisation there are the core permanent staff whose
numbers remain the same despite the level of economic
activity; in the other two elements there are the part-
time and temporary workers, and outsourced services.
These can be increased or decreased depending upon
the level of activity and therefore the organisational
size can be expanded or contracted. This avoids
the problems of over-capacity or an inability to meet
customer requirements.
Atkinson and Meager (1986) use four categories to

analyse the flexible firm based upon numerical and
functional flexibility, distancing, and pay:
Figure 4.3: Pyramid structure
• numerical flexibility involved the use of temporary
and part-time staff,
• functional flexibility was the use of job design (i.e. multi-skilling) to
enhance workforce flexibility,
• distancing was Atkinson and Meager’s version of outsourcing,
• pay was performance-related to enhance productivity.
These changes to organisational structures enhanced the competitive performance
of the UK economy during the 1980s and 1990s as Britain developed a cheap
and flexible labour force, using high levels of outsourcing and temporary workers.
Moreover, the flatter structures that were evolving were much more conducive to
innovation. For example, certain types of organisational environments are more
innovation-friendly than others. Since knowledge-generation and sharing are an
inherent part of an innovation strategy (see Session 3), it is essential that the most
appropriate structure is in place to achieve these goals. As Alfred Chandler said,
structure should always follow strategy. Key barriers to innovation include bureaucratic,
hierarchical structures, rigid functional boundaries, formal procedures and policies, and
a strong division of labour. There are also cultural issues that will be discussed later
in the session. The barriers that have been mentioned are all features of traditional
pyramid organisations where knowledge generation and sharing are blocked by the
vertical barriers to information flow caused by the hierarchical levels. The horizontal
and diagonal flows were also inhibited by functional barriers and the narrow scope
of work of the employees. The formal procedures and policies used by these
43 organisations also impacted negatively on idea-generation and sharing.
The modern entrepreneurial firms that were developing in the technology sectors,
however, looked very different to the traditional organisations that existed at the
beginning of the 1980s. Many of these small businesses were almost heterarchical
(non-hierarchical) in terms of their structures and deployed multifunctional project
teams. They were highly process-driven and the narrow tasks associated with the
division of labour were enlarged. This created high levels of empowerment and
employee involvement, leading to open channels of communication and the sharing
of ideas and knowledge from all areas of the organisation. Moreover, the policies
and procedures used to control the organisation were replaced by strong task and
entrepreneurial cultures that acted as a form of organisational glue binding the
company together. The blame cultures and aversion to risk that were features of the
traditional organisations were also avoided. The use of collective decision-making in
small units and the development of an enterprise culture with a positive attitude to
risk are also essential in an innovative company. An open attitude to change and the
enjoyment of new ideas are also features of successful innovative firms.
When the Committee of Enquiry on Small Firms reported in 1981, the Bolton Report
identified a number of key roles for small firms. Two of these were as follows:
• The most efficient form of business organisation in some industries or markets
(such as technology) where the optimum size of the production unit is small.
• Innovators of new products, services and processes.
This type of innovation climate is so important that even large companies now
utilise project team structures and have established R&D centres that simulate small
business environments. 3M has been a leader in the field of innovation through
promoting enterprise in its organisation. This approach is sometimes referred to as the
‘Silicon Valley model’, and can be found in all the successful technology companies
including Google, Apple and Lockheed Martin (aerospace).
4.5 Common types of organisational structure

The structures that most organisations adopt are usually aligned to one of the five
generic business structures:
• simple structure
• functional structure
• divisional structure
• holding company structure
• matrix structure.
The simple and functional organisational structures are centralised structures where
all the important and long-term decisions are taken by top management. Top
management will determine the rules and procedures that closely govern and direct
the jobs and tasks of managers further down the organisation who are responsible for
the departments, products, services and markets on a day-to-day basis.
In contrast the divisional, holding and matrix organisational structures are

