Integrating Business Management Processes: Volume 2: Support and Assurance Processes [2] 0367529971, 9780367529970

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Integrating Business Management Processes

Integrating Business Management Processes

Volume 2: Support and Assurance Processes

Dr. Titus De Silva, PhD

Consultant, Pharmacy Practice, Quality Management, Food Safety BSc (Chemistry), BSc (Pharmacy) Hons. Post-graduate Dipl (Computer Sci), MBA, PhD, CChem, FRSC, MRPharms, MPS

First published 2021 by Routledge 52 Vanderbilt Avenue, New York, NY 10017 and by Routledge 2 Park Square, Milton Park, Abingdon, Oxon, OX14 4RN Routledge is an imprint of the Taylor & Francis Group, an informa business © 2021 Taylor & Francis The right of Titus De Silva to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Library of Congress Cataloging-in-Publication Data A catalog record for this title has been requested ISBN: 978-0-367-48548-1 (hbk) ISBN: 978-1-003-04283-9 (ebk) Typeset in Garamond by codeMantra

This book is dedicated to my dear sons, Dr Samitha De Silva, Partner at C’M’S’ (UK) and Pradeepa De Silva, Head of Global Marketing Programs at Facebook (Singapore) for their unwavering support.

Contents List of Figures ......................................................................................................................... xxi List of Tables .........................................................................................................................xxiii List of Forms........................................................................................................................... xxv Disclaimer ............................................................................................................................ xxvii Foreword................................................................................................................................. xxix Review of Integrating Business Management Processes, Volumes 1, 2 and 3....................... xxxi Preface..................................................................................................................................xxxiii Acknowledgements .............................................................................................................. xxxv Review................................................................................................................................. xxxvii Author................................................................................................................................... xxxix

SeCtion i

SUPPoRt PRoCeSSeS

............................................................................. 1.1 History of Document and Record Management....................................................... 3 1.1.1 Early Document Management .................................................................... 4 1.1.2 Digital Age of Document Management....................................................... 4 1.1.3 Arrival of Enterprise Document Management............................................. 4 1.2 Challenges of Document Management ................................................................... 4 1.3 Definitions............................................................................................................... 5 1.4 Benefits of Good Document Management .............................................................. 6 1.5 Features of Documents............................................................................................. 6 1.6 Types of Business Documents.................................................................................. 7 1.7 Life Cycle of Documents.......................................................................................... 8 1.8 Electronic Document Management (EDM)............................................................. 8 1.8.1 Basic Components of EDM ........................................................................ 9 1.9 Challenges of Record Management ........................................................................10 1.10 Benefits of Good Record-Keeping ..........................................................................10 1.11 Features of Records................................................................................................. 11 1.12 Types of Business Records ..................................................................................... 12 1.13 Life Cycle of a Record............................................................................................ 12 1.14 Basic Components of Electronic Records Management Systems (ERMS) ..............14 1.15 Underlying EDM Technologies............................................................................... 15 1.16 Document Management Technologies.................................................................... 15 1.17 Managing Data across Data Life Cycle....................................................................16 1.18 Common Document Control Mistakes...................................................................17 vii

viii  ◾ Contents

1.19 Document Management Best Practices ..................................................................18 References ......................................................................................................................... 19 ......................................................................................................... 2.1 Introduction............................................................................................................21 2.2 Definitions ............................................................................................................ 22 2.3 The Importance of Effective Communication......................................................... 22 2.4 Factors Influencing Communication ..................................................................... 23 2.4.1 Formal Channels of Communication........................................................ 23 2.4.2 Authority Structure ................................................................................... 23 2.4.3 Job Specialisation ...................................................................................... 23 2.4.4 Information Ownership ............................................................................ 23 2.5 Styles of Communicators ....................................................................................... 24 2.5.1 Analytical Style of Communicator............................................................. 24 2.5.2 Driver Style of Communicator .................................................................. 24 2.5.3 Expressive Style of Communicator..............................................................25 2.5.4 Amiable Style of Communicator.................................................................25 2.6 Communication Process .........................................................................................25 2.6.1 Sender  .........................................................................................................25 2.6.2 Encoding....................................................................................................25 2.6.3 Message..................................................................................................... 26 2.6.3.1 Verbal Communication............................................................... 26 2.6.3.2 Written Communication............................................................ 27 2.6.3.3 Non-verbal Communication ...................................................... 27 2.6.4 Communication Channels and Media....................................................... 28 2.6.5 Communication in Organisations............................................................. 28 2.6.5.1 Top-Down Channels.................................................................. 30 2.6.5.2 Bottom-Up Channels.................................................................. 30 2.6.5.3 Horizontal Channels................................................................... 30 2.6.5.4 Informal Channels ......................................................................31 2.6.5.5 External Networking ..................................................................31  .....................................................................................................31 2.6.6 Receiver 2.6.6.1 Listening and Understanding ..................................................... 32 2.6.6.2 Active Listening.......................................................................... 32 2.6.6.3 Perception....................................................................................33 2.6.6.4 Perceptual Preferences .................................................................33 2.6.7 Decoding the Message................................................................................33 2.7 Seven C’s of Communication ................................................................................ 34 2.8 Barriers to Effective Communication......................................................................35 2.8.1 Organisational Barriers...............................................................................35 2.8.2 Cultural Barriers ....................................................................................... 36 2.8.3 Physical Barriers ........................................................................................ 36 2.8.4 Semantic Barriers....................................................................................... 36 2.8.5 Socio-Psychological Barriers....................................................................... 36 2.9 How to Overcome Communication Barriers ......................................................... 37 2.10 How to Improve the Effectiveness of Conversations .............................................. 38 2.11 Communication Skills............................................................................................ 38

Contents  ◾  ix

2.12 Manager’s Role in Communication........................................................................ 40 2.13 Communicating Quality, Environmental and Food Safety Issues.......................... 40 2.13.1 Internal Communication .......................................................................... 40 2.13.1.1 Quality Issues..............................................................................41 2.13.1.2 Environmental Issues ..................................................................41 2.13.1.3 Food Safety Issues........................................................................41 2.13.2 External Communication ..........................................................................41 2.13.2.1 Quality Issues............................................................................. 42 2.13.2.2 Environmental Issues.................................................................. 42 2.13.2.3 Food Safety Issues....................................................................... 43 2.14 Benefits and Best Practice Communication ........................................................... 43 References......................................................................................................................... 44 .................................................................................................................... 3.1 History of Marketing..............................................................................................47 3.2 Fundamentals of Marketing................................................................................... 48 3.3 Marketing Functions ............................................................................................. 50 3.3.1 How These Functions Are Applied............................................................. 50 3.4 Marketing Planning – Overview of Marketing........................................................51 3.4.1 Benefits of Marketing.................................................................................51 3.5 Marketing Process...................................................................................................51 3.5.1 Step 1: Understanding the Market and Identifying the Needs of Customers ...................................................................................52 3.5.1.1 Customer Needs, Wants and Demands........................................52 3.5.1.2 Market Offering...........................................................................52 3.5.1.3 Value and Customer Satisfaction .................................................52 3.5.1.4 Exchange and Building Relationships .........................................53 3.5.1.5 Markets........................................................................................53 3.5.2 Step 2: Establish a Customer-Oriented Market Strategy ............................53 3.5.2.1 Identifying the Customers to Serve..............................................53 3.5.2.2 Understanding the Market...........................................................53 3.5.2.3 Determining the Best Way to Serve Customers...........................53 3.5.3 Step 3: Marketing Programme – Marketing Mix (7 P’s)............................ 54 3.5.3.1 Product........................................................................................55 3.5.3.2 Price ............................................................................................55 3.5.3.3 Place............................................................................................55 3.5.3.4 Promotion ...................................................................................55 3.5.3.5 People..........................................................................................55 3.5.3.6 Process ........................................................................................55 3.5.3.7 Physical Evidence.........................................................................55 3.5.4 Marketing Plan...........................................................................................55 3.5.4.1 Stage 1 and Stage 2: Formulate Overall Direction and Goals...... 56 3.5.4.2 Stage 3: Evaluate the Current Market Position ........................... 56 3.5.4.3 Stage 4: Market Overview........................................................... 56 3.5.4.4 Stage 5: Strengths, Weaknesses, Opportunities and Threats (SWOT) Analysis���������������������������������������������������������������������� 56

x  ◾ Contents

3.5.4.5 Stage 6: Assumptions...................................................................57 3.5.4.6 Stage 7: Objectives.......................................................................57 3.5.4.7 Stage 8: Strategy......................................................................... 58 3.5.4.8 Stage 9: Resource Requirements...................................................59 3.5.4.9 Stage 10: Implementation and Control........................................59 3.5.5 Step 4: Build Profitable Relationships ....................................................... 60 3.5.6 Step 5: Capturing Customer Value.............................................................61 3.6 Contingency Planning ............................................................................................61 3.7 Environmental Marketing ......................................................................................61 3.7.1 Eco-Labelling............................................................................................ 62 3.7.2 Life Cycle Assessment ............................................................................... 62 3.7.3 Eco Design ............................................................................................... 63 3.8 Food Marketing .....................................................................................................65 References ........................................................................................................................ 66 ........................................................................ 4.1 Introduction........................................................................................................... 69 4.2 Data ...................................................................................................................... 70 4.2.1 Data Acquisition........................................................................................ 70 4.3 Information............................................................................................................ 70 4.3.1 Human-Centred Approach to Information Management.......................... 71 4.3.2 Information Maps and Information Guides............................................... 72 4.4 Information Systems............................................................................................... 72 4.4.1 Types of Information Systems.................................................................... 72 4.4.1.1 Transaction Processing Systems.................................................. 73 4.4.1.2 Management Information Systems.............................................. 73 4.4.1.3 Decision Support Systems .......................................................... 73 4.4.1.4 Expert Systems ........................................................................... 75 4.4.1.5 Executive Support Systems.......................................................... 75 4.4.1.6 Office Automation Systems......................................................... 75 4.4.1.7 K nowledge Work Systems........................................................... 75 4.4.2 Information System Development...............................................................76 4.5 Information Technology .........................................................................................76 4.5.1 Knowledge Requirements and Techniques of IT.........................................76 4.5.2 Application of IT ...................................................................................... 77 4.5.2.1 E-commerce ............................................................................... 78 4.5.2.2 E-learning .................................................................................. 78 4.5.2.3 Web Conferencing ..................................................................... 78 4.5.2.4 E-judiciary and E-legislature ...................................................... 78 4.5.2.5 E-health ..................................................................................... 78 4.5.2.6 E-protect and E-security............................................................. 78 4.5.2.7 E-transport and Advanced Transport Telematics ....................... 79 4.5.2.8 Knowledge Management............................................................ 79 4.5.2.9 Cloud Computing....................................................................... 79 4.5.2.10 Robotics...................................................................................... 79 4.6 Impact of IT........................................................................................................... 80 4.6.1 Impact on Productivity ............................................................................. 80

Contents  ◾  xi

4.6.2 Impact on Well-Being Effects ................................................................... 80 4.6.3 Impact on the USA Economy.....................................................................81 4.6.4 Impact on Supply Chain Performance .......................................................81 4.7 Problems of Implementing IT.................................................................................81 4.8 Managing IT Costs ............................................................................................... 82 4.9 Organisation of the IT Department ...................................................................... 82 4.9.1 Control of IT Department......................................................................... 83 4.10 Designing Information Systems.............................................................................. 84 4.10.1 Information Needs..................................................................................... 84 4.10.2 System Constraints ................................................................................... 84 4.10.3 Goals ........................................................................................................ 84 4.10.4 Development Stages .................................................................................. 84 4.11 Environmental Issues of IT..................................................................................... 84 4.11.1 Sources of Exposure....................................................................................85 4.11.2 Possible Solutions ...................................................................................... 87 4.11.2.1 Green Procurement..................................................................... 87 4.11.2.2 Reduction in Use of Toxic Substances......................................... 87 4.11.2.3 Power-Saving Techniques ........................................................... 87 4.11.2.4 End-of-Life Management............................................................ 88 4.12 Use of IT in Food Safety........................................................................................ 88 References ........................................................................................................................ 89 ................................................................................... 5.1 Introduction............................................................................................................91 5.2 Evolution of HRM .................................................................................................91 5.3 Objectives of HRM................................................................................................ 92 5.3.1 Societal Objectives..................................................................................... 93 5.3.2 Organisational Objectives.......................................................................... 93 5.3.3 Functional Objectives................................................................................ 93 5.3.4 Personal Objectives.................................................................................... 93 5.4 HR Competencies.................................................................................................. 93 5.4.1 Technical Skills ......................................................................................... 93 5.4.2 HR Skills .................................................................................................. 93 5.4.3 Conceptual and Design Skills ................................................................... 94 5.4.4 Business Skills............................................................................................ 94 5.5 HRM Functions .................................................................................................... 94 5.5.1 Manpower Planning ................................................................................. 94 5.5.2 Succession Planning................................................................................... 95 5.5.3 Turnover ................................................................................................... 95 5.5.4 Recruitment .............................................................................................. 95 5.5.4.1 Selection Process......................................................................... 96 5.5.4.2 Tests ........................................................................................... 97 5.5.5 Training and Development........................................................................ 97 5.5.6 Career Development.................................................................................. 97 5.5.7 Performance Appraisals.............................................................................. 98 5.5.8 Compensation............................................................................................ 98 5.5.9 Risk Management and Employee Protection.............................................. 98

xii  ◾ Contents

5.5.10 Safety and Well-Being................................................................................ 98 5.5.11 Managing Legal Issues............................................................................... 99 5.5.12 Progressive Discipline................................................................................. 99 5.5.13 Promotions and Transfers ....................................................................... 100 5.6 Employee and Labour Relations .......................................................................... 100 5.7 Ethics and Sustainability ..................................................................................... 100 5.8 HR Planning ........................................................................................................ 101 5.8.1 Strategic Approach to HRM .................................................................... 101 5.8.2 General Strategies .................................................................................... 101 5.8.2.1 High Performance Management ............................................... 101 5.8.2.2 High Commitment Management .............................................102 5.8.2.3 High Involvement Management................................................102 5.8.3 Specific HR Strategies...............................................................................102 5.8.4 Implementation of Strategies ....................................................................102 5.9 HRM Models........................................................................................................103 5.9.1 Harvard Framework Model .....................................................................103 5.9.2 Guest’s Model of HRM ...........................................................................103 5.9.3 Hard and Soft HRM Models....................................................................103 5.9.4 Best Practice Model..................................................................................104 5.9.5 Patterson’s Model......................................................................................104 5.9.6 Best Fit/Contingency Model ....................................................................104 5.10 Gaining a Competitive Advantage.........................................................................104 5.11 Challenges and Gaining Organisational Excellence...............................................105 5.12 Measuring and Managing the HR Function ........................................................105 5.12.1 Reasons for Measuring the Effectiveness of HRM ...................................105 5.12.2 The 5C Model...........................................................................................106 References........................................................................................................................107 ........................................... 6.1 Introduction..........................................................................................................109 6.2 Management Skills................................................................................................ 110 6.2.1 Planning................................................................................................... 110 6.2.2 Organising................................................................................................ 110 6.2.3 Leading..................................................................................................... 111 6.2.4 Coordinating ........................................................................................... 111 6.3 Personal Development Skills................................................................................. 112 6.3.1 Communication........................................................................................ 112 6.3.1.1 Promoting Effective Communication.. ....................................... 112 6.3.1.2 Applicability to Management Systems Development.................. 112 6.3.2 Teamwork ................................................................................................ 112 6.3.2.1 Types of Teams ......................................................................... 113 6.3.2.2 Stages of Forming Teams .......................................................... 114 6.3.2.3 Benefits of Team Approach........................................................ 114 6.3.2.4 Applicability of Team Approach to Management Systems Development ............................................................... 115 6.3.3 Delegation................................................................................................ 115 6.3.3.1 Effective Delegation................................................................... 115

Contents  ◾  xiii

6.3.3.2 Barriers to Delegation................................................................ 116 6.3.3.3 Applicability of Delegation to Management Systems Development ...............................................................116 6.3.4 Empowerment........................................................................................... 116 6.3.4.1 Defining Empowerment............................................................. 117 6.3.4.2 Dimensions of Empowerment ................................................... 117 6.3.4.3 Developing Empowerment......................................................... 117 6.3.4.4 Barriers to Empowerment ......................................................... 118 6.3.4.5 Applicability of Empowerment to Management Systems Development ...............................................................118 6.3.5 Problem-Solving....................................................................................... 119 6.3.5.1 Types of Problems ..................................................................... 119 6.3.5.2 Creative Problem-Solving (Osborn-Parnes Problem-Solving Model) ����������������������������������������������������������� 119 6.3.5.3 R ational Model of Problem-Solving.......................................... 120 6.3.5.4 Barriers for Implementation ......................................................121 6.3.5.5 Applicability of Problem-Solving to Management Systems Development ...............................................................121 6.3.6 Motivation................................................................................................121 6.3.6.1 Needs Theory of Motivation......................................................121 6.3.6.2 Motivating the Team ................................................................ 121 6.3.6.3 W hy Motivation Attempts Fail ................................................ 123 6.3.6.4 Applicability of Motivation to Management Systems Development .............................................................. 123 References....................................................................................................................... 123 ...................................................................................... 7.1 Introduction..........................................................................................................125 7.2 Definitions ...........................................................................................................125 7.3 Different Perceptions of Training and Development............................................ 126 7.4 Factors Affecting Training Outcome.................................................................... 126 7.5 The Need to Train Staff........................................................................................ 127 7.6 The Role of Training ........................................................................................... 128 7.6.1 Increase Efficiency.................................................................................... 128 7.6.2 Increase Morale.........................................................................................129 7.6.3 Improve Human Relations........................................................................129 7.6.4 Reduce the Need for Supervision .............................................................129 7.6.5 Increase Organisation’s Viability and Resilience........................................129 7.6.6 Gain a Competitive Advantage ................................................................129 7.6.7 Meet Technological Advancements ..........................................................129 7.6.8 Comply with Company Policy..................................................................129 7.7 Responsibility for Training .................................................................................. 130 7.8 Training Process .................................................................................................. 130 7.8.1 Assessment of Training Needs................................................................. 130 7.8.1.1 Gathering Information............................................................... 131 7.8.1.2 Benefits of the Assessment ......................................................... 131 7.8.1.3 Types of Needs Analysis............................................................. 131

xiv  ◾ Contents

7.9

Designing the Training Programme .....................................................................132 7.9.1 Setting Learning Objectives .....................................................................132 7.9.2 Creating a Motivational Learning Environment ......................................133 7.10 Developing the Programme...................................................................................133 7.10.1 Instructional Methods .............................................................................133 7.10.1.1 On-the-Job Training ................................................................ 134 7.10.1.2 Off-the-Job Training................................................................. 134 7.10.2 Selecting a Training Method.....................................................................137 7.11 Implementing the Programme...............................................................................139 7.11.1 Implementation of Different Programmes ................................................139 7.11.2 Training and Presentation Skills ..............................................................139 7.11.3 Preparation for the Presentation................................................................139 7.11.4 Presentation..............................................................................................140 7.11.5 Preparation of Audio-Visual Aids..............................................................140 7.11.6 Trainer’s Personal Style ............................................................................140 7.12 Evaluation of Training...........................................................................................140 7.12.1 Benefits of Evaluation...............................................................................140 7.12.2 Evaluation Models ................................................................................... 141 7.12.3 ROI Model of Evaluating Training ..........................................................142 7.12.4 Other Models of Evaluating Training Programmes .................................144 7.13 Features of Adult Learning.................................................................................... 145 7.14 Training versus Development ............................................................................... 145 7.15 Competence, Training and Awareness of Environmental Issues ........................... 147 7.16 Competence, Training and Awareness of Food Safety........................................... 147 7.17 How to Make a Success of Training .....................................................................148 References ....................................................................................................................... 149 ........................................................................... 8.1 Introduction.......................................................................................................... 151 8.2 Basics of Customer Relationship Management (CRM)......................................... 151 8.3 Evolution of CRM................................................................................................. 152 8.4 CRM Strategy....................................................................................................... 153 8.4.1 Elements of a CRM Strategy..................................................................... 153 8.5 Understanding the Customer ............................................................................... 154 8.5.1 Listen for Signals....................................................................................... 154 8.5.2 Understand the Rules................................................................................ 154 8.6 Types of Relationships........................................................................................... 155 8.7 Management Action.............................................................................................. 155 8.8 Benefits of CRM...................................................................................................156 8.9 CRM Types .......................................................................................................... 156 8.9.1 Operational CRM ................................................................................... 156 8.9.2 Analytical CRM ...................................................................................... 156 8.9.3 Collaborative CRM..................................................................................156 8.10 CRM Process ....................................................................................................... 157 8.10.1 Developing a Strategy .............................................................................. 157 8.10.2 Creating a Database ................................................................................. 158

