Business Management Today – A flexible process
Submitted by: Amy Wees
Table of Contents
- The business Plan
- writing a flexible but successful business plan
- making changes to the plan
- Executing the business strategy
- making sense of a situation
- making important choices
- making things happen
- making revisions
- Overcoming Competition in a Global Market
- When new segments emerge
- When cost structures can converge
- When the value chain can be rearranged
- Business Partnerships
- Formal contracts
- Relational governance
- Data and Methods of proving the formal contacts vs. relational governance theory
- globalization diversity and culture considerations
Problem Statement: It is important for today’s managers to remain flexible when making tough decisions about their business throughout the planning cycle.
New businesses fail at the rate of ninety percent in the first year. How can an entrepreneur plan a successful business in today’s cut throat market? The key is flexibility, the ability to see the big picture and to deal with unforeseeable uncertainties when writing a business plan and executing it. Some areas to consider are: writing the business plan, executing the business’ strategy, finding a place in the competitive market, and considering globalization and business partnerships. The most important aspect for today’s managers is to remain flexible when making tough decisions about their business throughout this planning cycle.
The Business Plan
The first step to the startup of a business is to create a solid business plan. This business plan must include strategic plans that include the overall goals of the organization as well as operational plans that outline how the strategic goals will be achieved (Robbins, 189). The actual goals listed must define the organization’s mission as in “how will the business make a profit?” A business plan must also include available resources, capital and technology use and how resources will be allocated. Essentially, a business plan should answer the questions: Who are we? What do we do? When will we start up? Where will we be located? Why are we starting this business (goals)? And how will we achieve our goals? After the entrepreneur has all of these items lined up he or she must understand that the business plan is, and always will be, a rough draft. If one is opening an Italian restaurant, for example, and the day before opening an Olive Garden moves in down the street, one might reconsider some parts of his or her original business plan and must be prepared to make changes as necessary in order for the business to succeed.
Executing the Business Strategy
During the start-up of an organization, the management must turn the previous strategy sessions of business planning into an executable plan. This can be difficult. Managers must ensure they inform the right people involved of their goals and that they give the right direction in the execution of those goals. Management professor and author Donald Sull has published an article in the Sloan Management Review detailing how managers can best close the gap between business strategy and execution. Professor Donald Sull (2007) discusses the “strategy loop”; an interactive process that consists of four major objectives, each with its own pitfalls and required management approaches. Professor Sull stresses that in today’s fast-paced industries, it is necessary to have complete flexibility during the strategy planning process, without this flexibility many leaders may commit to a failed course of action. Sull adds that it is the linear thinking approach to strategy planning instead of the interactive loop approach that leads to this failure. To avoid this failure, he created an idea called the “strategy loop” focusing on four steps:
1. Making Sense of a Situation: the objective here is to “develop a shared mental model of a situation” and requires leadership traits such as curiosity and empathy to see other points of view (Sull, p. 36).
2. Making Choices: the objective is to “agree on clear priorities to guide action and resource allocation” and requires leadership traits such as decisiveness, enterprise perspective, and the credibility to make the call (Sull, p. 36).
3. Making things Happen: It is important to “ensure that people make good promises and deliver” and that leaders possess trustworthiness, flexible tenacity, and the ability to inspire others (Sull, p.36).
4. Making Revisions: Leaders should be able to sense anomalies in their strategy and revise key assumptions using traits such as intellectual humility, respect for other viewpoints and sensitivity to anomalies (Sull, p.36).