decentralised, containing divisions/subsidiaries/project teams that have a significant
amount of decision-making power and responsibility of their own. Cooperation and
coordination between the divisions/subsidiaries/project teams and the board of
directors are crucial if the spread of power and responsibility throughout the structure
44
is to work for the organisation as a whole.
Simple structure
These structures are typical in small businesses or businesses that are in early stages
of their growth and development. The simple structure is centralised (see Figure 4.4),
with all the power and decision-making resting with the managing director, who is
likely to be the owner as well (owner-manager).
Because to its simple form (lack of hierarchy, functional specialists and formal
procedures), the simple structure provides an excellent environment for innovation.
However, the simple structure will change as the organisation grows because the
owner-manager finds it more difficult to control. As simple structure businesses grow
in size, they commonly develop functional structures.
Figure 4.4: Simple structure (Capon 2004)
Functional structure
This structure is rigid and centralised, with efficient management control systems.
This structure is common in medium-sized companies and well-established public
sector organisations. The functional structure also sees the introduction of specialist
functional managers who are responsible for the different departments, e.g. marketing,
operations, finance and human resources. The lines of communication and information
flowing within the functional structure are short and vertical, while job roles are also
clearly defined. Short-term decision-making rests with the functional heads, whereas
the long- and medium-term decision-making remains the responsibility of the board
of directors.
The organisation will start to outgrow its functional structure when it develops a
wider range of products or services and/or diversifies into wider geographic markets
(international sales). When this type of growth arises, the functional structure has
problems coping with the increased diversity because it is rigid and centralised, and
cannot coordinate activities across functions. The next stage of structural progression
therefore involves the adoption of a divisional structure.
45
Figure 4.5: Functional structure (Capon 2004)
Divisional structure
This structure is used to overcome the problems of increased diversity that cannot be
handled by the functional structure. Separate decentralised divisions are established
to accommodate individual product lines or services, e.g. a motor manufacturer may
have a car division, a truck and van division, and a passenger service vehicle (bus)
division. Alternatively, divisions can be based on the geographic areas of the markets
served e.g. Europe, Asia and North America. Organisations may contain a mixture of
different types of divisions with some based on product or service lines and others
geographically allocated e.g. cars, buses, trucks and overseas sales. However, one
single division would not usually be based on both product and location, so it is rare
to find divisions called ‘Cars (North America)’ or ‘Buses (Asia)’.
The divisions in a divisionalised company will consist of cost centres or profit centres
in their own right and will have to manage budgets, meet targets and operate within
budgetary constraints. The divisions must also satisfy performance criteria relating to
profitability and asset use, with profit margins and return on assets likely to be the
key measures applied to individual divisions. The company will aggregate the financial
information on each division’s performance to produce the overall annual company
report and accounts.
The separate divisions within the same organisation have an internal structure of their
own. A common structure for individual divisions to adopt is the functional structure
because it is suitable for the size and range of activities of a discrete division under
the larger divisionalised organisation. However, there are difficulties with this type of
structure in three key areas relating to the allocation of resources, overall coordination
of activities and the cost of running separate divisions. Competition for resources
between divisions may lead to conflict when the resource base has become depleted.
Company-wide coordination may also become very complex and lead to duplication
of activities and increased costs. One way of overcoming the latter problem is to
centralise the provision of shared services such as finance, human resources, legal
services and IT, etc.
46
Figure 4.6: Divisional structure (Capon 2004)
Holding company structure