Contents  ◾  xv

8.10.3 Analyse the Data....................................................................................... 158 8.10.4 Select the Customer.................................................................................. 158 8.10.5 Target Customers...................................................................................... 158 8.11 Relationship Programmes...................................................................................... 158 8.12 Privacy Issues ........................................................................................................ 159 8.13 Metrics.................................................................................................................. 159 8.14 Types of CRM Processes ...................................................................................... 159 8.15 Factors Affecting People-Driven CRM.................................................................. 159 8.16 CRM Implementation........................................................................................... 161 8.17 Optimising CRM.................................................................................................. 162 8.17.1 Gaining Customers...................................................................................162 8.17.2 Retaining Customers ............................................................................... 163 8.18 W hy Do CRM Programmes Fail? ........................................................................ 163 8.19 Misconception of CRM.........................................................................................164 8.20 The Future of CRM...............................................................................................166 References........................................................................................................................166 ........................................................................................... 9.1 Historical Aspects ................................................................................................. 169 9.2 Definitions ........................................................................................................... 169 9.3 Knowledge Types ................................................................................................. 171 9.3.1 Tacit Knowledge ...................................................................................... 172 9.3.2 Explicit Knowledge .................................................................................. 172 9.4 Knowledge Conversion .........................................................................................173 9.4.1 Conversion of Tacit-to-Tacit Knowledge ..................................................173 9.4.2 Conversion of Tacit-to-Explicit Knowledge............................................... 173 9.4.3 Conversion of Explicit-to-Explicit Knowledge........................................... 173 9.4.4 Conversion of Explicit-to-Tacit Knowledge .............................................. 174 9.5 The Role of KM in Management Systems............................................................. 175 9.6 Integrating KM and Management Systems .......................................................... 176 9.7 KM Process...........................................................................................................178 9.7.1 KM Models ............................................................................................. 179 9.7.2 KM Goals ................................................................................................ 179 9.7.2.1 Normative Knowledge Goals .................................................... 179 9.7.2.2 Strategic Knowledge Goals........................................................180 9.7.2.3 Operational Knowledge Goals .................................................. 181 9.7.3 Knowledge Creation ................................................................................ 181 9.7.4 Knowledge Identification.......................................................................... 181 9.7.5 Acquisition of Knowledge......................................................................... 182 9.7.6 Knowledge Development.......................................................................... 182 9.7.7 Knowledge Storage and Retrieval............................................................. 183 9.7.8 Knowledge Distribution........................................................................... 183 9.7.9 Knowledge Application and Use............................................................... 183 9.7.10 Knowledge Transfer..................................................................................184 9.7.11 Knowledge Preservation............................................................................ 185 9.7.12 Measurement of Effectiveness .................................................................. 185

xvi  ◾ Contents

9.8 W hy Do KM Programmes Fail? ...........................................................................186 9.9 Application of KM in Management Systems ........................................................187 References .......................................................................................................................188 .............................................................................................. 10.1 Introduction.......................................................................................................... 191 10.2 Evolution of Financial Management...................................................................... 191 10.2.1 Traditional Phase .....................................................................................192 10.2.2 Transitional Phase .................................................................................... 192 10.2.3 Modern Phase .......................................................................................... 192 10.3 Objectives of Financial Management.....................................................................192 10.3.1 Basic Objectives ....................................................................................... 192 10.3.2 Other Objectives....................................................................................... 193 10.4 Scope of Financial Management............................................................................193 10.4.1 Investment Decisions ...............................................................................194 10.4.2 Financial Decisions...................................................................................194 10.4.3 Dividend Policy Decisions .......................................................................194 10.5 Functions of Financial Management ....................................................................194 10.5.1 Routine Financial Functions..................................................................... 195 10.5.2 Special Financial Functions ..................................................................... 195 10.6 Benefits of Good Financial Management............................................................... 195 10.7 Financial System ...................................................................................................196 10.7.1 Financial Institutions ...............................................................................197 10.7.2 Financial Market......................................................................................197 10.8 Financial Management System..............................................................................197 10.9 Structure of the Financial Department ................................................................. 198 10.10 Financial Management Process..............................................................................199 10.10.1 Financial Analysis...................................................................................199 10.10.2 Financial Decision-Making ...................................................................199 10.10.3 Financial Planning..................................................................................199 10.10.4 Financial Control...................................................................................199 10.11 Preparation of the Budget .................................................................................... 200 10.11.1 Budgeting Activities.............................................................................. 200 10.12 Purpose of Budgeting .......................................................................................... 200 10.13 Types of Budgets ................................................................................................. 200 10.13.1 Operating Budget ................................................................................. 200 10.13.2 Capital Budget....................................................................................... 200 10.13.3 Cash Budgets or Cash Flow Statement...................................................201 10.13.4 Master Budget .......................................................................................201 10.14 Top-Down versus Bottom-Up Budgeting............................................................. 202 10.14.1 Top-Down  Budgeting........................................................................... 202 10.14.2 Bottom-Up Budgeting........................................................................... 202 10.14.3 Zero-Based Budgeting .......................................................................... 202 10.15 Accounting and Finance ...................................................................................... 202 10.15.1 Key Differences .................................................................................... 203 10.16 Financial Statements............................................................................................. 203 10.16.1 Objectives of Financial Statements ....................................................... 203

Contents  ◾  xvii

10.16.2 Limitations of Financial Statements....................................................... 204 10.16.3 Key Financial Statements...................................................................... 204 10.16.3.1 Balance Sheet ....................................................................... 204 10.16.3.2 Income Statement or Profit and Loss Statement.................... 205 10.16.3.3 Cash Flow Statement ........................................................... 205 10.17 Financial Analysis Process ................................................................................... 205 10.17.1 A nalysis of Financial Statements ........................................................... 206 10.17.1.1 Liquidity .............................................................................. 206 10.17.1.2 Leverage ............................................................................... 206 10.17.1.3 Profitability........................................................................... 206 10.17.2 Performing Analysis with Financial Ratios ........................................... 206 10.17.2.1 Liquidity Metrics.................................................................. 206 10.17.2.2 Leverage ............................................................................... 207 10.17.2.3 Profitability .......................................................................... 207 10.18 Internal Control .................................................................................................. 207 10.18.1 Control Environment ........................................................................... 208 10.18.2 Risk Assessment..................................................................................... 208 10.18.3 Control Activities ................................................................................. 208 10.18.4 Information and Communication ........................................................ 208 10.18.5 Monitoring............................................................................................ 208 10.19  Ethics .................................................................................................................. . 208 References ...................................................................................................................... 209

SeCtion ii

ASSURAnCe PRoCeSSeS

............................................................................................... 11.1 Introduction ......................................................................................................... 213 11.2 The Importance of Management Review .............................................................. 213 11.3 Definitions ........................................................................................................... 214 11.4 Objectives of Management Review........................................................................214 11.5 Review Input and Output..................................................................................... 215 11.5.1 Review Input ........................................................................................... 215 11.5.2 Review Output ........................................................................................ 215 11.6 Frequency of Management Reviews....................................................................... 216 11.7 Gathering Evidence............................................................................................... 216 11.8 Participants at Management Review Meetings ..................................................... 217 11.8.1 Top Management...................................................................................... 217 11.9 Content of Management Review Meetings............................................................ 217 11.10 Model Agenda for Management Review Meetings ............................................... 217 11.11 Measuring the Effectiveness of Management Review Meetings............................. 218 11.12 Non-conformance................................................................................................. 218 11.12.1 Disposition  of Non-conforming Product ............................................... 219 11.13 Corrective and Preventive Actions.........................................................................219 11.13.1 Misconceptions About Corrective and Preventive Actions...................... 219 11.13.2 Corrective and Preventive Action Process ............................................. 220 11.13.2.1 Define the Problem................................................................221 11.13.2.2 Define the Scope....................................................................221

xviii  ◾ Contents

11.13.2.3 Damage Control ...................................................................221 11.13.2.4 Identification of the Causes(s) of the Problem .......................221 11.13.2.5 Plan Corrective Action.......................................................... 222 11.13.2.6 Implement Corrective Action................................................ 222 11.13.2.7 Follow-Up ............................................................................ 223 11.14 Continual Improvement ...................................................................................... 223 11.14.1 Essential Components of Continual Improvement ............................... 223 11.14.2 Tools for Continual Improvement ........................................................ 224 11.14.3 How to Succeed in Continual Improvement......................................... 225 11.14.4 Continual Improvement Process ........................................................... 225 References....................................................................................................................... 226 ........................................................................................ 12.1 Introduction......................................................................................................... 227 12.2 Categories of Measurement ................................................................................. 227 12.3 Definition and Benefits of Measurement ............................................................. 227 12.3.1 Definition ............................................................................................... 227 12.3.2 Benefits of Measurement.......................................................................... 228 12.4 Effective Measurement of Quality Improvement ................................................. 229 12.5 Characteristics of Measurement ........................................................................... 229 12.6 Measurement Scales............................................................................................. 229 12.6.1 Properties of Measurement Scales ........................................................... 229 12.6.2 Types of Measurement Scales................................................................... 230 12.7 Assurance of Measurements................................................................................. 230 12.7.1 Identify Important Measurements ...........................................................231 12.7.2 Good Characteristics of Measurement .....................................................233 12.7.3 Determining Whether the Measurements Are Good Enough...................233 12.7.4 Documentation.........................................................................................233 12.8 Strategies for Planning for Measurement ..............................................................233 12.9 Uncertainty of Measurement................................................................................ 234 12.9.1 Uncertainty and Error.............................................................................. 234 12.9.2 Precision and Accuracy ........................................................................... 234 12.9.3 Taxonomy of Errors..................................................................................235 12.9.3.1 Random Errors .........................................................................235 12.9.3.2 Systematic Errors.......................................................................235 12.9.3.3 Mistakes.................................................................................... 236 12.10 Measurement Systems Analysis............................................................................ 236 12.10.1 Classification of MSA............................................................................ 236 12.10.2 Implementing MSA............................................................................... 239 12.11 Different Types of MSA........................................................................................ 239 12.11.1 Gauge R&R Method ............................................................................ 239 12.11.2 Attribute Agreement Analysis ............................................................... 240 12.12 Assessment of Variations....................................................................................... 240 12.12.1 Assessment of Stability.......................................................................... 240 12.12.2 Assessment of Bias ................................................................................ 240 12.12.3 Assessment of Repeatability and Reproducibility....................................241 12.12.4 Assessment of Linearity .........................................................................241

Contents  ◾  xix

12.12.5 A ssessment of Resolution........................................................................241 12.13 Causes of Variation .............................................................................................. 242 12.14 General Requirements for Effective Measurement Systems................................... 242 12.15 Guidelines for Measurement System Acceptability............................................... 243 12.16 Pitfalls in Measurements....................................................................................... 243 12.17 Statistical Analysis................................................................................................ 244 12.18 Data Quality........................................................................................................ 244 12.18.1 Reasons for Data Inaccuracy................................................................. 246 12.19 Getting It Right .................................................................................................. 246 References........................................................................................................................247 ....................................................................................................................... 13.1 Introduction..........................................................................................................249 13.2 Definitions ...........................................................................................................249 13.3 Objectives..............................................................................................................250 13.4 Benefits of Audits .................................................................................................250 13.5 Misconceptions about Audits................................................................................ 251 13.6 Audit Principles..................................................................................................... 251 13.7 Essential Features of Audits .................................................................................. 252 13.8 Types of Audits ..................................................................................................... 252 13.8.1 Product Audit .......................................................................................... 252 13.8.2 Process Audit............................................................................................253 13.8.3 System Audit.............................................................................................253 13.8.4 Desk Audit or Document Review ............................................................ 253 13.8.5 Internal and External Audits.................................................................... 254 13.8.5.1 First-Party Audits...................................................................... 254 13.8.5.2 Second-Party Audits................................................................. 254 13.8.5.3 Third-Party Audits.................................................................... 254 13.9 Audit Styles.......................................................................................................... 254 13.9.1 Inspectorial Style...................................................................................... 255 13.9.2 “Show and Tell” Style............................................................................... 255 13.9.3 Collaborative Style ................................................................................... 255 13.10 Audit Process......................................................................................................... 255 13.11 Internal Audits ..................................................................................................... 255 13.11.1 Purpose................................................................................................... 255 13.11.2 Audit Schedule ......................................................................................256 13.11.3 Distribute the Schedule .........................................................................258 13.11.4 Assign Auditor(s)....................................................................................258 13.11.5 Prepare the Audit ...................................................................................258 13.11.6 Conduct the Audit .................................................................................258 13.11.7 Report Findings......................................................................................258 13.12 External Audits......................................................................................................259 13.12.1 Four-Phase Model..................................................................................259 13.12.2 Purpose..................................................................................................259 13.12.3 External Audit Activities........................................................................259 13.12.3.1 Client’s Request ....................................................................259 13.12.3.2 Select the Team .....................................................................259

xx  ◾ Contents

13.12.3.3 Develop Audit Plans..............................................................259 13.12.3.4 Conduct Desk Audit............................................................. 264 13.12.3.5 Conduct the Audit ............................................................... 264 13.12.3.6 Report Audit Findings.......................................................... 266 13.12.3.7 Content of an Audit Report ................................................. 266 13.13 Audit Skills........................................................................................................... 272 13.13.1 Behaviour Skills..................................................................................... 272 13.13.2 Technical Skills...................................................................................... 273 13.13.3 Management Skills. ................................................................................274 References ....................................................................................................................... 274 Appendix: Abbreviations and Acronyms........................................................................... 277 Index .................................................................................................................................279

List of Figures Figure 2.1

Communication styles.......................................................................................... 24

Figure 2.2 Communication process. ..................................................................................... 26 Figure 2.3

Information richness of channels.......................................................................... 28

Figure 3.1

Key components of marketing.............................................................................. 49

Figure 3.2

Life cycle of making a T-shirt............................................................................... 64

Figure 4.1

Stages of IS development. .....................................................................................85

Figure 6.1

Needs theory of motivation. .............................................................................. 122

Figure 7.1

Training and development needs at various levels. ..............................................146

Figure 8.1

CRM process....................................................................................................... 157

Figure 9.1

Modes of knowledge conversion. ........................................................................173

Figure 9.2

Knowledge creation and transfer. ....................................................................... 174

Figure 9.3

Management systems and KM. ..........................................................................177

Figure 9.4

Knowledge management model...........................................................................180

Figure 10.1

Model of a finance system..................................................................................196

Figure 10.2

Financial management process. ........................................................................199

Figure 10.3

Relationship among various budget components. .............................................201

Figure 11.1

Multiple cause diagram..................................................................................... 222

Figure 12.1 Precision and accuracy.......................................................................................235 Figure 12.2

Measurement components................................................................................ 237

Figure 12.3 Relationship between precision, accuracy and measurement variation.............. 237 Figure 13.1

Internal audit process.........................................................................................256

Figure 13.2

External audit process...................................................................................... 260

xxi

List of tables T ..................................................... T ................................................................................ T .............................................................. T ................................................................... T ................................... T ..................................................... T ............................................................................ T ................... T .................................................... T ..................................................... T ................................................................................... T .................................................................... T ............................................................................... T ................................................................................ T ............................................................................... T ................................................................... T ............................................................................. T ........................................................................................................... T .................................................... table 4.2 Elements of Support Information Systems .............................................................74 T .................................................................................... T ............................................................................ T ................................................................. table 7.1

Factors that Influence Training Outcome. ........................................................... 127 xxiii

xxiv  ◾  List of Tables

T ............................................ T ...................................................................................... T ................................... T .......................................................................... T ......................... T .................................................. T ........................... T ................................................ T ........................................................ T ..................................... T ............................................................................................ T ........................................................................... T ...................................................................................................... T ................................................................. T ............................................................................... T ...................................................... T .............................................................................. T ..................................................... T ............................................ T ........................................................................ T ............................................................................. T .............................................................................................. T ........................................................................................... T .............................................................. T ..............................................................