Making Sense of a Situation:
The first step in the strategy loop is making sense of a situation. The idea is to gather all of the data available from different sources and organize it in a way that gives everyone a “shared mental model of how events might unfold” (Sull, p.32). The forum should encourage employees to think openly about the situation and encourage new ideas. This open forum will allow the goal of the situation to remain a short-term goal vs. a long term goal that may not allow the strategy loop to repeat itself as it needs to. One example Sull gives to support the open forum instead of a preconceived interpretation is the “Cuban missile crisis; While President John F. Kennedy was trying to assess the situation, his military advisors reflexively advocated invading Cuba, a course of action they had favored for some time, even though the specific situation at hand suggested that a military strike could easily escalate into nuclear war” (Sull, p. 32). A warning sign for managers to look for that open communication has been closed is when, during a meeting, employees stop talking and just listen, communicating that they think that the boss has already made the decision and is just looking for their approval (Sull, p. 33). Another important step in the process is to take the necessary time to make sense of a situation by talking about and assessing all of the details. “The result: The team shortchanges the sense-making discussion and jumps right into a debate about what to do and how to do it” (Sull, p.33).
After having the open discussions and assessing the situation, it is necessary to have more conversations focused on making choices to prioritize goals in order to “focus organizational resources and attention” (Sull, p.33). For decision making conversations, management should encourage participants to fight, but fight nicely. Professional arguments are required to make tough decisions. Sensitive issues may need to be brought up and addressed in order to be successful and leadership can encourage this type of communication by addressing all issues publicly during meetings (Sull, p.34). One common problem in this step of the process is priority-proliferation “when managers make decisions by focusing on specific issues in isolation without considering the existing portfolio of activities within the organization” (Sull, p.34). When this problem arises, leaders may forget to end certain activities to free up the resources to devote to newly needed ones (Sull, p.34). Finally it is important to set up simple rules during the prioritization process and it is also very important for leaders to be decisive and know when to say no (Sull, p.34).
Making Things Happen:
Making things happen is all about “the promise – a personal pledge a provider makes to satisfy the concerns of a customer within or outside the organization” (Sull, p.35). Depending on the clarity, details, and quality of the promises made, the outcome of this step will vary. For example, if all of the parts of the promise are not agreed upon by all parties involved, all of the parts of the promise will probably not be delivered or committed to. It is important for more discussion during this step in the strategy loop. “Managers should adopt a tone of supportive discipline, demanding explicit promises and holding people accountable for them but also helping those individuals to deliver on their commitments” (Sull, p.35). One example given in the text of this process is an approach used by people in the software industry called “scrum”. Every day at the same time, the team meets to discuss what they have done since yesterday, what they will do today and what they will do before the next “scrum” (Sull, p.35). The most important leadership trait during discussions to make things happen is trustworthiness, a manager shows this by leading by example and keeping his or her own promises (Sull, p.36).
Making revisions is very closely related to the first step in the strategy loop of making sense of a situation. During the making sense step, a mental picture is gained, but there will be a time when this mental picture will need to change because of “new opportunities or threats” (Sull, p. 36). This is where the cycle of the strategy loop starts over. It is time to say out with the old and in with the new. Organizations of today are constantly changing and without making revisions, it is possible to undermine the whole reason for coming up with the strategy in the first place. “Thus managers must keep their mental pictures fluid, modifying them in light of changes in the broader context” (Sull, p.36). Now in the discussion to make revisions it is important to think of the situation as an experiment by analyzing the recent results and revising as necessary (Sull, p.36). Pauses in the strategy loop are important and managers should set aside a time to learn from what has happened thus far and then make revisions for future success. During these discussions, there is sometimes a fear of blame to be placed on someone for something that didn’t go right or a fear of admitting mistakes by the persons involved in the process. Management can avoid these pitfalls by treating the discussions as experiments; “the team discusses what it expected to happen and why, versus what actually happened, and then it explores any gaps between expectations and reality” (Sull, p.37). The leadership trait required for making revisions is “intellectual humility”, admitting to the fluidity of leader’s mental models (Sull, p.37).