This is usually found in large industrial conglomerates and private equity firms where
the parent organisation acts as an investment company that acquires and divests
smaller subsidiary companies. A holding company will usually have a small corporate
headquarters from which the parent company conducts its business. This means
that the central overheads will be low because of the economies of scale that this
company-wide coordination achieves.
The subsidiary companies continue to trade under their own names, with the parent
company either wholly owning its subsidiaries or acting as a majority shareholder in
them. Subsidiary companies will operate fairly independently of the head office, with
all decision-making power and responsibility for their own performance resting with
their management. Although holding company structures are decentralised, the control
systems that are implemented by head office will tend to focus on the subsidiary
companies meeting tight financial targets with regard to profit forecasts, profit margins
and return on assets – or risking swift divestment by the holding company.
47
Figure 4.7: Holding company structure (Capon 2004)
Matrix structure
The matrix structure attempts to merge the benefits of decentralisation with
coordination across all areas of the business. Matrix structures are often used in
organisations where there are two distinct and important areas of operation that
require management and coordination. In order to deliver the full product or service
range, matrix structures are often found in large multinational companies, educational
establishments and small sophisticated service companies.
In a large multinational company (see Figure 4.8), the two arms of the matrix structure
represent the product or services areas and the geographic areas in which the
company operates. The product or service arm is responsible for the production of
the product or delivery of the service, while each geographic arm of the matrix is
responsible for the advertising, marketing, sales and distribution of those products
and services to the end users in the geographic area for which they are responsible.
The geographic arm becomes the customer of the product or service arm as they
purchase the product or service they need from them before selling these on to their
geographically defined customer base.
48
Figure 4.8: Matrix structure (Capon 2004)
The matrix structure does have disadvantages such as the lack of clarity of people’s
roles, responsibilities and accountability. Bringing together a team to work on a
specific project and then disbanding it once the project is complete, only to bring
together another team for the next project is a key feature of a matrix structure, which
is facilitated by its decentralised and flexible structure.
The success of the matrix structure depends heavily on communication and

coordination between the two arms of the matrix for any one product or service in any
market. This requires teams from both parts of the matrix to work together well at the
points that they meet in the matrix and engage in their internal customer relationship.
The quality of the end user or external customer relationship depends heavily on the
quality of this internal customer relationship between the arms of the matrix. The main
49
potential difficulty with the implementation of the matrix structure occurs when people
from both arms of the matrix fail to work together and coordination and communication
between the two break down.
The organisational structures of large corporations are complex and usually consist
of a variety of different formats. For example, a large multinational will probably
have a divisional structure but within each division other types of structure will exist,
including functional and project-based structures. The company may have a complete
research and development division that consists of project teams and simple structures
focused on the development of new products, e.g. the large technology companies in
consumer electronics and pharmaceuticals. However, the key determinants of whether
an organisational structure is appropriate is that it first achieves a fit with the external
environment (allowing it to respond to external change) and second, the structure
enables the organisation to implement its strategy successfully without creating
barriers to mobility.
4.6 What is culture?

Culture has been commonly defined as the way we do things around here (Deal
and Kennedy 1982). It therefore incorporates people’s values, beliefs and norms of
behaviour. Since the most important single input into an organisation is the people
who work as its employees, it is important that management can identify and
understand their organisation’s culture.
In the 1980s, partly in response to the rising power of the Pacific Rim economies,
the focus of interest in management consultancy and writing moved from issues
of organisational structure to organisational culture. Deal and Kennedy proposed
a new challenge to management and employees asking them to think about their
organisations as ‘strong’ and ‘weak’ cultures. They said that America’s great
companies were not merely organisations but successful, human institutions. The
high performers were ‘strong culture’ companies such as Caterpillar, General Electric,
DuPont, Price Waterhouse, 3M, IBM, Procter and Gamble, Hewlett-Packard and
Johnson & Johnson. Deal and Kennedy said that high-performing companies owed
their success to the development of a strong culture and listed five situations when
change was necessary and the culture needed reshaping. The first two are related to
the environment, which was perceived to be significant in the 1980s:
• When the environment is undergoing fundamental change and the company has
always been highly value-driven.
• When the industry is highly competitive and the environment changes quickly.
• When the company is mediocre or worse.
• When the company is truly at the threshold of becoming a large corporation.
• When the company is growing very rapidly.
It has often been said that companies only become motivated to undertake large-scale
organisational change when a dramatic change occurs in the external environment.
Pettigrew’s (1985) study of ICI is a good example of the vital importance of the
external environment in persuading people to recognise the need for change. Pettigrew
found that it was not until the organisation was facing a substantial crisis threatening
its long-term existence that fundamental change started to occur (under the leadership
of John Harvey-Jones). In some respects, ICI had a strong culture already but it had
50
become inappropriate when the environment fundamentally changed. Its culture was
felt by managers such as Harvey-Jones to be too elitist, bureaucratic and inward-
looking to remain a major player in the world chemicals industry. The external
environment became the determining factor when the growing threat to the company’s
business interests was ultimately reflected in reduced profitability and the worst losses
ICI had ever experienced.
Since culture exists in both the external and internal environments of organisations, we
will now look at internal cultures using Charles Handy’s (1993) generic culture models
before considering the external cultural dimensions based on Geert Hoftede’s (1980)
four dimensions of national culture classification.
According to research by Handy, there are four internal cultural models:

• The power culture is typically found in small entrepreneurial organisations where
the owner-manager or entrepreneur works closely with his/her employees. They
are at the centre of power and all crucial decision-making rests with them. This
culture can be found in organisations with simple structures. Since the organisation
is heavily dependent upon the leader, the loss of the individual concerned can
seriously threaten the survival of the firm. The power culture will also become
inappropriate as the organisation grows into a functional structure and develops a
role culture.
• The role culture mirrors the functional and divisional structures and is evident
within mature and larger organisations with departments, divisions and different
geographic areas. Role culture organisations are functional, bureaucratic and highly
systematised, with clearly documented routine procedures and well-organised,
efficient operations. Due to their size and the routine nature of their operations,
these organisations develop into solid and predictable institutions that ‘operate the
way they do because they have always done things that way’. These cultures find
an increase in the rate and speed of change a great threat and they are therefore
not adaptive to change.
• The task culture is more flexible than a role culture and has close connections
with the matrix structure. Organisations with a task culture undertake very specific
problem-solving or troubleshooting tasks as projects for internal or external clients,
usually on a consultancy basis. The culture is extremely team-oriented, since each
task or project requires a fresh team to be constituted containing the required skills
and knowledge that will enable the project to be completed successfully. Such a
culture is highly flexible but also expensive. This troubleshooting culture is often
brought into an organisation to solve problems that others have found intractable.
Members of the project team will exhibit their skills and competence through
an extravagant use of resources as they are used to being able to command
anything that they need to get the job done. Examples of task culture organisations
would include research, design and advertising agencies, as well as technology
companies and innovative high-growth start-ups.
• The person culture can be found in professional service firms (probably
partnerships) such as solicitors, doctors, IT and management consultants. The
members of these firms are usually self-employed and they consider themselves
to be highly valued, unique, creative and ultimately unaccountable. They are so
important that they grant the organisation the benefit of their services for which
they receive monetary reward. They may even avoid the use of the words ‘firm’ or
51 ‘organisation’, preferring to use the term ‘practice’.
Since organisations are filled with people who bring with them the culture they have
acquired in the wider society, it is also important to study external cultures. Moreover,
due to the increasing globalisation of the external business environment, it is important
to consider the different national cultures so that companies can manage alliances
with foreign partners and offshore service operations more effectively. Cultural
differences are the most common reason for the failure of alliances and partnerships
between organisations. These issues are made even more complicated when national
differences have to be reconciled.
Seminal research was conducted into national cultures by the social psychologist
Geert Hofstede (1980) at IBM subsidiary companies. The outcome of this research
was the identification of four basic dimensions upon which national cultures were
different:
• Power distance is concerned with the level of involvement that employees lower
down in the organisation have in the decision-making process and the level of
communication that takes place between senior management and the lower levels
of the firm. Large power distance countries include India and the Philippines; low
power distance countries would be Austria, Israel and the Scandinavian region.
• Uncertainty avoidance is the extent to which a culture copes with and encourages
risk-taking. In strong uncertainty-avoidance cultures such as Japan, employees are
risk-averse, agree to abide by the rules and remain loyal to the company. In low
uncertainty-avoidance cultures, employees are prepared to take risks, will change
employers regularly and may live beyond their means and borrow heavily to
finance their risk-taking.
• Individualism versus collectivism is the degree to which a culture encourages
individual as opposed to collectivist behaviour. In an individualist culture such as
the US and UK, the emphasis is on individual initiative and achievement where one
is supposed to take care of oneself plus the immediate family. A collectivist culture
(e.g. Iran and Hong Kong) is characterised by a tighter social framework where
people are members of extended families or clans who protect them in exchange
for loyalty. Group decisions are more important in a collectivist culture, where being
a good member is more important than being a good leader – a characteristic of
the individualist culture.
• Masculinity versus femininity takes a Western stereotype of the roles of
masculinity and femininity. Masculinity represents winning not losing, with less
regard for the costs of achievement (e.g. Austria and Italy). Money, ambition,
‘big’ and ‘fast’ is what counts. Femininity shows concern for the whole context
and process, and looks for ways of satisfying many participants’ goals (e.g. the
Netherlands and Sweden). Quality of life and the environment are important, not
just materialism and career ambition.
In addition to these four cultural dimensions there are also differences in attitudes
to authority, time and the way in which business relationships are conducted. For
example, in collectivist cultures, promotion and selection for management positions is
usually based on social status, cast and connections rather than on qualifications or
merit. In individualist cultures, promotion is based upon experience, track record and
qualifications.
Different cultures will also have different attitudes to time. Polychronic time prevails
where the culture emphasises relationships over time. The alternative to this is
52 monochronic attitudes to time, where time is money and punctuality is important.
This influences attitudes towards business negotiations that can be relationship- or