List of Forms Form 13.1 Section of an internal audit report ..................................................................... 268 Form 13.2

Section of an external audit report .................................................................... 269

Form 13.3 Non-conformance report....................................................................................271

xxv

Disclaimer While the author has used reasonable efforts to include accurate and up-to-date information for the content in the publication, he does not represent, warrant or promise (whether express or implied) that any information is or remains accurate, complete and up to date, or fit or suitable for any purpose. Any reliance a reader places on the information in this publication is at their own risk (including their use of the forms and procedures), and this publication is not intended as a substitute for ISO standards, including ISO 9001, ISO 22000 and ISO 14001. Reprinted material is quoted with permission, and sources are indicated. The authors and publishers apologise to copyright holders if permission to publish in this form has not been obtained. If any copyright material has not been acknowledged, please write and let us know so we may rectify in any future reprints. These three books on Integrating Business Management Processes are designed to provide practical guidance and do not constitute technical, financial, legal, or any other type of advice and should not be relied on for any purposes. It is not intended to guarantee certification of the integrated management system. The procedures in Volume 3 of the series are based on the author’s personal experience of developing, implementing and auditing management systems in pharmaceutical, cosmetic and food industries in an executive quality assurance role during a period of over 25 years as well as on contributions from numerous resources. The author does not claim them to be original and/or have been developed specifically for this publication. In particular, the author acknowledges the valuable contribution from the resources listed in the bibliography.

xxvii

Foreword The usual definition of a business management system is that it is a set of policies, processes and procedures used by an organisation to ensure that it can fulfil the tasks required to achieve its objectives, covering all the key aspects of the organisation’s operations. But this definition doesn’t really do justice to the importance and complexity of an effective business management system. It should be, but often isn’t, an integrated and dynamic system which links the organisation’s key activities and provides guidance and motivation for staff at all levels. Not a set of stand-alone, isolated procedures and objectives, but something which drives the organisation to continuous improvement and ultimately, business success. The integration of different activities into a cohesive and interlinked system is key to this. Various books and articles have been written analysing different approaches in an attempt to provide guidance on how to derive effective integrated management systems, often based on satisfying the requirements of ISO standards. But this book takes the approach a step further, on the premise that it is more logical to integrate management processes, rather than management systems, and to focus on customer satisfaction and not just ISO standards. It is aimed principally at manufacturing and consulting organisations where quality, food safety and environmental management are key, but it also covers the full gamut of management processes, which are integral to most businesses. Based on his own wide-ranging experience, Dr De Silva presents a series of three volumes on Integrating Business Management Processes, which sets out a rational and detailed approach to the development of a fully integrated business management system using process-based principles. Volume 1 gives a comprehensive coverage of the key management and core, processes, while making a case for the inclusion of good manufacturing, quality and food safety practices, which are often dealt with separately. Volume 2 sets out support and assurance processes in a business environment. This is followed by Volume 3 which describes the integration of quality, food safety and environmental processes, complete with procedures and flowcharts, based on Dr De Silva’s own personal journey in developing successful integrated business management systems. It is an account and an approach which I thoroughly recommend. The series of these three volumes is a valuable resource for any organisation, large, small or medium, in the development, implementation, maintenance and improvement of an integrated management system. Dr David C Taylor BSc Pharmacy (Hons), PhD, Former Director of Product Development, Analytical Development and Project Management, AstraZeneca, United Kingdom. December 2019

xxix

Review of integrating Business Management Processes, Volumes 1, 2 and 3 Dr De Silva has written an excellent series of three books on Integrating Business Management Processes that provides a structure to manage four key elements of a modern business: ◾ ◾ ◾ ◾

Quality and food safety. Respect for the environment. Respect for employee well-being. Good business.

Dr De Silva demonstrates that these principles need not be at odds with each other. Rather, when applied with understanding and care, they work harmoniously for the good of the business, its employees, customers and community. The process of integration adopts a novel approach, focusing on processes encountered in dayto-day business operations without the need for formalised third-party accreditations. To write this series encompassing quality, food safety and environmental activities requires a comprehensive knowledge of these disciplines. Dr De Silva’s wide experience in developing management systems and auditing provides the essential competency to put together complex processes in a simple format. I worked extensively with Titus to set up formalised quality and business management systems so this work is no surprise. An added bonus is the historical and philosophical context Titus provides to frame our modern position. These books, with their series of examples and procedures, show how organisations can benefit from satisfying customer requirements and the requirements of ISO standards to gain entry into lucrative markets. The series is detailed enough to be comprehensive as a complete guide to systems development, or the reader may be selective in addressing specific issues that they may be encountering. Volumes 1 and Two provide a broad knowledge base on management, core, support and assurance processes encountered in the business environment. In Volume 3, quality, food safety and environmental procedures are merged to form an integrated management system. The aim of the series is to enable readers, at very little cost, to set up an effective and efficient integrated quality, food safety and environmental management system for themselves. The three books complement each other, and this series on Integrating Business Management Processes is a xxxi

xxxii  ◾  Integrating Business Management Processes

complete business management system capable of being adapted to suit a business without the need of a specialist to do it for them. All three volumes are practical workbooks necessary for any organisation, small, medium or large, to develop, implement, maintain and improve an integrated quality, food safety and an environmental business management system and they are highly recommended. Nick Rowe Supply Chain Manager and Logistics Consultant Marisco Wines, New Zealand December 2019

Preface The three books on Integrating Business Management Processes cover quality, food safety and environmental processes encountered in a business environment. This book (Volume 2) describes ten support processes and three assurance processes required to assure quality, food safety and good environmental practices. Volume 1 includes five chapters on management processes and ten chapters on core business processes. Good Manufacturing Practices (GMP) and Hazard Analysis and Critical Control Points (HACCP) are key chapters in this book. Volume 3 is about building an integrated management system (IMS) by merging quality, food safety and environmental processes. Management systems form an integral part of any business. Business organisations have to satisfy not only the customers they serve but also statutory and regulatory requirements, industry standards and their own internal requirements, while keeping the environment clean. To meet these needs, organisations have developed a multitude of stand-alone management systems. Most organisations that design integrated management systems resort to satisfying the clauses of relevant ISO standards. These standards per se are not management systems, but are tools that can be used to evaluate the effectiveness of management systems. Organisations that design management systems merely to satisfy the clauses of ISO standards lose sight of the ultimate aim of implementing these systems. Books on IMSs that focus on procedures that are only relevant to ISO standards tend to ignore programmes such as marketing and finance, which are integral parts of any business organisation. Employees do not take ownership of such systems, which is an important consideration for the success of the programme. A management system should be designed to cover all business activities to satisfy its stakeholders, and certification should only be used to evaluate its effectiveness and promote continual improvement. These three volumes on Integrating Business Management Processes include many disciplines encountered in the business environment. Numerous case studies are included in the chapters. The integration approach used in Volume 3 is unique: (a) most books on integration deal with the integration of quality, environmental and occupational safety, and hygiene standards with management systems or ISO standards. A rational approach is to integrate management processes rather than management systems or ISO standards; (b) quality, food safety and environmental processes are integrated, a rare combination not found in books on integrated management systems. It is a rational approach, because food safety is closely linked to quality, Good Manufacturing Practices (GMPs) and environmental issues; (c) business processes are described in sufficient detail in Volumes 1 and 2 to provide a comprehensive understanding; (d) business processes have been classified into management, core, support and assurance procedures and are described using the process-based approach. Procedures associated with these processes in Volume 3 can easily be tailored to suit the needs of the organisation; (e) the procedures are supplemented with numerous forms, tables and flowcharts; and (f) procedures specific to quality, food safety and the environment are also described. xxxiii

xxxiv  ◾ Preface

Food safety is an integral part of quality and GMPs. Therefore, these three books take the lead in integrating closely related, but different, business processes. The management skills necessary for developing and implementing management systems are well described in my previous book, Essential Management Skills for Pharmacy and Business Managers (CRC Press, 2013). In my corporate role as the head of quality assurance in the largest winery in New Zealand (Montana Wines Limited), the experience of developing and implementing management systems, auditing them and exposure to several industry sectors (such as pharmaceutical, cosmetic, food and beverage, and retail pharmacy) provided me with the depth of knowledge and expertise required to write this series. The books focus on business processes and not on ISO standards, and as such, it is not intended as a substitute for these standards. Those who intend to use this book for developing or integrating management systems should thoroughly understand the processes described in Volumes 1 and 2. Then, the necessary management, core, support and assurance processes required to satisfy the needs of the organisation and its customers should be identified. The final phase is to adopt the procedures presented in Volume 3 of the series to suit individual needs. The Way Forward in Volume 3 takes you through this process. The primary aim should be to satisfy the needs of stakeholders rather than the clauses of ISO standards. When the system has been implemented and found to meet expectations, the organisation can work towards certification, consulting the relevant ISO standards. The journey is arduous. Staff development and team work are essential ingredients for success. It is a dynamic process, and continual improvement takes place when employees take ownership of the system.

Acknowledgements During the five-year period of developing these three books on Integrating Business Management Processes, many individuals devoted their time and effort to make this project a success. Over the years, I have come to know many colleagues in management who shared their knowledge with me. I wish to thank Dr David Taylor, in the UK, former Director of Product Development, Analytical Development and Project Management, AstraZeneca, for writing the foreword of this book in spite of his busy schedule. I am grateful to Mr Nick Rowe, Logistics Consultant in New Zealand, for reviewing the chapters on new product development and warehouse management, and writing a valuable review. I appreciate his comments and recommendations, which were incorporated in the chapters. I acknowledge with thanks the contribution made by Mr Chanaka De Silva, a Chartered Accountant in New Zealand for reviewing the chapter on financial management and making worthy recommendations. I acknowledge with thanks the unwavering encouragement and enormous support given to me by my son, Dr Samitha De Silva, in the UK, a Partner at C’M’S’, the seventh largest law firm globally. Special thanks go to my son, Pradeepa De Silva, Head of Global Marketing Programs at Facebook based in Singapore, who supported me in numerous ways, including the review of the chapters on marketing and sales management. My wife, Anoma De Silva, a librarian and an archivist, presented me with many recommendations and challenges for which I am very grateful. These enabled me to achieve my objective of completing the manuscript on time. I wish to thank Helen McDonald in New Zealand for excellent proofreading. I also thank the organisations I worked for in senior management roles in New Zealand (Hoechst NZ Limited, Penfolds and Montana Wines Limited), Japan (National Institute of Hygienic Sciences), the UK (Eli Lilly Research, Boots and Lloyds Pharmacy Limited), Kuwait (Ministry of Health) and Sri Lanka (Ministry of Health). Finally, I acknowledge with thanks the professionalism of the editorial team of Taylor & Francis.

xxxv

Review At a personal level, I have found that, with advancing years, I need the support of organised systems to ensure that I complete the tasks that I need to do, rather than those that are unnecessary or unhelpful. Having undertaken research and development as an employee in the pharmaceutical industry, as an academic member of multi-task industrial project teams and a governmental regulatory authority, I am well aware of the benefits of organisational systems to achieve successful outcomes. I was therefore fascinated to see the extensive aspects of such systems as provided by Dr De Silva in the three volumes on “Integrating Business Management Processes”. He has considered the wider, fundamental aspects of the range of systems and their organisation in a manner which supports the delivery of a successful product or project. While examples are provided for particular industries, the principles provided in the 29 chapters can be applied to many systems. Thus, the content of each chapter may not be relevant to every management system or situation, but Dr De Silva has emphasised that, where relevant, integration of relevant chapters is beneficial. He has evidenced this from the development stage of these systems, through to their implementation and control. The dynamic nature of these systems is clearly demonstrated, as is the likelihood that they will change as new knowledge, materials, and processing and test methods emerge and the operational performance of these management processes is observed. The lists of references at the end of each chapter provide the source of the information used to present the text and indicate that each chapter could probably be expanded into a book. This work, however, offers succinct and comprehensive information regarding the important issues involved for each system. The figures, flowcharts, forms, procedures and tables provide a valuable contribution to the understanding of this work on organisational systems. Dr J.M. Newton Emeritus Professor of the School of Pharmacy of London University, Honorary Professor in the Department of Mechanical Engineering at University College, London, Member of CPS (Chemistry, Pharmacy and Standards), a subcommittee of the CSM (Committee on the Safety of Medicines: 1978–1995), and Member of the Medicines Commission: 1978–2000). March 2020

xxxvii

Author Titus De Silva, PhD, is a consultant in management skills development, pharmacy practice, quality management and food safety and has been an advisor to the newly established National Medicines Regulatory Authority in Sri Lanka. Dr De Silva gained his pharmacy degree (with Honours) from the University of Manchester in the UK. In addition, he has a BSc degree in Chemistry, a post-graduate diploma in Computer Science (NZ) and an MBA and PhD in Management Science (USA). He is a Chartered Chemist (CChem) and a Fellow of the Royal Society of Chemistry, UK (FRSC), a member of the Royal Pharmaceutical Society of Great Britain (MRPharmS) and a member of the Pharmaceutical Society of New Zealand (MPS). For over 30 years, he held senior management positions in New Zealand, the UK and Sri Lanka. He has worked in the UK, New Zealand, Japan and Kuwait in many sectors including manufacturing, research, cosmetics, beverage, and hospital and community pharmacy. Before immigrating to New Zealand, he was the head of the National Drugs Quality Control Laboratory in Sri Lanka. During his time in Sri Lanka, he was a visiting lecturer and examiner at the Faculty of Medicine of the University of Colombo, School of Pharmacy. While in Kuwait, he served as a specialist in drug analysis and quality control in the Ministry of Health. In Japan, he was attached to the National Institute of Hygienic Science in Tokyo, where he worked with experts in pharmaceutical science. Other organisations he has worked for include the Southland Hospital Board (New Zealand), Hoechst Pharmaceuticals (New Zealand), Pernod-Ricard (New Zealand), Eli Lily Research (UK), Ballinger’s Pharmacy (New Zealand), Boots Chemists (UK) and Lloyds Pharmacy (UK). Pernod-Ricard (previously Montana Wines Limited) owned the largest winery in New Zealand, with wineries in four regions. In his role as Corporate Quality Assurance Manager, he was responsible for developing and implementing management systems to comply with international standards. In this role, he coached and trained staff for management positions. He gained competency as a lead auditor and was a registered auditor in quality management and occupational safety and hygiene. He worked closely with suppliers, auditing their management systems and providing encouragement and support. His auditing experience enabled him to gain broad knowledge of many disciplines encountered in the business environment. Dr De Silva’s expertise has been sought by many professional organisations. He has presented numerous papers at international seminars and published a number of papers and articles on quality management, food safety, pharmacy practice and topics of general interest in management journals and magazines. He was the co-author of the chapter “Hazard Analysis and Critical Control Point” in the book Handbook of Food Preservation published by Marcel Dekker, New York (1st Edition) (1999). In the second edition of the book, published by CRC Press, Boca Raton, xxxix

xl  ◾ Author

Florida in July 2007, he was the author of the revised “Hazard Analysis and Critical Control Point (HACCP)” chapter and the “Good Manufacturing Practices” chapter. His book Handbook of Good Pharmacy Practice was published in 2011 in Sri Lanka. In 2013, his book Essential Management Skills for Pharmacy and Business Managers was published by CRC Press. Dr De Silva was a member of the Review Board of the Joint Accreditation System of Australia and New Zealand (JAS-ANZ) and its Technical Advisory Council. JAS-ANZ is the sole body responsible for accrediting certifying bodies in Australia and New Zealand. He was enlisted as a consultant to the United Nations Industrial Development Organization (UNIDO). In 2004, the New Zealand government conferred the Queen’s Service Medal (QSM) for his services to the New Zealand community.

SUPPoRt PRoCeSSeS

i

Chapter 1

Document and Record Management 1.1 History of Document and Record Management The history of document management goes back to the early years of human civilisation. Our early ancestors like the cavemen drew pictures on the walls depicting their lifestyle. Such early drawings exist in many parts of the globe and are now preserved by government agencies. These can be considered as the earliest forms of record-keeping kept for future reference. Egyptian hieroglyphics are excellent examples of primitive record-keeping. They are really archivists’ ‘gold mines’, and they have been able to understand the environment in which the cave dwellers lived and their activities from bygone eras (Adam, 2007). Writing first developed in the river plains of Mesopotamia from 3100 BC, and clay was the writing material of temple scribes. A piece of reed was used as the writing tool. Clay tablets hardened when exposed to the sun making it almost indestructible, but they were inconvenient to carry about. Egyptian papyrus was used around 3000 BC, which retained ink without blurring or smudging. They remained longer than any other material in the history of written documents. Bamboo books evolved in China from 1500 BC. They remained in use until about 400  BC. According to some sources, bamboo slips have been used as early as 1250 BC in the Shang Dynasty, although no artefacts have been discovered (Adams, 2018). From the 5th century BC, clay tablets coated with wax were used for writing. Wax could be melted and tablets were used over and over again. Early Buddhist scriptures in India were written on strips of birch bark. Parchment paper began to appear in the 2nd century BC in the Mediterranean region as a more expensive alternative to papyrus. It was made from processed animal skin and was strong and flexible enough for creating separate pages of a manuscript to be bound together on one side to form the spine of a book (History World, n.d.). The first known “paper” was produced in China in the 2nd century from rags and fibres from mulberry, laurel and Chinese grass. Gradually, the discovery migrated to Europe, and by the 15th century, it was used in printed books. In the 19th century, wood pulp was turned into paper. The first weekly newspaper to be published from wood pulp paper was the Boston Weekly Journal in January 1863 (History World, n.d.). 3

4  ◾  Integrating Business Management Processes

1.1.1 Early Document Management In the early years, document management was a laborious and tedious process. Documents were created by hand and stored in a physical location for which businesses had to pay. The files, as they were called, were kept in filing cabinets making it convenient to retrieve them whenever necessary. However, an enormous amount of space was needed to store large amounts of files in the business. It was common for large organisations to allocate entire storage areas or rooms to store boxes and filing cabinets containing their paperwork. Every file that was created needed to be filed, costing the business resources and time. The process was extremely inefficient, and the retrieval process was equally difficult. Employees would have to spend more time, energy and resources to find documents, and even then some files could not be located. Paper copies of documents posed more problems. The files were often stolen or misplaced, and some documents were misfiled making it impossible to retrieve them. The filing cabinets and the files themselves were prone to natural disasters such as floods and fire. These tragedies could completely wipe out the documents making true document management impossible (eFileCabinet, 2014).