Overcoming Competition in a Global Market
It is equally important for businesses to consider and understand their competition in both local and global markets. Authors Ghemawat and Hout (2008) discuss ways for multinational corporations to overcome competitive giants in their industry and succeed no matter their size or orientation. They quote “multinational companies from developed and emerging economies alike can gain a competitive advantage by moving outside their comfort zones” (Ghemawat, p.83). There are several ways discussed to do this when faced with certain situations:
- 1. When new segments emerge: Established corporations need to project market growth and ensure they invest in that area, control the weight of their global capabilities, and use price and branding to shift the demand for their product (Ghemawat, p.83). One example that the article gives to do this large companies like Sharp and Samsung slashing prices on flat screen TV’s to encourage customers to buy them over cheap conventional televisions made by the Japanese. In doing this they overtook the market and eliminated the competition. (Ghemawat, p.83)
Newly introduced corporations should use their local knowledge, find a niche for their product in overseas consumer markets, and avoid entering higher cost markets. One example in the article of this is an e-commerce site called Dang-dang in China realized that the country had a poor credit card payment system and developed a better cash settlement system for Amazon. (Ghemawat, p.83)
- When cost structures can converge: Established companies should study and echo local competitors cost structures as closely as possible and hire from a local pool as well as internationalize senior management positions (Ghemawat, p.83). An example of this in the journal: “IBM and Accenture are ramping up operations in India and absconding with much of the local talent by paying more for it – simultaneously lowering their own costs and raising those of Indian rivals” (Ghemawat, p.83).
Emerging multinational corporations should expect to lose some of their cost structure over time and prepare to compete at the next level. Overseas they must use core operating strengths to sustain business (Ghemawat, p.83). An example of this a Chinese auto-parts manufacturer using the knowledge it gained from success in China and applying the same concepts to its locations in the United States (Ghemawat, p.83).
- When the value chain can be rearranged: All multinational corporations need to use the value chain to their advantage by spreading parts of it all over the market in the best locations for that particular product. They can also partner with specialists and make new additions of their company as multinational as possible (Ghemawat, p.83). One example of this concept is for a company to specialize in one part of the value chain, such as customer care, to gain a competitive advantage and then outsource other areas. (Ghemawat, p. 83)
A flexible business knows where it fits in the competitive market, what its competitors are doing and are preparing to do, and how to best use its product and strategies to the business’ advantage. Globalization is a good example of flexibility in business. It takes a lot of flexibility to introduce a product to an overseas market and especially to operate a business in a global market. A manager cannot know what to expect as there will always be things that are new and changing in both competitive and global markets.
Business Partnerships are a great way for a business to remain flexible and keep its options open. It is important to have a good support system, partner or team in any situation; especially in the business world. Another factor for managers to consider is to add partnerships with other businesses and also consider outsourcing some of the businesses’ services. Poppo, Laura and Zenger, Todd (2002) explain that while many argue that formal contracts between businesses undermine trust and encourage the opportunistic behavior they are designed to discourage, formal contracts and relational governance also can function as complements. This complementary relationship is the focus of their paper and covers the following main points:
1. Formal Contracts: Rather than hindering or substituting for relational governance, well-specified contracts may actually promote more cooperative, long-term, trusting exchange relationships. Well-specified contracts narrow the domain and severity of risk to which an exchange is exposed and thereby encourage cooperation and trust (Poppo, p. 707).
2. Relational Governance: The continuity and cooperation encouraged by relational governance may generate contractual refinements that further support greater cooperation. Relational governance may heighten the probability that trust and cooperation will safeguard against hazards poorly protected by the contract. Finally, relational governance may help overcome
The adaptive limits of contracts: a bilateral commitment to ‘keep-on-with-it’ despite the unexpected complications and conflicts (Poppo, p. 708).
3. Data and Methods of Proving the Theory: Poppo and Zenger test whether relational governance and formal contracts operate as complements or substitutes using data on outsourcing relationships in information services during the early 1990s. The data was collected from surveys of senior managers regarding their sourcing of various information services, such as data entry, software application development, data network design, and network maintenance (Poppo, p. 708).
A formal contract is a binding agreement between two organizations that outlines the actions, promises and obligations that one organization is to perform for the other. The more promises and obligations made in the contract, the more complex the contract and also the possible disputes. It is manager’s job to design the contract in a way that it outlines work to be performed, procedures for following up on the work and penalties for not completing the work as described in the contract. If there are complications in the exchange, a manager must write in contract safeguards to protect both organizations, which can be costly if the contract is breached. There are three common categories of exchange complications, better known as exchange hazards, which call for contract safeguards: asset specificity, measurement difficulty and uncertainty (Poppo, p. 708-709).