task-oriented. Relationship-oriented negotiations require prior socialisation before
any business can be transacted, whereas in a task-oriented approach, business is
transacted straight away based on a planned agenda and time scale, i.e. time is
money.
So why are Hofstede’s cultural dimensions so important? Any organisation that plans
to set up an alliance or to outsource key parts of their value chain are most likely to
be forming relationships with a foreign partner that has a different cultural background.
It is therefore important to understand the cultural differences that could seriously
jeopardise the success of any business negotiations and the successful merger of
two businesses. For example, the level of risk that the foreign partner is prepared to
accept will vary depending on the level of power distance in that society. The idea
of sending a woman to conduct business or run a subsidiary company in the Gulf
States would also cause problems due to the high levels of masculinity. Moreover,
the approach to negotiations must consider whether a task- or relationship-oriented
approach is preferred. The type of speech used may also be important: some cultures
use high context speech (indirect and explicit) as opposed to low-context speech
(direct and explicit).
4.7 Key points

• the links between environmental change and strategy, structure and culture,
• the importance of structure and culture in achieving successful strategy
implementation,
• the role of technology and innovation in creating new organisational forms,
• important linkages with earlier sessions in the module, i.e. environment, resources
and capabilities.
Activity 4
The group will be divided into two teams, A and B.
Team A will be required to analyse its organisation (or an organisation that its
members are familiar with). The task is to analyse the organisation’s structure using
concepts from the module to ascertain the following:
1. What type of structure does the organisation have? Can you identify a single
classification from the module materials or are there several structures within the
organisation? The use of an organisational chart might help with this task.
2. Does the organisational structure have a good fit with the external environment?
3. What are the strengths and weaknesses of the structure and what
recommendations would you make for its improvement?
Team B will be required to carry out an analysis of its organisation (or an organisation
that its members are familiar with). The task is to analyse the organisation’s culture
using concepts from the module to ascertain the following:
53
1. What type of culture does the organisation have? Can you identify a single
classification from the module materials or are their several cultures within the
organisation?
2. Does the organisation have a healthy or unhealthy culture; that is, does it enable
or disable the company from achieving it goals, particularly when change is
required?
3. What are the strengths and weaknesses of the culture? What recommendations
would you make for any improvements?
Two sub-conferences will be set up for your group discussions. One volunteer from
each group will also be required to write a summary of the group’s conclusions that
the other group will then comment on.
Activity 5
The purpose of this activity is to help students consolidate and reflect on the
concepts, models and activities studied in the four workbook sessions. The activity is
designed to help the student to develop a holistic view of their chosen organisation
and understand the extent to which the organisation has managed to respond to
environmental change.
Students should attempt the following questions using appropriate concepts and
frameworks from the four module sessions. The answers to the questions should be
posted in the sub-conference that has been set up for this activity.
Select an organisation you are familiar with. This may be the same organisation
that you analysed in the earlier module activities. Provide a brief summary of the
organisation’s background, e.g. the nature and characteristics of the company.
Critically analyse the performance of the organisation based on the following

questions:
1. To what extent is the organisation a good corporate citizen?