1.1.2 Digital Age of Document Management In the 1980s, computers were available to businesses. They were bulky, occupied large spaces and were expensive. Important documents were stored in the computer. In the early days, the first business unit in an organisation to have computers was the finance department. Documents such as the payroll, financial statements and financial data were all stored in the computer. Early document management systems were not perfect, and they were linked to specific computers and not freely available to other employees. The software market had not evolved, and getting the files onto the computer was a tedious task. However, they were the pioneers of modern electronic document management (EDM) systems (eFileCabinet, 2014).

1.1.3 Arrival of Enterprise Document Management In the mid-1990s, enterprises were diverting their efforts to manage their information resources and assets. However, unlike more tangible assets such as materials management or facilities management, which have well-defined measures, it was difficult to assign values for information. Enterprises that were focused on data- and system-centred processes directed their investments into documented-centred processes. The basic unit of document-centred processes was the document. More and more companies are allocating increased budgets for document management problems and paperwork reduction. Enterprises were aiming at eliminating wasteful tasks and time-consuming shadow functions for a reduced workforce (Sutton, 1996).

1.2 Challenges of Document Management The failure of traditional methods of document management has been due to the passive management of documents. Some of the problems of traditional methods are (Sutton, 1996) as follows:

Document and Record Management  ◾  5

4. Email systems and workstation-based file managers have contributed to the increased volume of document production, publication and corporate-wide distribution causing problems in document security, control, traceability and retrieval. 5. The too easy accessibility of documents to system administrators with network administration access. 6. File logs that give a distribution list for sharing information enables easy tracking. However, with email systems anyone can be added to an electronic distribution list. 7. File folder captions and keywords that described the generic content of a file were ineffective ways of finding a document. Email systems force the user to store emails within the proprietary database of the email provider, but do not provide functionality for searching all the emails with a text search engine. 8. Challenges of migrating a large, legacy, paper-based electronic system to an automated workflow and enterprise document management environment. The goal of document management is to share important, critical and corporate information by making it secure, shareable, accessible, retrievable and interchangeable.

1.3 Definitions Document: “A legally sanctioned record of a business transaction or a decision that can be viewed as a single organised unit” (Sutton, 1996). A document may be a written text, a video recording, a physical sample, a sample drawing, a computer programme, etc. Record: A document stating results achieved or providing evidence of activities performed. Table 1.1 shows the differences between documents and records. Document management: “Creation, storage, organisation, transmission, retrieval, manipulation, update, and eventual disposition of documents to fulfil an organisational purpose” (Sprague, 1995). Record management: It is “the systematic control of organisation’s records throughout their lifecycle in order to meet operational business needs, statutory and fiscal requirements and community expectation” (National Archives of Scotland, 2016). T Document

Record

1

Active paper

“Dead” paper

2

Subject to change

Cannot be changed

3

Approved and issued by an authorised person

Created and approved after completing the activity by a designated person

4

Retention period is not significant, because they are active papers

Retention period can be specified

5

Changes are specified by the issue or the version numbers

Identified by formal numbers

6  ◾  Integrating Business Management Processes

1.4 Benefits of Good Document Management An effective document management system can generate value to a business in several ways (Sprague, 1995): 1. In the publishing industrial sector, documents are a source of revenue as a product or support for a product. Examples include user manuals for products, reference manuals for software products or an application for employment. 2. Documents improve the management and communication of concepts and ideas. A good document management system improves the effectiveness of documents in storing and communicating concepts, ideas, policies and objectives within and between organisations. 3. Documents are a source of organisational memory. They provide a means to access and analyse organisational memory to improve productivity and performance. 4. New document management technology allows the processing, access and retrieval of large amounts of documents which have been resistant to computerisation.

1.5 Features of Documents The University of Reading in the UK has benchmarked documents against 16 criteria under four categories: Language, Design, Relationship and Content. The categories are shown in Table 1.2 (Waller, 2011).

T Category Language Ease of understanding

Design Visual impact

Criteria

Description

Directness

Use of direct language to express the idea clearly

Plain words

Use of vocabulary to enhance understanding

Grammar and punctuation

Correct use of grammar and punctuation

Readability

Use of understanding the expressed idea

Legibility

Use of legible fonts and layout of the document

Graphics

Using bullet points, charts, graphs, etc. as appropriate

Structure

The quality of the document in relation to the function

Impression

Overall pleasing appearance of the document

(Continued )

Document and Record Management  ◾  7 Table 1.2 (Continued)  Features of a Good Document Category Relationship Ability to connect with the recipient

Content Purpose of the document

Criteria

Description

Originator

The originator of the document

Contact

Contact details of the originator

Fitness to the audience

Appropriateness of the document to the skill level and understanding ability of the recipient

Tone

Matching the style and language to the context of the document

Relevance

Relevance of the content to the recipient

Subject

Clarity of the topic in the document

Response

Action required of the recipient

Alignment

Compatibility of contents of the document with aims and values of the organisation The information remains current

Timeliness

1.6 types of Business Documents A company communicates, conducts transactions and analyses metrics using documents. They provide evidence of a company’s activities and are kept as a source of reference for years to come. Although there are numerous types of documents, business documents fall into four categories (Tingium, 2016): 1. Emails and memorandums: Communication within the organisation takes place through emails. Before the emergence of emails, information was conveyed via memorandums. Even at present, memos are used to convey messages which accompany a specific file and in situations which demand more privacy. Both emails and memos identify the sender and the recipient, and carry a subject heading. 2. Business letters: These are used to communicate with individuals or organisations outside the organisation. They include customers, colleagues in other organisations, professional bodies, consultants who provide a service to the organisation, statutory bodies and applicants for jobs. They are usually written on letterheads. 3. Business reports: These are longer than letters and carry formal information. A wide variety of matters are conveyed through reports, and they include safety compliances, sales and marketing data, financial data, feasibility studies, results of projects and performance data. Such reports usually accompany charts, graphs, trend graphs, statistical data, etc. Some reports are prepared for the benefit of stakeholders. Periodic reports are done on templates to enable comparison with previous reports. 4. Transactional documents: These provide evidence of an organisation’s transactions with external organisations. These documents are usually formatted as a form such as an order form or an invoice. The type of transactional document used varies with the type of business. Contracts are a type of transactional documents which are usually drafted by company lawyers.

8  ◾  Integrating Business Management Processes

5. Financial documents: These refer to the financial aspects of the organisation. These documents are used to present the budget, prepare budget proposals, file tax returns, etc. Receipt records, payrolls, paid bills, bank statements, income statements, balance sheets and tax returns are also types of financial documents. Financial documents generally originate from the finance department of the organisation. A business owner uses the financial documents to monitor the financial position of the organisation, and a department manager uses the budget documents to monitor the performance of the department.

1.7 Life Cycle of Documents Documents generally go through the following life cycle (Microsoft, 2016; Dartmouth College, n.d.): 1. Creation involves planning, designing and initiating. 2. Authentication and approval are methods used to ensure that documents are genuine and have the approval of the designated person of the organisation. 3. Indexing is the process of cataloguing or creating metadata via manual or automated methods. 4. Managing and storing for ready accessibility in a physical location or electronically in the computer. 5. Accessing is the searching process to find the documents using classification, metadata or other technologies. 6. Retrieving means reviewing the documents found from search methods. 7. Administering refers to the process of managing users, resources, content types and structures. 8. Repurposing is reusing or creating new versions of the document for new products and/or cost savings. 9. Sharing and collaborating is the process of modifying in a work group via real-time or nonreal-time techniques. 10. Distribution of the document describes the methods of passing the document to interested parties. 11. Retaining low usage or inactive documents for their specified retention period is governed by the policies and practices of the organisation. 12. Disposition refers to the secure destruction of documents that have passed the specified retention period. 13. Archiving is a concept similar to retention and describes the long-term retention in a readable form when a document is no longer active. Documents no longer to be retained or have expired are also archived.

1.8 electronic Document Management (eDM) EDM is the application of electronic technology to avoid the use of paper, improve communication and increase the productivity of business operations. It expands the scope of information management and increases the responsibilities of information system managers (Sprague, 1995).

Document and Record Management  ◾  9

Even with modern electronic technology, paper documents are widely used in organisations all over the world. The following statistics show the extent of use of all types of documents (Microsoft, 2016): ◾ ◾ ◾ ◾ ◾ ◾

In the USA, over 30 million original documents are used annually. Documents account for 15% of company revenue. A staggering 85% of documents are never retrieved. 50% of documents are duplicates. 60% of documents are obsolete. Managing the document creation process is expensive (for every $1 that a company spends on creating a final document, $10 has to be spent to manage the document creation process).

1.8.1 Basic Components of EDM In addition to a document management function, EDM systems incorporate additional features such as workflow, collaboration, record management, archiving and imaging. The core elements of EDM are as follows (Adam, 2007):







a. Document repository: It is the location where documents under management are stored in the computer network connected to one server or distributed across several servers. To be effective, all documents should be stored in a central server to enable authorised access and retrieval of documents. Proper management should ensure that all documents are stored in the repository on creation by preventing them from storage in the user’s hard drive. The EDM system also uses a database to store information about the documents usually referred to as metadata. b. Folder structure: The EDM system enables the system administrator to set up a folder structure to identify documents according to a classification, which may be organisation-based, project-based or a combination of both. It could also be based on business functions and a property-based structure. c. Integration with desktop applications: Another important functionality of an EDM system is the integration with desktop applications, such as Microsoft Office, to enable the user to save the document created using the application to the central repository. d. Check-in and check-out: Check-in and check-out are functions of the EDM system control who is editing the documents in the repository and when it is being edited. The EMD system allows only one person to check-out to edit a document at any given time. Other users of this document are prevented from editing the document and can use the read-only function to view it. On completion of editing the checked-out document, the user can check-in the document to save it in the repository allowing the updated copy to be used by other users. The system should allow tracking of documents by versioning auditing. e. Version control: This is the process of keeping track of changes made by assigning version numbers to documents. Previous versions of the document should also be available in the system for access, if necessary. f. Auditing: The auditing feature in the system enables the users to identify the date of creation, the date of updating, the person responsible for updating and the changes made to a document. The information is made available as a report. g. Security: The security feature of the EDM system dictates authorisation access to the document. The administrator should be able to set up and maintain security settings on individual

10  ◾  Integrating Business Management Processes

files, folders or groups of folders within the system by allowing for read, write or no access security authorisation to be set up. Various levels of security are dictated by company policies and procedures. h. Classification and indexing: The ease of accessibility and retrieval depends on the method of classification and indexing of documents. Usually documents are indexed and classified using metadata that contains information about the document such as the author, document title, date of creation, and the subject and origin of the document. i. Search and retrieval: An effective EDM system should offer the user multiple ways to search and retrieve documents such as browsing, basic search and advance search. In a basic search, the user types in a keyword that retrieves all documents matching the metadata or document content. An advance search allows the user to search on the basis of more than one individual metadata field using an “and/or” statement. Words or phrases within the document content can also be used as search criteria. The system should also allow the user to browse documents.

1.9 Challenges of Record Management There has been an exponential growth of records being created in digital form by business organisations, because of the progress of information technology (IT) and the widespread use of network capability. Some of the records in electronic form are emails, spreadsheets, video recordings, etc. However, electronic records too are vulnerable, and the following are some of the challenges in managing them (Government of Hong Kong, 2016): ◾ Fragility: Electronic media such as magnetic tapes, optical discs and USB drives are fragile and subject to failure. ◾ Dependency on technology: Access and retrieval of records can only be done using a computer or other such device. ◾ Ease of manipulation: Records can be accessed and changed by unauthorised individuals using technology. ◾ Absence of contextual information: Absence of self-evident and contextual information such as the originator, when it was created and to whom it was sent makes them less understandable and usable.

1.10 Benefits of Good Record-Keeping Good record management offers numerous benefits to organisations from economic good practice in reducing the use of paper to being able to meet statutory requirements. In an unmanaged record environment, the performance of duties is more difficult, and it costs the organisation time, money and resources. In addition, they are subject to security breaches and prosecutions, damaging the reputation of the organisation. It has been estimated that when records are not managed, 10% of staff time is spent looking for vital information (National Archives of Scotland, 2016). Corrupt record management practices ultimately lead to the fall of organisations. Record destruction at the accounting firm Arthur Anderson resulted in a felony conviction of the company, and this particular crisis could have been avoided if employees had not destroyed records

Document and Record Management  ◾  11

in an attempt to cover it up (Sampson, 2002). The importance of good record management is best illustrated with reference to Truth Commission records in South Africa during the period 1995–2002. According to the findings of the Commission, “records were systematically destroyed in massive quantities between 1990–1994” … and “ … was still destroying records as late as 1996 …”. Therefore, the details of this historical event were lost forever (United States Institute of Peace, n.d.). The systematic management of records offers the following benefits to an organisation (National Archives of Scotland, 2016): ◾ ◾ ◾ ◾ ◾ ◾ ◾ ◾ ◾

Awareness of the existence of records and their location Improvement of performance Cost savings in staff time and storage Supports decision-making Accountability Achievement of business objectives and targets Achievement of business continuity in case of a disaster Compliance to regulatory requirements Protection of interests of clients, employees and stakeholders.

1.11 Features of Records The purpose of a record is to provide evidence of an activity. Therefore, they must be complete and possess the following three elements (Government of Hong Kong, 2011): 1. Content: Information or the idea that the record conveys. 2. Context: Details of the origin of a record, e.g. who created it, when it was created, to whom it was transmitted and why it was sent. 3. Structure: Physical and logical formats of a record and how individual sections of the record relate to each other. Records can only be useful if they are available when and where it is needed, well organised and maintained. Therefore, the record-keeper must ensure that records have the following attributes (National Archives of Scotland, 2016):

a. Authentic: Records present evidence of the genuine nature of records and who created them. The management trail should ensure that details of changes are correctly recorded. b. Accurate: The records reflect the accuracy of transactions that record documents. c. Accessible: The records are readily available when needed. d. Complete: Records must contain sufficient content, context and structure to enable the reconstruction of activities and transactions that they represent. e. Comprehensive: Records must cover all aspects of the business. f. Compliant: All records must comply with regulatory requirements, audit rules, company procedures, etc. g. Effective: Records are created for a specific purpose, and the information contained in them must reflect the purpose and be linked to the process that the records relate to.

12  ◾  Integrating Business Management Processes

h. Secure: Records must be maintained and stored in a secure environment to prevent damage and deterioration. Systems must be in place to prevent unauthorised access, alternation and removal. When records are migrated because of technological changes or other reasons, their accuracy and authenticity must be maintained.

1.12 types of Business Records In classifying record types, the distinction between records and documents is rather blurred. An email can be considered as a record or a document depending on the information that it contains. An email sent as a reminder of a meeting is a document. If it conveys information about a conversation or some results of tests, it is treated as a record. Such common records like emails and their attachments, reports, forms and books are kept on paper, remote servers (cloud computing), digital and magnetic media, CDs, DVDs, photographs and microfilm. Records can be classified based on the purpose for which they have been created: internal, external transaction and reference (Read & Ginn, 2016). a. Internal records contain information needed to operate the business. They may be created inside or outside the organisation. E-commerce systems using databases or web server applications are used to create such records. Examples of internal records are payroll records, news bulletins and government regulations. b. External records are created for use outside the organisation, and they may be created inside or outside the organisation. Examples of such records are letters, faxes or communications sent to a customer, client, supplier or to a government department. c. Transaction records are used by the organisation’s day-to-day operations. They are generated manually, electronically or through e-commerce systems. Invoices, purchase orders, cheques and shipping orders are some examples of transaction records. d. Reference records contain information that could be used to operate a future business. These records are referred for information about previous decisions, plans and statements. Examples of reference documents are sales and marketing information, financial reports and catalogues. Some records are of extreme importance to the organisation, and the classification presented in Table 1.3 is based on the value of the record to business operations (Read & Ginn, 2016).

1.13 Life Cycle of a Record According to the life cycle model, the four traditional phases of records are creation, active records, semi-active or inactive records, and final disposition (Afshar & Ahmad, 2015). This concept is similar to the biological system of birth and death. Creation: Life cycle begins when records are created or received. Active records: They are needed frequently and accessed at least monthly and are stored in readily accessible locations.

Document and Record Management  ◾  13 T Category

Use

Examples

Vital

Critical business operations Not replaceable and operations cannot continue Highest degree of security

Legal documents, property titles, profit and loss statements, reports to shareholders

Important

Business operations Usually replaceable at high cost High degree of security

Personal records, sales records, policy manuals, contracts, financial and tax records

Useful

Supports business operations Replaceable at less cost Low or moderate degree of security

General emails, letters, memos

Non-essential (documents)

No predictable value after initial creation and use Lowest degree of security

Company announcements, bulletins to staff, telephone messages

Semi-active and inactive records: They are not needed for day-to-day operations and need to be kept for legal or financial reasons. They are not stored in prime locations and are usually stored at lower cost in record centres. Often semi-active records are referred to as inactive records. Final disposition: When records are no longer needed and have no value to the organisation, they are disposed of by destroying them securely, storing them in archives or transferring to another department. In practice, the life cycle model is a useful framework and can be easily used by professionals in other disciplines. However, the model has the following drawbacks: (a) it does not consider the design stage of record management system, (b) it is unsatisfactory in a changing technological environment and (c) it is not applicable to electronic record-keeping. Furthermore, this model treats archives and records as separate entities. According to the continuum model, records undergo recurring and reverberating activities rather than stages that fall within archives and record management. The four dimensions of the record continuum model are creation, capture, organising and pluralisation (Afshar & Ahmad, 2015). Dimension 1 – Create: All business activities take place in this dimension. The content of the records serves as evidence of activities that have taken place. Dimension 2 – Capture: The capture phase is the transaction phase involving the management of transactions and records. At this stage, records can be distributed to others as evidence of transactions. They are tagged with metadata, including how they relate to other records. Dimension 3 – Organise: This phase represents the record-keeping phase of record management and encompasses the organisation of record-keeping processes. It serves as corporate memory and is now part of the archive collection. This phase is referred to as “the archive” or “the fonds”. Dimension 4 – Pluralise: This phase is about the disposal of records, and they are either destroyed or archived. Archiving is the responsibility of the archivist managers.