- Asset specificity is required when there are significant investments in physical and/or human assets (Poppo, p. 708). For example, an information technology specialist offering installation and training on new equipment acquired. If this human relationship is ended, there is also a forfeiture of the contract to a certain extent (Poppo, p. 708-709).
- Difficulty in measuring the performance of the hired contractor can also cause market hazards. “Markets succeed when they can effectively link rewards to productivity – that is, they can measure productivity and pay for it accordingly” (Poppo, p.709). Managers must decide whether to accept lower performance because of their inability to measure it or to create a more complex contract to better and more distinctly measure performance (Poppo, p.709).
- Uncertainty is a hazard because it requires all parties involved in the contract to adapt to issues that were unforeseeable and may not be spelled out in the contract (Poppo, p. 709).
Relational governance occurs between two socially agreeable organizations that do not use a contract to outline the work. Instead, there is a trust between the organizations that the work will be done. Promises are made through social interaction which “promotes the norms of flexibility, solidarity, and information exchange” (Poppo, p.710).
- “Flexibility facilitates adaptation to unforeseeable events” (Poppo, p.710).
- “Solidarity promotes a bilateral approach to problem solving, creating a commitment to joint action through mutual adjustment” (Poppo, p. 710).
- “Information sharing facilitates problem solving and adaptation because parties are willing to share private information with each other” (Poppo p. 710).
The social interaction of relational governance can minimize the hazards created by formal contracts.
Data and Methods of Proving the Theory:
Data for the study was collected via survey of Information Services (IS) executives. The executives held specific positions in their organizations as the senior information services executive or the manager in charge of data-processing facilities. Each participant had experience with managing and reviewing outsourced information services activities. The “Directory of Top Computer Executives” was used to find the executives to participate in the survey (Poppo, p. 714). Poppo and Zenger did find it hard to get full commitment for participation from these busy executives but those executives who pre-committed to the survey had a forty percent response level. The data presented on the survey was from a buyer’s perspective and included the following variables: respondent position, company size, industry, IS attributes and performance (Poppo, p.714).
The result of the findings was that “increases in the level of relational governance are associated with greater levels of contractual complexity and that increases in the level of contractual complexity are associated with greater levels of relational governance suggesting that managers may complement their use of one governance tool with the other” (Poppo p. 720-721). These findings suggest that relational governance and contracts function as complements rather than substitutes (Poppo, p. 721).
After studying these extensive findings, it is clear that in order for today’s managers to succeed they must trust in the partnerships of other organizations. This will require ultimate flexibility as one source may not be able to deliver on time and a manager may have to hire another source on a short notice basis to achieve customer satisfaction. As Poppo and Zenger have pointed out, long term relationships with other business have complimented a business’ success rather than hindered it.
As you can see, there are many things to consider when creating and running a successful business, but it is the things that you cannot see that will cause problems if you are inflexible in your planning and execution processes. Keep all of these constantly changing values of the business in mind and prepare to change course when necessary. If you do this, you are sure to stay ahead of the rest and keep your business afloat.
Donald N. Sull (2007). Closing the Gap Between Strategy and Execution. MIT Sloan Management Review, 48(4), 30-38. Retrieved September 22, 2008, from ABI/INFORM Global database. (Document ID: 1360146091).
Ghemawat, P., & Hout, T. (2008, November). Tomorrow’s Global Giants. Harvard Business Review, 86(11), 80-88. Retrieved November 7, 2008, from Business Source Complete database.
Poppo, L., & Zenger, T. (2002, August). Do Formal Contracts and Relational Governance Function as Substitutes or Complements?. Strategic Management Journal, 23(8), 707. Retrieved September 22, 2008, doi:10.1002/smj.249
Other sources referenced
Robbins, S., & Coulter M. (2007). Management. Upper Saddle River, NJ: Pearson Education Inc.