2. How well does the organisation scan its external environment and respond to
change (STEEP analysis)? If you have selected a private sector company, how
competitive is the organisation (Porter’s five forces framework)?
3. Is the organisation efficient in managing its resources and capabilities? What role
does outsourcing and alliances play in this?
4. How important is innovation in enhancing the performance of the organisation?
5. How appropriate are the organisation’s culture, structure and processes in
achieving a strategic fit with the environment? To what extent do the organisation’s
culture, structure and processes facilitate or hinder the implementation of corporate
strategies?
54
References and
Acknowledgements
REFERENCES
References and Acknowledgements

Anderson, S. and Cavanagh, J. (1996) Top 200: The Rise of Global Corporate
Power, Institute for Policy Studies, Washington.
CIM’s Insights Team (2005) Fair Trade, The Marketer, no. 9, pp. 7–8.
Beauchamp, T.L. and Bowie, N.E. (2004) Ethical Theory and Business,
Prentice Hall.
Bolton Report (1971) Committee of Enquiry on Small Firms, HMSO, Cmnd

4811.
Bowie, N.E. (1999) Business Ethics: A Kantian Perspective, Blackwell

Publishing.
Cannon, T. (1994) Corporate Responsibility: Issues in Business Ethics,

Governance, Roles and Responsibilities, FT/Prentice Hall.
Capon, C. (2004) Understanding Organisations’ Context, 2nd edn, FT/Prentice

Hall.
Chandler, A. (1962) Strategy and Structure: Chapters in the History of the

American Industrial Enterprise, MIT Press.
Charan, R., and Freeman, E. (1980) ‘Planning for the business environment of
the 1980s’, Journal of Business Strategy, vol. 1, pp. 9–19.
Chryssides, G.D. and Kaler, J.H. (1993) An Introduction to Business Ethics,

Thomson Business Press.
Curran, J. and Stanworth, J. (1982) ‘The small firm – a neglected area of

management’, in Cowling, A., Deal, T.E. and Kennedy, A.A. (eds) Corporate
Cultures: The Rites and Rituals of Corporate Life, Penguin.
Donaldson, L. (2001) The Contingency Theory of Organizations, Sage

Publishing.
Drucker, P.F. (1968) The Age of Discontinuity, Harper Row.
Friedman, M. (1970) ‘The social responsibility of business’, The New York

Times Magazine, September 13.
Galbraith, J.K. (1985) The New Industrial State, Houghton Mifflin.
Handy, C.B. (1985) The Age of Unreason, Boston, Harvard Business School
Press.
56
REFERENCES
Handy, C.B. (1993) Understanding Organisations, 4th edn, London, Penguin.
Hennart, J.F. (1988) ‘A transaction cost theory of equity joint ventures’, Strategic
Management Journal, vol. 9, pp. 361–74.
Hofstede, G. (1980) Culture’s Consequences: International Differences in Work-related

Values, London, Sage Publications.
Johnson, G., Scholes, K. and Whittington, R. (2007) Exploring Corporate Strategy, 7th
edn, Prentice Hall, Europe.
Kallenberg, A.L. (2001) ‘Organising flexibility: the flexible firm in a new century’, British
Journal of Industrial Relations, vol. 39, no. 4, pp 479–504 (26), December.
Mintzberg, H. and Waters, J.A. (1985) ‘Of strategies, deliberate and emergent’,
Strategic Management Journal, vol. 6, pp. 257–72.
Pettigrew, A.M., (1985) The Awakening Giant: Continuity and Change in ICI, Oxford,
Blackwell.
Porter, M.E. (1985) Competitive Advantage: Creating and Sustaining Superior