14  ◾  Integrating Business Management Processes

1.14 Basic Components of electronic Records Management Systems (eRMS) Most electronic records management systems (ERMS) are used in combination with electronic data management systems (EDMS)or contain EDMS functionality, and both have some common features (Adam, 2007):















a. Repository: All records are archived in the repository, which is located in one or more database servers, but users see them as a central repository. It should allow the user to browse the repository for contents if access rights have been granted by the administrator. b. Folder structure: The repository contains a folder structure which allows the administrator to systematically categorise the records in the system where they are archived. Organisations generally employ one or more of the following hierarchical folder structures: organisational structure, business functions-based structure and property-based structure. c. Classification, indexing and metadata: Within the folder structure, all records have to be categorised and indexed using metadata to enable users to access and retrieve records easily. d. Capturing and declaring records: ERMS has an automatic method to capture and declare records. For example, a form sent by a client will be captured and declared as a record. The response sent by the organisation will be another document and also forms a part of the record of the interaction with the client. If the system does not capture them automatically, it has to be processed manually which is subject to human error. e. Retention and disposal: Records have to be kept for a specified period dictated by the organisation’s policies and regulatory requirements. When records reach the end of the retention period, they are either completely deleted securely from the system or migrated to offline storage according to the policy of the company. f. Record security: The security of records is an important feature of any record-keeping system for the organisation’s own security and to comply with legislative requirements. Access authorisation should be set up by the administrator to prevent unauthorised access. Several levels of security may be needed depending on the organisation and its records. g. Management of physical records: An efficient ERMS should be able to manage existing physical records in various business units. The administrator should provide authorised users, the details of where the records should be stored in the system. The functionality of the system should allow the details of deletions to be recorded – a check-out procedure. h. Search and retrieval: The search and retrieval functionality of the ERMS is similar to the EDMS. It should enable both basic and advance search, and browsing facilities. In addition, the search functionality of ERMS should allow the retrieval of both records (both electronic and physical) and documents related to the search parameter. For example, information about a certain client may be in current documents, records or in archived records. The search mechanism should be transparent to the user who needs information from whatever source. i. Auditing and recording: This functionality is common to both EDMS and ERMS. Authorised users should be able to produce audit trails of documents and records to check access and changes, creation and modification dates, etc. Users should also be able to create tailored reports. j. Compliance with standards and regulatory requirements: An EDMS should comply with legislative requirements that apply to the organisation, business sector, and the country of implementation in order to be compliant and legally accountable.

Document and Record Management  ◾  15

k. Scanning and imaging: The scanning and imaging functionality of EDMS enables the system to capture images of paper-based documents, so that the staff have instant access to these documents and to free up physical storage space. l. Collaboration: A central repository is useful to communicate and share information. This additional feature can be used by employees to work together on documents which require collaboration. m. Workflow: Workflow is also known as business process management (BPM) and is a process of managing document flow within the organisation. For example, a salesperson creates an order for x number of items, which then goes to the Sales Manager for authorisation. The sales order then reaches the Warehouse Manager for despatching the goods. Finally, the document goes to the accounts department to create an invoice which is transmitted electronically or gets posted to the customer.

1.15 Underlying eDM technologies Advances in basic technology infrastructure have contributed towards rapid developments in EDM. Not only do they support the handling of information in any form but also provide functionality to process and manage documents. These technologies can be classified into five categories (Sprague, 1995): 1. Improved desktop workstations: Large high-resolution colour screens in desktops can display a full page (one or two at time) and deliver (capture) non-text media such as voice, video and animation. 2. Storage media: High-capacity storage media can capture large multimedia documents. Magnetic media such as hard drives and diskettes offer greater storage capacity, but the demand for storing large multimedia documents has also been increasing. Optical storage media such as CD/ROMs and laser disks and holographic storage devices offer larger storage space. 3. Networks: Networks are in wide use in organisations, and they interconnect the workstations in the organisation both within and between organisations. They provide high band width functionality to transmit large volume of data in electronic records and forms. Some of these technologies are Fibre Distributed Data Interface (FDDI), broadband Integrated Service Digital Network (ISDN) and Asynchronous Transfer Mode (ATM). 4. User-friendly software: Improved Graphic User Interface (GUI) enables the users to handle electronic documents more easily. The need to manage thousands of electronic documents is a challenge facing software developers. 5. Operating systems: New operating systems have been shifting their focus from applications to documents. In fact, client–server operating systems and network management systems are document oriented.

1.16 Document Management technologies These technologies are classified as middleware and provide processing and function of managing documents. Table 1.4 summarises some document management technologies (Sprague, 1995).

16  ◾  Integrating Business Management Processes T Technology for

Description

Capture and creation

Technologies to digitise documents by scanning. Also include word processing and graphic software, joint and group authoring tools, digital cameras, audio capture devices and computer graphic systems.

Storage and organisation

Compound document architecture, distributed storage management software, integration of databases, documents and hypertext.

Retrieval and synthesis

Information retrieval enables the collection of documents based on keywords assigned by the indexer. Text retrieval is based on content-bearing words. Retrieval concept uses thesauri and word co-occurrence analysis to select documents that contain similar but different words to represent an idea.

Transmission and routing

Emailing is the primacy mechanism for transmitting documents and forms. Object independence allows the transmission of compound documents. Technologies for routing are workflow management software, access control mechanisms and intelligent documents.

Printing and display

Digital printers and copiers in the network along with paperhandling software, page layout languages, what you see is what you get (WUSIWYG) displays, production publisher (Xerox).

1.17 Managing Data across Data Life Cycle Record-keeping technologies should be designed to ensure compliance and data quality and reliability, and should be applicable to both paper and electronic records. Computerised systems that capture electronic data have to be validated at a level appropriate for their use. Validation includes an assessment of risk, controls to prevent and detect risks, and development of mitigation strategies for the data cycle (WHO, 2015). The data life cycle includes data creation and capture, data processing, data review, and data reporting, including handling of atypical data and date retention and retrieval. Effective risk management of the data life cycle involves a good understanding of the science and technology of data processing and their limitations. Good data processing systems ensure data integrity as well as effective and efficient business processes. Data integrity risks vary across the data life cycle and likely to be highest when data processing steps are ◾ ◾ ◾ ◾ ◾ ◾ ◾

Inconsistent Subjective, biased and unsecure Complex and redundant Unclear and not well understood Applied to manual or paper-based records Based on unproven assumptions Non-compliant with good data processing practices.

Document and Record Management  ◾  17

Therefore, in order to mitigate data integrity risks, organisations should ensure that data processing steps are well managed across the whole data life cycle.

1.18 Common Document Control Mistakes Apart from ISO 9001 requirements for document controls, other organisations and regulatory bodies such as the US Food and Drug Administration (FDA), Good Manufacturing Practices (GMPs), Information Technology Infrastructure Library (ITIL) and Sarbanes–Oxley (SOX) require organisations to have good document control procedures. Paper-based documents are more prone to mistakes than electronic documents (Anderson, 2016). The ten common document control mistakes are as follows: 1. Files are not backed up regularly: Most companies fail to monitor back-up procedures, and the problem crops up when documents are lost in the system. 2. Not saving revisions of documents under a new name: Organisations revise documents regularly to reflect changes. When the modified document is saved under the old name, the previous document gets replaced, and unless back-up copies are available, then retrieval of the copy is a daunting task. 3. Saving the documents in the shared hard drive: When access controls are not implemented, documents are revised, renamed, migrated elsewhere and even deleted. 4. Failure to use document templates: Templates provide a consistent approach to create and maintain documents throughout the organisation irrespective of who creates and maintains the documents. 5. Circulating paper drafts for review: When paper copies are used for document review, the administrator has to decide on the changes to incorporate, enter revisions and resubmit the document to the reviewer for clarification. The task is difficult when documents are distributed across all business units of the firm. 6. Distributing final documents without protection: When documents are not write-protected, an unauthorised person can make changes without the knowledge of the person responsible for the document. 7. Distributing paper documents to employees: Many organisations still use paper documents to circulate procedures and policies. Unauthorised changes can be made or even become lost. It is difficult to keep track of the distribution list relating to various types of documents. 8. Not managing obsolete documents: Unless inactive documents are retrieved from those who are using them, employees will keep on using obsolete documents and this will disrupt business activities. 9. Designing an organisation’s own document control system: Many software applications are in the market for document control, and organisations can choose one that is most appropriate for them. Attempts to create one’s own document control system can end up in failure unless the organisation has the expertise. 10. Ignoring audit findings: Document control is also subject to internal and external audits. These audit findings may include non-compliances such as the failure to follow procedures, uncontrolled procedures, failure to back-up as scheduled, and failure to retain and keep documents in legible condition. Unless timely corrective action is taken, the problems recur, causing disruption to business activities.

18  ◾  Integrating Business Management Processes

1.19 Document Management Best Practices There are seven best practices that help organisations implement an effective document management system (Williams, 2014).











1. Establish goals and key metrics for document management Document management systems have many applications in an organisation, and their goals must be specific. They must help users find documents easily, save on storage costs and enhance collaboration. Key metrics enable the progress towards the goals and establish a baseline with the current system. 2. Prioritise business processes and systems to automate Automation efforts should first focus on important business processes in keeping with document management goals, in order to improve customer response times, and it needs to be done while leveraging the accounting system to speed up financial transactions. Effective document management systems allow users to log-in, get what they want quickly, and logout with few clicks. 3. Consider additional automation opportunities Document management systems can automate numerous functions, integrate workflows, applications and notifications, and capture data with databases. By automating the process to capture documents, users can gather information and search content using workflows that efficiently detect document type and automatically transmit documents to the right individuals. 4. Capture content close to the point of origin The document management system should be able to capture electronic records without having to print and scan the record. By capturing documents as close as possible to the original, it is possible to eliminate unnecessary steps and improve data quality. Virtual printers and electronic records are able to automatically extract data from a document, reducing manual data entry. 5. Improve on paper-based processes Organisations still generate paper-based documents and attempt to replicate paper-based processes in the digital environment. An effective data management system improves efficiency by eliminating the unnecessary steps involved with paper-based documents. 6. Establish an indexing system compatible with business needs: Indexing documents has to match business needs. Too many indexing fields make it difficult to capture documents, especially when the information is entered manually. 7. Keep the user interface user-friendly A good document management has many useful features, but not all of these are essential to all users. The administrator should be able to set up the system so that the most useful elements are displayed on screen for a specific user.

Adopting IT to manage documents is a challenge faced by many information systems managers in the current technological environment. Most of the valuable information in organisations is in documents such as business forms, records, reports, letters, memos and policy statements, and is driven by document flows. An effective document management system enhances productivity and performance by applying new technology to documents and document processing.

Document and Record Management  ◾  19

References Adam, A. (2007). Implementing Electronic Document and Record Management. Boca Raton, FL: Auerbach Publication. Adams, A. (2018). A History of ancient book and writing materials. Retrieved March 10, 2019 from https:// brewminate.com/a-history-of-ancient-book-and-writing-materials/. Afshar, M. and Ahmad, K. (2015). A new hybrid model for electronic record management. Journal of Theoretical and Applied Technology, 18 (3), 489–495. Anderson, C. (2016). How to reduce document control mistakes. BizManaulz. Retrieved January 20, 2018 from https://www.bizmanualz.com/improve-business-processes/how-to-reduce-document-controlmistakes.html. Dartmouth College. (n.d.). Document life cycle: Definitions, supporting technologies and application. Retrieved January 16, 2018 from http://www.dartmouth.edu/∼library/recmgmt/forms/DocLifeCycle.pdf?mswitchredir=classic. eFileCabinet. (2014). Short history of document management. eFileCabinet. Retrieved January 16, 2018 from http://www.efilecabinet.com/document-management/. Government of Hong Kong. (2011). Good record management practices. Government Records Service. Retrieved January 17, 2018 from http://www.grs.gov.hk/pdf/grmp_(Eng).pdf. History World. (n.d.). History of writing materials. Retrieved January 16, 2018 from http://www.historyworld.net/wrldhis/PlainTextHistories.asp?historyid=aa92. Microsoft. (2016). What is document management. Developer Network. Retrieved January 16, 2018 from https://msdn.microsoft.com/en-us/library/dd163514.aspx. National Archives of Scotland. (2016). Record management. Retrieved January 16, 2018 from http://www. nas.gov.uk/recordKeeping/recordsManagement.asp. Read, J. and Ginn, M. L. (2016). Records Management (10th Ed). Boston, MA: Cengage Learning. Sampson, K. L. (2002). Value Added Records Management: Protecting Corporate Assets, Reducing Business Risks (2nd Ed). Westport, CT: Quorom Books. Sprague, R. H. (1995). Electronic document management: Challenges and opportunities for information systems managers. MIS Quarterly, 19 (1), 29–50. Standards Australia. (2002). Records Management. Part I: General. Sydney: Standards Australis International Limited. Sutton, M. J. D. (1996). Document Management for the Enterprise: Principles, Techniques and Application. New York: John Wiley & Sons. Tingium, J. (2016). 5 Types of business documents. Demand Media. Retrieved January 15, 2018 from http://smallbusiness.chron.com/5-types-business-documents-22842.html. United States Institute of Peace. (n.d.). Truth commission: South Africa. Retrieved May 17, 2016 from http:// www.usip.org/publications/truth-commission-south-africa. Waller, R. (2011). What Makes a Good Document? Technical Paper 2. Reading, MA: University of Reading. WHO. (2015). Guidance on Good Data and Record Management Practices. Working document QAS/15.624. Geneva: WHO. Williams, M. (2014). 7 Essential document management practices. Docuware. Retrieved January 24, 2018 from http://blog.docuware.com/blog/2014/09/7-essential-document-management-best-practices.

Chapter 2

Communication 2.1 I introduction The earliest known communication problem has been recorded in the Bible (Genesis 11:9), where the descendants of Noah began to build a city and tower (known as the Tower of Babel) in a place called Shinar. However, God was not pleased and he realised that nothing is impossible to achieve by people working as a team, speaking the same language. God then made the people speak in different languages so that they could not work as a team on building the city and the tower. The story highlights an important point that communication is at the heart of all human transactions. The fate of Air New Zealand Flight TE 901 to Antarctica in 1979 was the result of a colossal communication failure. On November 28, 1979, this DC10 aircraft crashed into Mt Erebus in Antarctica instantly killing all 275 on board. Amidst controversies surrounding several investigations and court actions, one undisputed fact emerged. The night before the flight airline flight planners made a correction to the earlier flight plan which they thought was a minor adjustment. But, in fact, the change was so significant that it shifted the flight path from McMurdo to a path above Mt Erebus. This change was not communicated to the flight crew who believed that they were flying above McMurdo (New Zealand Airline Pilots’ Association (NZAPA, 2009). Communication can also be used to boost the image of a company and promote social responsibility. One such company is Google. In November 2014, Google announced that it would pledge $2 for every dollar donated through its website, https://onetoday.google.com/page/fightebola. The corporate social responsibility campaign was so popular that a “Google ebola” search generated over 22 million results with the posts, news, articles and intentions of this initiative. By November 2015, it has raised $75 million to combat ebola (Campos, 2014). Communication is a two-way process, and it is successful when all the parties involved have a common understanding of the communicated message. Communication gaps destroy this common understanding. It can involve several iterations before mutual understanding is achieved. Business communication is the thread that runs through all the management functions of planning, organising, staffing, coordinating and controlling. It is goal oriented and the organisation’s rules, policies and procedures have to be communicated to all within it. The process is governed by certain rules and norms of the organisation. Technological progress has provided numerous channels for effective communication.

21

22  ◾  Integrating Business Management Processes

2.2 Definitions Communication: It is a two-way process of exchanging ideas, information and feelings between two or more people. Symbols: These are things that represent something else. Active listening: It is the process of analysing and evaluating a sender’s message in order to understand the feelings or the true meaning of the message. Non-verbal communication: It is the transmission of a message without the use of words. Perception: It is the process by which a person assimilates, interprets and uses sensory data.

2.3 the importance of effective Communication Effective communication is an important element for the success of every organisation and for people within the organisation for performing their roles as effective leaders, managers, supervisors and employees. It reduces conflicts and improves understanding among employees in the organisation. Effective communication is important for three primary reasons (Stoner et al., 2007): 1. Communication plays a significant role in all managerial functions. Plans are developed through communicating with the relevant people in the organisation. Managers organise to implement the plans by communicating with people and defining their roles and responsibilities. The regular exchange of information promotes motivation and demonstrates leadership. Communication is also essential for controlling work practices. 2. Globalisation of business has created a multicultural workforce, and effective communication enables managers to capture the diverse range of talents in the workforce. There is no universal business language. Conducting business internationally requires a sound understanding of culture, values and the language of foreign countries. Communication, like any intellectual activity, can be enhanced through encountering new challenging opportunities. 3. It is a well-known fact that managers spend a great deal of time communicating via various channels such as face to face, electronic, telephone and video links. Even when managers are not verbally communicating, they may be dictating memos, letters, writing reports or even reading communications received. Managers who are engaged in these activities are also interrupted by communications. Mintzberg (1990) defined three managerial roles where communication is a key element:

1. Interpersonal role: In this role, the manager acts as a figurehead performing symbolic duties as the representative of the organisation, as a leader creating an environment to motivate employees and as a liaison officer developing and maintaining communication with external stakeholders. 2. Informational role: In the informational role, a manager receives all types of information that are relevant and useful to the organisation, disseminates information from outside the organisation to those inside and as a spokesperson transmits the information from inside the organisation to outside. 3. Decision-making role: In this role, managers initiate change and adapt to the environment to create new projects, resolve unexpected situations, allocate resources, negotiate with individuals and interact with other organisations.

Communication  ◾  23

2.4 Factors influencing Communication Four factors influence the effectiveness of communication: (a) formal channels of communication, (b) authority structure, (c) job specialisation and (d) information ownership (Stoner et al., 2007).

2.4.1 Formal Channels of Communication A formal channel of communication is a mode of communication that is endorsed and within the control of managers. Newsletters, memos and reports and meetings are all formal channels of communication. This mode of communication affects the communication process in two ways: 1. Formal channels cover a large network of business units with the growth and expansion of the organisation. However, effective communication among several dispersed branches is more difficult to achieve than in a small retail store. 2. Formal channels have the tendency to block the free flow of information between organisational levels. A shop floor person may communicate with their immediate supervisor rather than with the plant manager about issues affecting their work. The restriction imposed by the hierarchical structure prevents senior managers from receiving unnecessary information. But this interaction has the disadvantage of higher-level managers not receiving information that they should get. The banking sector has been using electronic communication and information technology for decades. Security First Network Bank (SFNB) in the USA has expanded the communication network to the customer interface and is the first bank in the world to gain approval from the Federal Deposit Insurance Corporation (FDIC) and US regulators for offering all its banking of its products and services entirely via the web. Within one year after receiving the federal charter to offer internet banking facilities to customers, SFNB had more than 1,000 customers from all 50 states in the USA using its internet banking service (Westland & Clarke, 2001).

2.4.2 Authority Structure The organisation’s hierarchical structure has a similar influence on communication effectiveness. Hierarchical position and power distance determine who will communicate with whom. The content and accuracy of information will also be governed by this authority difference. A shop floor person communicating with the CEO may demonstrate respect, politeness and formality.

2.4.3 Job Specialisation Job specialisation usually facilitates communication within a specialised group because they share the same jargon, goals, work environment, tasks and personal styles. However, among different specialised groups, communication is likely to be difficult.

2.4.4 Information Ownership Individuals in an organisation possess unique information about their job and the way tasks are carried out. For example, a machine operator may be able to respond to a machine failure through experience. A human resource manager may have developed a unique method to settle conflicts.

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A sales representative has unique knowledge about each of the customers. Usually individuals are reluctant to share such information with others because the holders of this information consider it as power. This part of their knowledge is called tacit knowledge. Therefore, open communication does not take place in the organisation. Progressive companies motivate and encourage their employees to share this tacit knowledge.

2.5 Styles of Communicators Communication effectiveness is enhanced by understanding other people’s social style. In basic terms, social style is a categorisation of the way an individual interacts interpersonally with others and it has two dimensions: assertiveness and responsiveness. Misunderstandings often arise when there is lack of awareness of another person’s working style. Assertiveness is the degree to which an individual is seen to be forceful or directive. Responsiveness represents the degree to which individuals are seen to be emotionally responsive or expressive, or emotionally controlled. Based on this concept, the four social styles – analytical, amiable, driver and expressive – can be plotted on a grid in relation to the two dimensions (Figure 2.1) (Bolton & Bolton, 1984).

2.5.1 Analytical Style of Communicator These people need hard data, real numbers and are not satisfied with individuals who are unsure of information. Accuracy of expression and facts is characteristic of an analytical style communicator. Communications are presented logically and dispassionately, and the receiver of the message considers the sender to be an expert. However, an analytical style of communicator may be perceived as cold, unemotional and tense, and they can exhibit a low level of emotional self-control and assertiveness.

2.5.2 Driver Style of Communicator These people focus on the bottom line and require clear, concise, relevant and focused information. The sender has to be decisive and efficient. They are high in assertiveness and low in response.

High Responsiveness

Amiable

Expressive

Analytical

Driver

Low Low

Figure 2.1  Communication styles.

Assertiveness

High

Communication  ◾  25

2.5.3 Expressive Style of Communicator These people tend to focus on the big picture and take a creative approach to problems. They enjoy themselves while working and love to take risks to achieve their goals. Their message is designed in a way that is enthusiastic, expressive, friendly, flexible and open to possibilities. These communicators avoid too much detail. The expressive style of communicator is high in both assertiveness and emotional response.

2.5.4 Amiable Style of Communicator These are caring people who take relationships seriously. They are cooperative and supportive and interested in information about the skills and interests of other people. The amiable style of communicator loves to receive feedback. Low assertiveness and high responsiveness are characteristics of the amiable style of communicator.

2.6 Communication Process The process of sharing ideas, attitudes, values, opinions and information among two or more people in communication requires a sender who initiates the process and a receiver who perceives and receives the message. Managerial functions are conducted through communication. Managers need access to relevant information for decision-making, and they have a network of contacts that facilitate information gathering, interpretation and dissemination. Their key role enables them to monitor the environment for changes that could affect the organisation and share this information with others. The process of communication is illustrated in Figure 2.2. Basic elements of the communication process are the sender, encoding, the channel of communication, decoding, the receiver, feedback and the response to feedback. Each of these elements is described below (Hellriegel et al., 2002).

2.6.1 Sender The sender is the source of information and the initiator of the communication process, and they encode the message and select the mode of transmission.

2.6.2 Encoding Encoding is an important element of the whole process. The message is converted into a medium: written, visual or spoken. The sender attempts to seek concordance of meaning with the receiver. The message is encoded using the sender’s experience, values, attitudes, language, knowledge, gender, age, etc. These are the filters and are often unconscious influences in the way we say or write things (Ellis, 2005; De Silva, 2013). The application of the following five principles improves the encoding accuracy: 1. Relevance: The message should be meaningful and significant, and words, symbols or gestures should be carefully selected. 2. Simplicity: Construct the message in the simplest terms, minimising the number of words, symbols or gestures.

26  ◾  Integrating Business Management Processes

Additional feedback from sender Decoding

Encoding Idea

Message Sender

Encoding filters Experience Value Attitude Language Gender Age

Channel Noise Verbal and non-verbal feedback

Message Receiver

Decoding filters Content Language Timing Emotion Culture Situational content Experience

Figure 2.2 Communication process.

3. Organisation: Organise the message in a meaningful way to promote understanding. 4. Repetition: Re-state the significant points in the message, particularly in spoken communication. 5. Focus: Emphasise the essential points in the message. Key points can be underlined or italicised for clarity. In verbal communication, key points can be emphasised by changing the tone of voice, pausing, gesturing or using appropriate facial expressions.

2.6.3 Message The message contains verbal (spoken) or written symbols and non-verbal clues which represent the information that the sender wants to transmit (Hellriegel et al., 2002; Jayasree, n.d.).

2.6.3.1 Verbal Communication Verbal communication involves the use of language and meaning (either spoken or written) and contributes to about 45% of all communications. Spoken communication is conducted face to face, by telephone and via other electronic means. The words in the message are either concrete or abstract. Concrete words (e.g. chair) are precise and convey ideas clearly. On the other hand, abstract words such as intelligence and beauty are subject to interpretation based on the filters used in decoding (Jayasree, n.d.). Jargon may also be used in the message to clarify the idea. However, excessive use may hinder communication, especially when the receiver has no understanding on the jargon. Effective verbal communication requires the sender to (a) encode the message in a way that is easily understood by the receiver and (b) organise the message to emphasise clarity and avoid distractions.

Communication  ◾  27

2.6.3.2 Written Communication Although a spoken message is transmitted instantly, organisations employ written communication in many forms such as reports, memos, letters, emails and newsletters. Written messages are essential if information has to be collected from different locations or distributed to a wide network and records have to be kept for future use. The following guidelines are useful to present a clear written message: ◾ Draft the message with the receiver in mind. ◾ Contents should be well thought out ahead of time. ◾ Make the message as brief as possible (if the message is long present a summary at the beginning). ◾ Organise the message carefully starting with important points.

2.6.3.3 Non-verbal Communication Non-verbal communication (often referred to as body language) is the expression of feelings, emotions, attitudes and thoughts through body movements, gestures, eye contact, etc. About 60% of the message in transmitted through facial expressions and other methods of non-verbal communication. Components of this type of communication are as follows (Management Study Guide (MSG), 2015a; Jones, 1998): 1. Communicating through facial expressions, gestures and postures: Folding one’s arms or legs is considered a defensive position. People in Eastern countries often use gestures with arms during a conversation. They may raise a finger to emphasise a point, but in western countries this gesture is considered a threat. 2. Communicating through eye contact: Keeping eye contact demonstrates an interest in the transmitted message. In the USA, brief eye contact is appropriate in many situations. However, brief eye contact can also be interpreted as a lack of interest in the subject. Also, some cultures interpret prolonged eye contact as a threat or a sign of romantic interest. 3. Touching: This is the most powerful form of non-verbal communication. Emotions such as anger, interest, trust, love and warmth can be communicated through touching. People also vary in their response to touching, for instance, a stranger touching a child is taboo in western society. 4. Proximity: People use the distance between them and other people to convey messages. Each individual has a psychological space around them. Invading the physical personal space around them is sometimes interpreted as an invasion of privacy. The distance between people when communicating varies according to their relationship. 5. Time: Sometimes how rapidly one responds to a message is a form of non-verbal communication. An employee who fails to meet the superior at the appointed time conveys a nonverbal message that the meeting is not important. 6. Vocalism: The pitch, volume, speed and pauses of a spoken message can convey the emphasis placed on spoken words. 7. Physical appearance: The perception of a person is often based on the physical appearance of the individual.

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2.6.4 Communication Channels and Media The path that the message follows from the sender to the receiver is known as the channel. The two components of the channel are the richness and the media through which the message is transmitted. Channel richness indicates the amount of information that can be transmitted by the message and it has three characteristics (Mor & Alexandra, 2015): (a) the ability to process multiple clues simultaneously, (b) the ability to provide feedback and (c) the ability to establish a personal interaction (Daft, 2008). The information richness of various communication media is depicted in Figure 2.3. Face-to-face communication is the richest communication channel, and it provides both verbal and non-verbal cues. The interaction between the sender and the receiver enables feedback and immediate clarification. A telephone conversation is less rich than face-to-face communication and non-verbal cues are hidden from the receiver, but the human voice can still be heard and carries emotions such as anger and laughter. Electronic messaging has now replaced the telephone, but cues such as eye contact, gaze, posture and other non-verbal cues are missing. Email technology has improved during the last few years, and messages can be transmitted rapidly with costs lower than long-distance telephone calls. Other forms of electronic communication are instant messaging, the World Wide Web, intranet and video conferencing, which vary in information richness. An intranet enables the transmission of messages to a large number of people distributed over a wide network in different locations simultaneously. Companies employ company web pages, web logs or blogs to keep in touch with suppliers, customers, employees and other stakeholders as they allow rapid feedback. Written media such as memos and letters can be personalised, but only written cues are provided and feedback is slow. Flyers, bulletins and computer-generated reports are impersonal and not directed to single individuals. They are very low in information richness and do not provide feedback. The advantages and disadvantages of widely used communication media are presented in Table 2.1 (Melcrum.com, 2015; Communication Tool Box, 2008).

2.6.5 Communication in Organisations Apart from the information richness of communication media, there is a hierarchical pattern in communication in organisations. The pattern includes downward, upward and horizontal formal and informal channels (Hellriegel et al., 2002). Channel

Figure 2.3

Richness

Advantages

Disadvantages

Face-to-face

Highest

Telephone

High

Personal, twoway, rapid feedback

No record, unprompted, hard to distribute

Email

Moderate

Memo

Low

Report

Lowest

information richness of channels.

Provides a record, planned, easily distributed

Impersonal, one way, slow feedback

Communication  ◾  29 T Media

Advantages

Disadvantages

1

Face to face

Provides both verbal and non-verbal cues Enables feedback Confidential

No records Unsuitable for large organisations or audiences Unsuitable for some people Poor retention No legal validity

2

Telephone

Easy and quick to use Less expensive Can reach any location Enables tracking Can express emotions

Non-verbal cues hidden Can be used for illegal activities Network coverage Cause miscommunication Miss calls

3

Email

Rapidly reach large audiences Cost effective and simple to use Consistent and controlled message Reaches receiver instantly Good for communicating information

Access limitations Impersonal and open to misinterpretation Information overload Do not know whether the message has been read Cannot prioritise No non-verbal cues

4

Written

Availability of record Possible to organise the message Prevents wastage of time and money Accurate presentation Enables verification Legal validity

Expensive Time consuming Limited confidentiality No flexibility Slow response Delay in decision-making Maintenance of records No non-verbal cues

5

Reports

Provide information to the management Identify strengths and weaknesses Monitor performance Regulatory compliance

Cost of time and money Inadequate information Authoritative Need skills in preparing Poor quality information No non-verbal cues

6

Meetings

Can be personal and relevant Opportunity for discussion and feedback Interactive Enhance understanding

Success depends on the leader Time commitment for all involved Information overload

7

Intranet

Rapid and consistent Good for information store and distribution Promote involvement and discussion

Access limitations Relies on people seeking information Need time to read Difficult to monitor Can be abused

(Continued )

30  ◾  Integrating Business Management Processes Table 2.1 (Continued)  Advantages and Disadvantages of Communication Media Media

Advantages

Disadvantages

8

Print magazines

Consistent message to all Can read it at leisure Promote feedback and response

Can be seen as biased and not credible Information outdated quickly Difficult to make information relevant to all

9

Notice boards

Visible and may catch reader’s attention Good for instruction and information

May not be read No owner May be overused

10

Video and audio

Creative and entertaining Dealing with real people Make people and places accessible Controlled message Cover long distances Good for information and instructions

Video presentations are expensive Not interactive on its own Not suitable for mobile workers Can be seen as company propaganda Relies on people prepared to listen

11

Social media

Access to information updates Source of learning and education Creates awareness As a media for promotion

Hacking Cyberbullying and crime Health issues Addiction Can damage the reputation

2.6.5.1 Top-Down Channels Downward channels involve the means of sending messages from the management to employees in the organisation. Information on special promotions, job descriptions, company policies and procedures and planned activities can be easily communicated. However, it has its limitations: it can be misused and it is a one-way channel that does not promote a response or involvement.

2.6.5.2 Bottom-Up Channels Upward channels are used by employees to communicate with the management on day-to-day issues affecting their jobs. This channel is used by firms to improve efficiency and effectiveness. Employees use this channel to provide responses to messages they have received. It gives the opportunity for employees to voice their opinion and grievances. A major disadvantage of upward communication is that employees may not want the management to know about their poor performance.

2.6.5.3 Horizontal Channels Horizontal channels are the means of cross-communicating across business units in the organisation and with customers and suppliers. Messages communicated across horizontal channels are

Communication  ◾  31

usually related to company activities, information that needs to be shared and problems at work. It is an important channel, especially for process workers, because they can communicate among themselves to solve problems.

2.6.5.4 Informal Channels Informal channels include all informal means of communication between the sender and the receiver downwards, upwards and horizontally. A grapevine is an organisational informal communication channel along which messages are transmitted in any direction. This mode of communication is based on social interaction and not on organisational hierarchy. The term “grapevine” is derived from a Civil War practice of hanging telegraph wires loosely from tree to tree. A grapevine can carry incorrect information that may not be beneficial to the firm, so companies must exercise some sort of control to prevent abuse.

2.6.5.5 External Networking Managers develop close informal relationships with talented people outside the organisation through meetings, conferences, trade shows and other gatherings. Through external networking, managers provide mutual support and share relevant information. Siemens, the world’s largest engineering conglomerate, has established a very effective way of internal communication with its 65,000 employees in the USA (Kass, 2012). According to Shelly Brown, Head of Internal Communication, the aim is “to foster engagement while helping employees understand the company’s business objectives and how they fit into them”. Brown and her team located in Siemens’ headquarters in Germany tailor the messages for the US audience working in the business units of Industry, Healthcare and Energy. The following channels are used for internal communication: ◾ Online communication: The intranet has become the main internal communication channel. It gives employees the opportunity to respond to every article and rate them. ◾ Video and blogging: The content is more important than technical quality. It also uses blogging platforms to alert employees about news story postings on the intranet via Twitter. ◾ Executive communication: The CEO of the Siemens industry sector in the USA uses videos to deliver corporate messages to employees and blogging to communicate the company’s vision. ◾ Print publication: The monthly global magazine Siemens World publishes articles on corporate programmes, values, compliance and any significant happening online that Siemens wants to promote. Since many employees depend on email to receive information about the company, an HTML version of the newsletter is created to share information to colleagues across the globe.

2.6.6 Receiver The receiver receives the message and decodes it to facilitate understanding. The ability to listen and comprehend is an important element in reception. The receiver must exercise control over the communication process. Reception of the message is successful when the sender understands

32  ◾  Integrating Business Management Processes

what the receiver wants and why they want it. The receiver in turn sees or hears the message using filters from their own perception. The main requirement of the receiver is the ability to listen, and it involves paying attention to what is heard. Managers spend about 75% of their time in communicating, and of this, half the time is spent on listening to others. Better listening improves the communication process. Most people are able to recall immediately only about 50% of what they have heard, but after 2 months they can recall only about 25%. Using several media to communicate improves the effectiveness of communication (Daft, 2008; Cyr, 2004).

2.6.6.1 Listening and Understanding Real communication is achieved when the receiver listens with understanding. It involves seeing the expressed idea and attitude from the sender’s point of view and their frame of reference about the expressed message. However, the listener has to overcome several obstacles to this listening approach (Rogers & Roethlisberger, 1991). Lack of courage: When a receiver listens with understanding, they are compelled to see things the way the sender intended. This means the listener listens without evaluating and has influenced the receiver’s attitude. Most people are not prepared to take that risk. Heightened emotions: When emotions run high, the listener is unable to understand the frame of reference of the sender of the message. In such situations, a third party is able to defuse the situation and listen to both parties with understanding to clear any misunderstandings. The advantages of such an approach are a decrease in defensiveness, exaggerated statements, evaluation and critical behaviour. Large crowd: Understanding between two groups who are geographically remote presents new problems. Similar problems arise when representatives of two groups try to communicate. A moderator will be able to listen to both parties and present the facts in understanding each other’s position without evaluating. This approach has proven effective even when emotions run high.

2.6.6.2 Active Listening Active listening is the process used by the receiver to facilitate communication and enhance understanding and it has several benefits (Cyr, 2004): (a) saves time and promotes understanding; (b) helps assess a situation accurately; (c) enables clarification of the message and encourages reception and (d) reduces emotions. Some guidelines for active listening: Relax and pay attention to the sender. Listen with your whole body by maintaining eye contact and showing both verbal and non-verbal cues. Step 1: Acknowledge the speaker’s thoughts, feelings and ideas: Use non-verbal cues and comments to indicate your reception. Step 2: Reflection: Repeat what has been said in different words – paraphrasing. It clarifies the communication and slows the pace of conversation. Step 3: Use open-ended questions for clarification: Check your interpretation of what has been heard by asking questions beginning with “what”, “how”, “please clarify” or “describe”. Step 4: Summarise and clarify: Understand the speaker’s intent and avoid selective perception, as the latter leads to a predetermined response and inhibits true understanding.

Communication  ◾  33

Step 5: Express your opinion: Do this if requested by the speaker or if they are willing to hear your voice.