Performance, Free Press.
Porter, M.E. (1990) ‘How competitive forces shape strategy’, Harvard Business Review,
vol. 57, no. 2, pp. 137–45.
Rothwell, R. (1994) ‘Towards the fifth-generation innovation process’, International

Marketing Review, vol. 11, no. 1, pp. 7–31.
Schumpeter, J.A. (1934) The Theory of Economic Development: An Enquiry into

Profits, Capital, Credit Interest and the Business Cycle, Transaction Publishers.
Spender, J.C. (1996) ‘Making knowledge the basis of a dynamic theory of the firm’,
Strategic Management Journal, Winter Special Issue, vol. 17, pp. 45–62.
Stanworth, M., Bennett, R., Curran, J. and Lyons, P. (eds) (1987) Behavioural Sciences
for Managers, Edward Arnold.
Toffler, A. (1984) The Third Wave, Bantam.
Acknowledgements
UK Trade & Investment

Module One: Understanding Business
Grateful acknowledgement is made to the following sources:
Figures
Chapter 4 - How businesses implement modern-day strategies
Figures 4.4 – 4.8: Capon, C. (2004) Understanding Organisational Context, 2nd
edition, FT Prentice Hall, Pearson Education Limited.
57

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MODULE 1

1. The role of modern business. 6

2. The changing business environment 16

3. Managing resources and capabilities in the modern

4. How businesses implement modern-day strategies 40

References and Acknowledgements 56

1. The role of modern business.

1.1 Learning objectives

1.3 The role of business in society

A business corporation exists primarily to produce goods and services

According to Milton Friedman (1970), achieving profitability (or profit

Although a business enterprise must perform economic functions in order to survive,

Figure 1.1: Systems model

So if an organisation adopts Friedman’s capitalist approach of profit maximisation

If the organisation pollutes the atmosphere and contributes significantly to global

There has subsequently been a change in the attitude of a broad range of

It has therefore become increasingly difficult for a modern business to pursue a

Green marketing and societal marketing

Customers increasingly look for a company with a genuinely moral stance

Corporate social responsibility

11 Figure 1.2: Stakeholder diagram

The concept of stakeholders is important for two reasons:

Figure 1.3: Power and interest matrix (Johnson et al. 2007)

1.5 Key points

2. The changing business environment

2.3 The three environments model

2.4 The micro-environment

Figure 2.2: Porter’s five forces framework (1990)

2.5 Environmental change and instability: the micro-environment

2.6 The macro-environment

Figure 2.3: STEEP model (adapted from Johnson et al. 2007)

Large multinational corporations allocate considerable resources to lobbying political

2.7 The internal environment

2.8 Environmental change and instability: the macro-environment

2.9 Key points

1. Complete a STEEP analysis for your chosen organisation.

3. Managing resources and capabilities 

3.3 The need for innovation

Figure 3.1: Toffler’s waves of change (1984)

3.4 What is innovation?

Radical innovation is often referred to as being discontinuous or disruptive because

Another contrast in approaches to innovation is whether it is a planned and structured

If we return to the writings of Joseph Schumpeter that we mentioned earlier,

supported business networks and clusters.

3.5 Managing resources and capabilities for

Figure 3.2: Porter’s value chain

Porter’s value chain highlights the different value-adding activities of an organisation.

A cooperative strategy between firms involves sharing resources and capabilities in

3.6 Key points

Now answer the following questions:

4. How businesses implement modern-day strategies

4.3 Deliberate and emergent strategies.

4.4 Organisational structure

A strategy to become an innovative company and technology leader will not be

Figure 4.2: Flat structure

These developments were taken a stage further by

Atkinson and Meager (1986) use four categories to

4.5 Common types of organisational structure

In contrast the divisional, holding and matrix organisational structures are

Figure 4.4: Simple structure (Capon 2004)

Figure 4.5: Functional structure (Capon 2004)

Figure 4.6: Divisional structure (Capon 2004)

Holding company structure

1. The role of modern business. 6

2. The changing business environment 16

4. How businesses implement modern-day strategies 40

References and Acknowledgements 56

3. Managing resources and capabilities