2.6.6.3 Perception Perception is the way the message is sent by the sender and understood by the receiver. It is influenced by: (a) what individuals see; (b) experience stored in memory and (c) the meaning attached to the message. A raised finger during a conversation can be interpreted as emphasising a point or as a threat. Selective perception and stereotyping are two problems associated with perception: Selective perception: It is the process of filtering the information that a person wants or needs to avoid. Often during presentations in conferences, individuals listen to information that is of interest to them and screen out information that they do not need. Process workers pay close attention to manufacturing problems, and financial officers tend to listen to financial information. Employees filter out information on areas of no interest to them and focus only on information that is directly applicable to them (Hellriegel et al., 2002). Stereotyping: It is the process of making judgements about individuals solely on the basis of their gender, race, age or other characteristic that defines them. In New Zealand, in the 1990s, most of the dairies (corner shops) were owned by people of Indian origin. On my day off, I was painting my fence in the garden. A person who was new to my neighbourhood saw what I was doing and asked, “Did you close the shop early?” I was not offended and when I explained who I was he was very apologetic. My neighbour’s perception was that anybody who has a dark skin is of Indian origin and owns a corner shop.

2.6.6.4 Perceptual Preferences A good communicator takes into account the perceptual preferences of the receiver of the message, and this person may be naturally visual, auditory or kinaesthetic. An understanding of this aspect of communication is essential in delegating tasks. Visual people retain information best when they are shown what is required and they tend to put into pictures what they see or hear. Auditory individuals understand the message when what they see is supported by what they hear. They interpret the message by the sender’s tone, pitch or other non-verbal signals in the message. Kinaesthetic people understand the message by actually doing and they prefer a demonstration (Team FME, n.d.).

2.6.7 Decoding the Message Decoding is the process by which the receiver interprets the transmitted message and translates it into meaningful information. It involves two steps: (a) the receiver perceives the message and (b) the receiver interprets it. The receiver’s perception is influenced by factors such as content, language, timing, emotion, culture, situational content and experience. In general, the closer the match between encoding and decoding, the more effective the communication has been. The match can be facilitated by a mutual understanding between the sender and the receiver (Hellriegel et al., 2002).

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2.7 Seven C’s of Communication The seven C’s of communication are applicable to both oral and written communication (MSG, 2015b): 1. Completeness: Communication must convey all the facts required by the receiver. The sender needs to understand the receiver’s mindset and their social style. A complete message has the following benefits: – Complete communication develops and enhances the reputation of the organisation among all stakeholders. – Avoids the need to repeat or clarify the message. – Provides additional information and leaves no room for error. – Helps in better decision-making by the receiver as they have all the relevant information. – Creates awareness among the recipients. 2. Conciseness: This means expressing the message clearly without affecting the other C’s of communication. The following are features of conciseness: – It saves time and money. – The message focuses on essential points without unnecessary detail. – The message is short with a limited number of words. – It is more appealing and comprehensive to the receiver. – The message is non-repetitive. 3. Consideration: This means understanding the receiver’s mindset, which includes taking into account the viewpoints, background, education level, etc. of the audience. Design the message to suit the audience, maintaining self-respect and not adversely influencing their emotions. The following are features to consider: – Demonstrate empathy to draw the attention of the audience. – Focus the message on “you”. – Emphasise the possible rather than the impossible (encouraging words such as committed, warm, thanks, healthy and help are appreciated by the audience). 4. Clarity: This implies focusing on one specific message at a time rather than attempting to overload the audience. A clear message is easier to understand, enhances the meaning of the message, and has appropriate, exact and concrete words. 5. Concreteness: Concrete messages are particular and clear and not vague or general, and they develop confidence in the audience. The messages have specific facts and figures, clear words that promote reputation and the content cannot be misunderstood or misinterpreted. 6. Courtesy: This implies demonstrating the expression of the sender and respecting the understanding of the receiver. The sender is sincerely polite, judicious, reflective and enthusiastic. A courteous message considers both the viewpoints and the feelings of the receiver, is positive and focuses on the audience. Expressions in the message show respect to the audience and they are not biased. 7. Correctness: This implies the accuracy, correctness and grammar of the message. The following are features of a correct message: – It is exact, correct and timely. – It enhances the confidence of the audience. – It has a greater impact on the receiver. – The facts and figures of the message are accurate and precise. – The message uses correct grammar and language.

Communication  ◾  35

2.8 Barriers to effective Communication In order to improve the effectiveness of communication, organisations must strive to identify the hurdles to the process. These hurdles hinder the sending and receiving of messages by distorting or even blocking intended messages. Barriers to communication can be classified as organisational, cultural, physical, semantic and socio-psychological (Team FME, n.d.; Hellriegel et al., 2002; Behera & Tripathy, 2009).

2.8.1 Organisational Barriers The structure of the organisation has a major influence on the communication process. Hierarchical organisations have more levels of authority and greater differences in status attached to the job. In contrast, flat organisations have fewer levels of authority and equality in status. The degree of specialisation in the firm can also influence the communication process. a. Authority and status levels: The authority level of a person is their formal position in the organisation. A person in a higher formal position has higher authority in the organisation. Status is the person’s social rank in the organisation, and a person of higher status is held in high esteem. When authority and status levels differ, communication problems can arise. As the number of levels of authority increases, so does the distance between the sender and the receiver of the message. Even among persons at the same level of authority, someone holding a higher status has a greater influence. Organisations tend to overcome this barrier by introducing video messaging. b. Job specialisation: Organisations employ professionals in almost every business unit. Their specialised knowledge enables them to communicate effectively with others in the same profession using jargon and technical knowledge. However, communication with people outside the field is difficult. A production engineer might have difficulty in communicating problems in equipment with marketing personnel. Misunderstanding causes miscommunication and the whole message gets distorted. In a diabetic clinic in the UK, the nurse demonstrated the method of injecting insulin using an orange. When the patient returned for a review, he told the nurse that he is not fond of oranges and wanted another fruit to be used for injecting and eating! Professionals sometimes use jargon deliberately to mislead a manager who is not familiar with their technical jargon. c. Different goals: When individual business units have their own goals, these can interfere with the overall performance of the organisation. The goals can be conflicting and may even lead to competition among the business units in the same organisation. Competing interests arise from miscommunication created by the different perspectives of the personnel involved. Open communication among business units with differing goals resolves issues and makes communication more effective. ABB, the Zurich-based power technology and automation company, was at the brink of bankruptcy in late 2002. A reason for its failure was the conflicting profit goals and incentives of different business units. Key decisions about big power project bids involved negotiating with these different business units which made the process difficult and inefficient. A new CEO, Jürgen Dormann, analysed the decision failures and consolidated the business units and centralised profit and loss accountability. This change restored ABB’s ability to generate fast, competitive bids (Blenko et al., 2010).

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2.8.2 Cultural Barriers These barriers are due to individual and cultural differences and diversity issues. Organisations operating in global markets need to be aware of these differences and the meanings attached to messages. For example, verbal communication in Spanish is colloquial and direct. Appropriate gestures and eye contact are used to convey the message. Therefore, it is useful for companies dealing with Spanish organisations to have a native speaker translate the message so that the intended idea is correctly conveyed. One of the major problems in communication is stereotyping, and this is often associated with previous experience. A message conveyed as “urgent” may have different meanings in different countries.

2.8.3 Physical Barriers These barriers refer to the environment in which communication takes place. They include a large number of barriers ranging from noise and bodily movement, to the ill health of either or both of the sender and receiver, to confusion or discomfort. Lack of privacy also hinders good communication. In oral communication, other barriers such as poor seating arrangements create a distance between the sender and the receiver, and fatigue cause miscommunication. In written communication, illegible writing and bad photocopies hinder communication. A few years ago, I was invited to deliver the keynote address at a session of the Sri Lankan Pharmaceutical Society. The session was held on the first floor of the building and the ground floor was occupied by the gym. During the session, very loud music from the gym drowned what I was saying and it was a complete disaster. Organisations carry out a wide variety of tasks, and the management needs to provide appropriate environments to suit different tasks to enable the staff to communicate effectively. Providing rooms to ensure privacy during communication, open plans and facilities to work from home are some options available for organisations to promote effective communication.

2.8.4 Semantic Barriers These are barriers relating to language and vary from spoken words to graphics, charts, etc. Linguistic difficulties are some of the major barriers in communication between various cultures. Potential problems are: (a) related to the basic meaning of words; (b) caused by the connotations of words, e.g. the specialised expanded meaning and (c) due to differences in intonations in speaking. Attaching different meanings to the same word by different industries complicates the issue. Paralinguistics plays an important role in overcoming linguistic barriers in communication. The sender of the message should not assume that the meaning of the message is same for all the people they are interacting with. HSBC Bank introduced the slogan “assume nothing” in their campaign to enter into the overseas market. Unfortunately, some countries translated the slogan incorrectly as “do nothing”. This translation damaged the reputation of the bank, and in 2009, HSBC Bank spent millions of dollars to scrap its 5-year-old “assume nothing” campaign. The slogan was rebranded to “The World’s Private Bank” at a cost of $10 million (Brooks, 2013).

2.8.5 Socio-Psychological Barriers These barriers are associated with social and psychological barriers and they include personal experience, filtering and psychological distance. People’s backgrounds, perceptions, values, biases,

Communication  ◾  37

needs and expectations are elements of experience. Encoding of messages by the sender and decoding by the receiver are influenced by personal experiences. Miscommunication results when the sender’s field of experience does not match that of the receiver. What we see and hear is filtered by what we are emotionally influenced to see and hear, and this is caused by individual needs and interests which guide our listening. The psychological distance between individuals is caused by the attitudes of individuals. The communication signals of the sender and the attitude adopted portray their self-esteem and confidence. The sender may adopt an aggressive attitude to demonstrate confidence which may be interpreted as arrogance. It may also be due to the stress level experienced by the sender. An effective communicator is aware of their own bias, which can influence the communication process.

2.9 How to overcome Communication Barriers Communication is the key to strong and effective business relationships between the organisation and its customers and between employees in the same organisation. In a workplace, some or all of the barriers can exist in the organisation. There are many feasible ways to overcome these barriers to make communication more effective and successful. The organisation must make a genuine effort to identify and resolve the issues surrounding the barriers (Koneru, 2008). Table 2.2 shows some of the more acceptable and easily practicable ways and means of overcoming hurdles in communication. T Communication Barrier

How to Overcome

Organisational

Provide opportunities for communicating in all directions (upwards, downwards and lateral) employing tools such as employee surveys, open-door policies, company newsletters, memos and minutes of various group meetings

Cultural

Demonstrate empathy, avoid asserting your own background and culture on others, diversity training, develop your own understanding and background of others, their perceptions and scope of knowledge, avoid stereotyping and do not assume generalised behaviour

Physical

Select a suitable location, minimise distractions and interruptions, ensure visibility and audibility, choose the most appropriate transmission medium, use proper seating arrangements and ensure general environmental comfort

Semantic

Use simple language, graphics, charts, symbols, audio-visual resources, improve listening skills, avoid jargon, use a common language and be competent about the topic

Socio-psychological

Motivate listeners, encourage feedback, plan and clarify ideas and opinions, avoid prejudices and assumptions and have an open attitude towards others

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2.10 How to improve the effectiveness of Conversations Managers have often underestimated the importance of conducting a productive conversation with employees. There are several strategies to help improve conversations (Barker, 2010; Whetten et al., 2000): 1. Clarify objectives: Formulate the objectives clearly at the start. The information to be communicated and the expected outcome should be clear to both the sender and the receiver. 2. Organise your thinking: Organise the communication in a logical manner to promote understanding. Thinking is a two-stage process: Thinking about the problem and thinking about a solution associated with the conversation. Unstructured conversation confuses the receiver and fails to achieve the desired outcome. The most important communication skill is the ability of the sender to transmit a clear, precise message accurately. 3. Manage your time: Conversations proceed at varying rates. Generally, an effective conversation starts slowly and gets faster. Choose a time and place convenient to both parties and be flexible to postpone it if the time and place are not appropriate. 4. Establish common ground: In order to convey the message, it is important to identify common ground such as interests, issues and the “language” to be used. The conversation starts in the sender’s own territory and, as it proceeds, it crosses over to the receiver’s territory. The sender has to gain the receiver’s permission to do so. The receiver should be the right person to receive the message and it may be necessary to inform the person in advance. 5. Avoid argument: When communicating, arguments affect the understanding and delivery of the message. Taking a position, holding it, defending it, attempting to convince others of its worth and attacking another person’s viewpoint kill a conversation. The best relationships are based on matching the conversation, both verbally and non-verbally. Genuine honest statements without hidden agendas are always better than artificial and dishonest statements. 6. Establish empathy: Empathy promotes understanding. Each person has a unique perspective that should be respected and valued. Be prepared to understand and listen to another person’s point of view without evaluating while disclosing your feelings and beliefs. 7. Summarise often: Summarising what has been said creates a common understanding between the two parties. At the start of the conversation summarise the important points about the objective. As the conversation proceeds summarise to check the other person’s understanding. Finally, summarise what has been achieved and agree on the action plan. 8. Use visuals: It is well known that “a picture is worth a thousand words”. Generally people remember 20% of what they hear and 80% of what they see. Most effective are word pictures – images people can create in each other’s minds with the words they see.

2.11 Communication Skills The skills necessary for effective and successful communication have been described by many authors, but most of the skills presented in the literature refer to the description of the communication process such as compiling the message and encoding. Communication skills can be classified into three categories: expressive skills, listening skills and skills for managing the overall process (Dick, 1997) (Table 2.3).

Communication  ◾  39 T Dick (1997)

Hargie (2006)

Expressive skills

Non-verbal communication

Chapter 2, Section 2.6.3.3

Explaining

Clarifying points to promote understanding that leads to action

Self-disclosure

Selective revelation of personal information based on potential rewards (personal, relational and professional) assessed against potential risk in disclosing information How self-disclosure function in personal and work relationships

Humour and laughter

Used to convey motives and intentions Provide clues to better reception

Persuasion

Adopting the message to audience by identifying current obstacles to agreement or compliance and compiling the message to minimise obstacles

Reinforcement

Plays key roles in learning to communicate effectively Emphasises key points to promote understanding

Active listening

Chapter 2, Section 2.6.6.2

Questioning

Obtain and give information Questions need to be designed to encourage response and should relate to the discussion

Reflection

Closely associated with active listening with responding to others in such a way as to convey intent, understanding and engagement

Managing

Managing internal and external communication and clear persuasion Explaining to promote understanding

Listening skills

Managing the process

Description



a. Expressive skills: These skills are used to convey information to others by getting their attention, actually conveying the information and checking the recipient’s understanding. b. Listening skills: These skills present a mirror image of expressive skills. They provide an opportunity for the other person to make a clear and unthreatening statement about their position. The sender is able to achieve listening skills by giving the other person their attention, listening with understanding and offering feedback. c. Managing the process: These are skills needed to decide whose concerns to work on and what sort of information to convey. Hargie (2006) has described nine core communication competencies, which are classified in Table 2.3 under the categories described earlier.

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2.12 Manager’s Role in Communication Communication is a vital part of a manager’s job, and in performing their tasks, they have a network consisting of superiors, work peers, subordinates, juniors, other colleagues and other stakeholders. Communication takes place upwards, downwards and horizontally. There are five “W’s of communication” – who, why, where, when, what – and of course how (Weinstein, 1992). Who: Understand the audience with whom communication needs to take place. Craft the message to suit the audience. Everyone who needs to be told about something should be told. Openness is the key. Transmit the message on a need to know basis. Why: The reason for communicating has two parts: promptness and a required response. Identify the task of communication – teach, persuade, suggest, inform, motivate, establish good rapport, etc. Be aware of the intended outcome. Where: Where denotes the place where communication takes place and whether it is formal or informal. Communication may be a one-to-one encounter in a lecture hall, in a room, on the shop floor or at a meeting. The task in hand dictates the best place to communicate. When: Communicate at the first opportunity to prevent takeover by the grapevine and rumours as these have the habit of travelling at amazing speed, thus distorting the message. Brief those internally before those externally and transmit the message to all affected employees at the same time. What: The what of communication is about the content of the message. The subject matter should be relevant to the recipient. The category of information determines the mode of communication: face to face or memo, meetings and other two-way communications, wellwritten articles or notice board. How: The most appropriate method of communication depends on the complexity or simplicity of information that must be conveyed. Two-way communication should be used if a response is needed.

2.13 Communicating Quality, environmental and Food Safety issues Communication plays a key role in managing the quality, environmental and food safety issues at workplace. One of the roles of top management is to decide who (both internally and externally) needs to know what, when they need to know and what they need to accomplish as a result of this knowledge and understanding.

2.13.1 Internal Communication Internal communication can be considered to happen in four phases (Sheldon & Yoxon, 2008):

1. Informing: Disseminate information issues affecting employees’ tasks in order to implement the management programme. 2. Instructing: This phase delivers directed communication to take necessary action to resolve issues. 3. Motivating: Involve the staff in the decision-making process to encourage motivation. 4. Seeking: Encourage the staff to bring forward new and innovative ideas that will help achieve the desired results.

Communication  ◾  41

2.13.1.1 Quality Issues In order to ensure continued effectiveness of the quality management system, quality processes have to be communicated to staff at all levels. A role of the Quality Manager is to inform about the requirements, objectives and achievements of the quality management system at team meetings, work practices, procedures, organisational meetings, notice boards, in-house journals, electronic means or using audio-visual aids.

2.13.1.2 Environmental Issues Key roles of the Environmental Manager are to communicate the environmental issues that affect their work, demonstrate commitment and provide the necessary training. Communication effectiveness can be achieved by informing the staff about the environmental management system (EMS) and its requirements, keeping employees updated throughout the development phases, seeking their ideas, providing feedback and conducting regular environmental management meetings. Table 2.4 presents the quality and environmental information that has to be communicated to staff (Sheldon & Yoxon, 2008).

2.13.1.3 Food Safety Issues The focus of the food safety management system (FSMS) is food safety and properly communicating any potential food safety issues. Communication has to be clear and accurate and follow documented protocols. The food safety team leader should be involved in setting up, reviewing and ensuring the effectiveness of the protocol. The management should ensure that communicated issues are clearly understood by all the staff. Information should include all issues having an impact on food safety (Table 2.5) (Sun, 2012).

2.13.2 External Communication External communication is an important element of the corporate world. It focuses on stakeholders outside the organisation such as suppliers, investors, consumers, regulatory bodies, community, media and non-government organisations. Generally good business practices lead to good T Environmental • Environmental policy, objectives and targets • Legal and other requirements • Environmental aspects • Emergency response procedure • Roles and responsibilities • Operational controls • Skill requirements • Results of audits, reviews, corrective and preventive actions, complaints and results of monitoring activities

Quality • Quality policy, objectives and targets • Compliance with standards and regulations • Roles and responsibilities • Process controls • Results of audits, reviews, corrective and preventive actions, complaints and results of monitoring activities

42  ◾  Integrating Business Management Processes T Food Safety Issues • • • • • • • • •

Knowledge of food safety hazards Regulatory requirements Raw materials, ingredients and services used in production Products and new products Production processes, cleaning and sanitation programmes Packaging, storage and distribution Operation of equipment Skill requirements Results of audits, reviews, corrective and preventive actions, complaints and results of monitoring activities • Other conditions that have an impact on food safety

external communication and significantly contribute to company earnings. Progressive companies have integrated communication programmes in organisational strategic planning and goal setting.

2.13.2.1 Quality Issues The following are some of the quality issues that are communicated to external agencies: ◾ Product information using the internet and corporate advertisements in major businesses and trade media including TV, printed matter and airport displays ◾ Enquiries, contracts or order handling ◾ Customer feedback including customer complaints, customer surveys, independent competitive surveys, meetings with external agencies and customer visits.

2.13.2.2 Environmental Issues Organisations have a social responsibility to communicate environmental issues that impact on the community. The purpose of good external communication is to establish and maintain trust and understanding among stakeholders. External communication has an important role to play in the organisation’s strategy. The demands of the stakeholders vary, and by analysing the stakeholders, their requirements can be identified. External communication with stakeholders is a two-way flow: from stakeholders to the organisation and from the organisation to the stakeholders. The three essential elements of external communication are: (a) identification of stakeholders’ requirements; (b) the type of information that the organisation is prepared to disclose and (c) the mode of communication. The type of information may include but is not limited to: ◾ ◾ ◾ ◾ ◾ ◾

Environmental policy Objectives and targets Environmental aspects Legal issues Environmental performance Emergency preparedness.

Communication  ◾  43

External communication also involves handling inquiries and questionnaires from external agencies. Inquiries and questionnaires may be related to emissions and noise, toxic waste, the use of hazardous or banned material, waste disposal, and product liability, performance and functionality.

2.13.2.3 Food Safety Issues External communication provides information on the food safety aspects of the organisation’s products that may be relevant to other organisations in the food chain. This also applies to food safety hazards that need to be controlled by external organisations. External organisations include suppliers and contractors, statutory and regulatory authorities and other organisations that have an impact on (or will be affected by) the effectiveness and updating of the FSMS. A vendor quality programme enables communication between processors and vendors on any changes to ingredients. Food processing organisations should establish communication procedures in their recall and traceability programmes. External communication should also include product information and customer feedback and complaints.

2.14 Benefits and Best Practice Communication Communication is therefore a key component of effective business operations. A review of the relevant research has shown the benefits of good communication and best practice communication employed by companies such as Federal Express, Xerox, IBM and AT&T (Hargie et al., 2004), and these are summarised in Table 2.6. The major obstacle between two people is the inability to listen to each other intelligently, in an understanding way and skilfully. Therefore, an organisation must strive to educate its people to listen actively to improve the effectiveness of staff communication.

T Benefits • • • • • • • •

Improvement of productivity Better quality of products and services More staff suggestions Higher levels of innovation Greater employee job satisfaction Reduced staff turnover and absenteeism Less industrial disputes Reduction of costs

Best Practices • Establish clear communication targets and assign roles and responsibilities • Regular attitude surveys and communication of results of surveys • Greater interaction between management and employees • Encourage face-to-face two-way communication and offer of rewards for good suggestions • Use of electronic modes of communication • Regular communication training • Communications are designed to meet the needs of recipients • Employees evaluation of communication effectiveness is appreciated

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References Barker, A. (2010). Improve Your Communication Skills (Rev. 2nd Ed). London: Kogan Page. Behera, A. K. and Tripathy, B. K. (2009). Barriers to effective communication and how to overcome them. Academe, XII, 14–15. Blenko, M. W., Mankins, M. C. and Rogers, P. (2010). Design and Deliver: 5 Steps to Breakthrough Performance in Your Organisation. Cambridge, MA: Harvard Business School Publishing. Bolton, R. and Bolton, D. G. (1984). Social Style/Management Style: Developing Productive Work Relationships. New York: American Management Association. Brooks, C. (2013). Lost in translation: Eight international marketing fails. Business News Daily, October, 7. Campos, I. (2014). The 10 Best PR and communications campaigns in 2014. Retrieved November 30, 2018 from http://www.augure.com/blog/communication-campaigns-2014-2-20141218. Communication Tool Box. (2008). Types of communication medium. Retrieved May 26, 2018 from http:// www.communicationtoolbox.com/types_of_communication_medium.html. Cyr, L. F. (2004). Effective Communication. Bulletin 6103. Orono, ME: University of Maine, Cooperative Extension Publications. Daft, R. L. (2008). Leadership Experience (4th Ed). Mason, OH: Thompson South-Western. De Silva, T. (2013). Management Skills for Pharmacy and Business Managers. Boca Raton, FL: CRC Press. Dick, B. (1997). Communication. Action Research. Retrieved January 9, 2019 from http://www.aral.com. au/resources/communicn.html#a_com_com. Ellis, C. W. (2005). Management Skills for New Managers. New York: Amacom. Hargie, O. (2006). Handbook of Communication Skills (3rd Ed). Abingdon: Routledge. Hargie, O., Dickson, D. and Tourish, D. (2004). Communications Skills for Effective Management. New York: Palgrave Macmillan. Hellriegel, D., Jackson, S. E. and Slocum, J. W. (2002). Management: A Competency-Based Approach (9th Ed). Singapore: Thompson Asia. Jayasree, R. (n.d.). Effective communication. Retrieved January 9, 2019 from http://img.kerala.gov.in/docs/ downloads/communication.pdf. Jones, J.E. (1998). Communication Modes: An Experiential Lecture. Pfeiffer Library (2nd Ed), pp. 44–50, vol.  6. San Francisco, CA: Josse-Bass Wiley. Kass, K. (2012). Effective internal communications at Siemens. Retrieved March 17, 2018 from https://simplycommunicate.com/effective-internal-communications-siemens/. Koneru, A. (2008). Professional Communication. New Delhi: Tata McGraw-Hill. Melcrum.com. (2015). Choosing the right communication channel: Templates and tools. Retrieved November 24, 2017 from https://www.pinterest.com/pin/746260600725052842/. Mintzberg, H. (1990). The manager’s job: Folklore and fact. Harvard Business Review, 68 (2), 163–176. Mor, S. and Alexandra, S. (2015). The Role of communication media in negotiations. In M. Benoliel (Ed.), Negotiation Excellence: Successful Deal Making (2nd Ed), pp. 397–406. Singapore: World Scientific Publishing MSG. (2015a). Non Verbal communication – Actions speak louder than words. Retrieved January 9, 2019 from http://managementstudyguide.com/non-verbal-communication.htm. MSG. (2015b). Seven C’s of effective communication. Retrieved January 9, 2019 from http://managementstudyguide.com/seven-cs-of-effective-communication.htm. NZAPA. (2009). The Erebus story: The loss of TE 901. Retrieved January 9, 2019 from http://www.erebus. co.nz/Background/TheStory.aspx. Rogers, C. R. and Roethlisberger, F. J. (1991). Barriers and gateways to communication. Harvard Business Review, 69 (9), 105–111. Sheldon, C. and Yoxon, M. (2008). Environmental Management Systems: A Step-By-Step Guide to Implementation and Maintenance (3rd Ed). London: Earthscan. Stoner, J. A. F., Freeman, R. E. and Gilbert Jr. D. R. (2007). Management (6th Ed). New Delhi: Prentice Hall. Sun, D. W. (2012). Handbook of Food Engineering. Hoboken: Blackwell Publishing.

Communication  ◾  45 Team FME. (n.d.). Effective communication: Communication skills. Retrieved January 9, 2019 from https:// www.academia.edu/30210413/Effective_Communications_Communication_Skills. Weinstein, K. (1992). Managing communication. In D. M. Stewart (Ed.), Handbook of Management Skills (2nd Ed, pp. 275–292). Aldershot: Gower Publishing Company. Westland, J. C. and Clark, H. K. (2001). Global Electronic Commerce: Theory and Case Studies. Hyderabad: Universities Press. Whetten, D., Cameron, K. and Woods, M. (2000). Developing Management Skills for Europe (2nd Ed). London: Pearson Education.

Chapter 3

Marketing 3.1 History of Marketing The history of marketing has been a subject of debate among the historians. According to one view, the need for marketing was brought about during the Industrial Revolution that took place in Britain around 1750 and in the USA and Germany around 1830. There were four stages in the development of marketing (Baines et al., 2011; Fahy & Jobler, 2012): a. Stage 1 (1890s–1920s) – Production period: Advances in production and distribution and the migration of the rural population looking for work in urban areas created a potential for large-scale markets. There was virtually no competition, and there was only a limited range of products available. The demand exceeded the supply. b. Stage 2 (1920s–1950s) – Sales period: During this period, business people exploited these markets. The focus was on personal selling, and institutions of marketing such as advertising media and distribution channels were established. c. Stage 3 (1950s–1980s) – Marketing period: During this period of market orientation, business organisations focused on customers’ needs. Marketing as a field of study originated during the early part of the 20th century, and in the 1950s and 1960s, marketing courses examined the techniques of marketing. In more recent times, the philosophy of marketing and the impact of marketing on stakeholders and society in general have been recognised as a way of doing business. d. Stage 4 (1980s–present) – Societal marketing period: Business organisations began to realise the impact of business activities on the environment. The concept of societal marketing was recognised as a marketing strategy, developing a corporate socially responsible programme and delivering value to customers while reducing the environmental impact. Another view about marketing as a process that has evolved over a long period of time disregards the production period. Soap manufacturers were advertising their products in the UK, the USA and Germany in the late 19th century. Self-service supermarkets were seen in the USA as early as the 1930s. The term “consumer engineering” was used to describe the process of designing and redesigning products using research to meet customers’ needs.

47

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The influence of practitioners and the developments in industrial economics, psychology, sociology and anthropology perceived marketing as a discipline as follows (Enright, 2002):

a. Influence of industrial economics: The principles of perfect competition and the matching of supply with demand strongly influenced the price at which goods were sold, quantity distributed and the nature of business-to-business marketing. Income distribution, scale of operations, monopoly, competition and financial facilities are all related to the theories of economics. b. Influence of psychology: Motivational research in psychology in relation to consumer attitudes and perceptions, persuasion, consumer personality and customer satisfaction provides us with our knowledge of consumer behaviour. c. Influence of sociology: Customs, culture, social class and motivation among different groups influence the process of marketing. Sociology also involves an understanding of what society thinks as a whole, how we influence the way customers think and how we adopt our perspective, which are all essential ingredients in market research. d. Influence of anthropology: Qualitative market research approaches such as ethnography and observations on consumer behaviour, particularly of subgroups such as beer drinkers and motorcyclists, add value to the process of marketing.

3.2 Fundamentals of Marketing Marketing is a major function in any business organisation, and it plays a significant role in the success or failure of an organisation. Successful companies not only attract customers through their marketing efforts but also retain them by satisfying their changing needs. The goal of marketing is long-term customer satisfaction not through gimmicks or deception but through careful planning. Peter Drucker, top management consultant, emphasises this concept in his book The Practice of Management (2004): Because the purpose of business is to create and keep customers, it has only two central functions – marketing and innovation. The basic function of marketing is to attract and retain customers at a profit. The principles of marketing can be applied to not-for-profit organisations too. The function is to satisfy social needs such as eliminating hunger and providing safe water. Successful companies retain customers by adding value and building long-term relationships. The costs of attracting new customers are six times higher than the costs of retaining existing customers. Both commercial and not-for-profit organisations are characterised by strong competition. Therefore, organisations have to be well aware of not only what customers want but also what competitors provide. If the demands are not met, customers switch over to new suppliers (Fahy & Jobber, 2012). The following incidents illustrate the contrasting attitude of two airlines towards their customers: In 2011, my wife and I travelled to India on a British Airways flight. Our visa was only valid until the day following our scheduled departure date. We thought we arrived at the airport well on time. But, when we tried to check in at the counter we were

Marketing  ◾  49

told that the flight had already left in the morning. On checking our e-ticket we realised our mistake: we had misread the departure time which was in 24-hour format (4.15 hours). The checking clerk informed us that we had to pay for two additional fares to board the next flight. We were devastated and discussed the best option. Then, a smartly dressed young man approached us and asked my wife, “Madam, you look worried. What seems to be the problem?” My wife explained our plight and immediately he accompanied us to the counter and instructed the clerk to book us on the next flight. We had to pay only a very small booking fee. It was a great relief. When we returned to the UK, I wrote to British Airways expressing our gratitude and appreciation for the excellent care and service we received. In 2013, my wife and I visited Australia and New Zealand. According to the e-ticket we had to stop over and check in at an airport in Asia. We also booked two seats next to each other and they were confirmed. But at the checkout counter we were allocated two seats in different areas in the aircraft. It was a long flight from this airport to our destination. Our appeals to get seats next to each other fell on deaf ears. To make matters worse, the flight manager was rude and telling everybody around us that we expected the airline to change the seats of other passengers in order to accommodate us! Of course we never expected that. It appeared to us that empty seats were being filled without any consideration towards the passengers. Finally, two young people who were allocated seats next to each other offered us their seats. We shared our experience with many of our friends and decided not to use this airline again. A fundamental principle of marketing is exchange, which is the act or process of receiving something, such as goods services, ideas and money by giving something in return. Most of the time products or services are exchanged for money and satisfied customers always return. In order to stay competitive, organisations have to satisfy customers’ demands while providing better products and services than their competitor’s products and services. Therefore, according to the modern marketing concept, organisations have to achieve their corporate goals through meeting and exceeding customer needs and expectations better than the competition. Key components of this concept are shown in Figure 3.1 (Jobber & Ellis-Chadwick, 2013).

Marketing Concept

Customer Focus

All activities focus on satisfying the demands of customers

Customer Satisfaction

Staff

Commitment to share corporate goals and focus on customer

Figure 3.1

Achieving the corporate goal of meeting and exceeding customer expectations better than competitors

Key components of marketing.

Belief that corporate goals can be achieved by satisfying the needs of customers

50  ◾  Integrating Business Management Processes

3.3 Marketing Functions Marketing performs several important functions in the organisation. Marketing plans make the products and services that can be offered by the company visible to customers. There are nine major functions carried out in marketing (Burrow, 2009): 1. Market planning: Market planning involves (a) the identification and understanding of the market the company wants to serve through market intelligence and customer insight, and (b) developing effective marketing strategies for each market. 2. Product and service management: The marketing team initiates and works closely with the production team on the design and development of products and services to meet the needs of prospective customers. 3. Distribution: It involves the determination of the most effective methods and procedures so that prospective customers are able to locate and obtain the products and services offered by the organisation. 4. Pricing: The marketing team establishes a pricing strategy and communicates the value of its products and services to prospective customers. 5. Promotion: This function makes the products and services of the company visible to prospective customers. Information about products and services is communicated through advertising and other promotional methods to encourage their purchase. 6. Selling: The functions of buying and selling are called exchange functions. The selling function involves direct personal communication with prospective customers to assess their needs and satisfy them with appropriate products and services. 7. Marketing information management: Improved decision-making and marketing performance can only be achieved by collecting, managing and using accurate market information and data. Market information helps the Marketing Manager find buyers, identifies their needs that the company is capable of satisfying at a profit, creates an effective marketing mix of offerings that align with company objectives and monitors the progress and results of marketing plans towards the objectives. 8. Financing: This is the process of budgeting for the necessary financing and the provision of financial assistance to customers to assist them with purchasing the products and services. 9. Risk management: Organisations assume several risks associated with buying, selling, storing and financing products: (a) customers may not purchase or pay for the products; and (b) its products will be made obsolete by newer products in the market. Risk management also covers the provision of security for products, personnel and customers.

3.3.1 How These Functions Are Applied Product and service management: Multi-feature cellular phones which provide the technologies of wide screen, telephone, internet browsing, high-resolution camera, voice recording and radio among other features have been developed by marketing and design teams to meet the increasing demands of mobile phone users. Distribution: Rental cars now available in convenient locations can be booked online. The transaction is made easier by having the paperwork ready at the collection point. Another aspect of distribution is food delivery service which is expanding rapidly all over the globe. Food delivery companies allow consumers to purchase wholesome meals online and have them delivered at their doorstep, all within a few clicks.

Marketing  ◾  51

Promotion: Facebook offers powerful and unique ways to promote products to people based on location, age, gender, interests and much more, and use tools to understand how they are performing and make them even better. Personal selling: The legal profession and finance profession attract new customers through personal contact via telephone. Some cosmetics and plastic ware are sold through personal contact. Marketing information management: Electronic scanners in retail outlets provide valuable market information such as the quantities sold, categories of purchased goods and the most popular brands. Marketing automation is a category of technology that can be used by companies to streamline, automate and measure the performance of marketing activities and workflows to enhance operational efficiency and revenue. Financing: Companies are offering products with payment by instalments. The instalments can even be spread over 36 months with no interest. Risk management: Before a product becomes obsolete, companies promote the item through advertisements and market it as a special with attractive discounts.

3.4 Marketing Planning – overview of Marketing A marketing plan is a business document that describes the current market position of a business and its marketing strategy for a specific period. The purpose of a marketing plan is to clearly show the steps to be followed to achieve the business objectives. It describes the role each department has to play to satisfy corporate and shareholders’ demands and allocate the necessary resources.

3.4.1 Benefits of Marketing A well-designed marketing plan provides several benefits to the organisation (Wood, 2007):

1. It provides opportunities to satisfy customers, achieve its marketing goals, and identify current and potential threats to overall performance. 2. It provides a framework for the identification of different possibilities and customers. 3. It helps the organisation to focus on its customers and determine what can be achieved. 4. It enables the organisation to examine the offerings in the context of competition and the marketing environment. 5. The plan provides a basis for allocating resources to achieve efficiency and effectiveness in marketing operations. 6. It provides the organisation with a strategy to meet its revenue and market share targets.

3.5 Marketing Process Customers are central to the marketing process. Marketing is the process of analysing marketing opportunities, selecting target markets, developing a marketing mix and managing the marketing effort. It has five distinct steps: (a) understanding the market and identifying the needs of customers; (b) establishing a customer-oriented marketing strategy; (c) developing a comprehensive programme that delivers superior value; (d) building strong exchange relationships to satisfy customers and (e) capturing value from customers to enhance profits and customer equity (Kotler et al., 2013).

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3.5.1 Step 1: Understanding the Market and Identifying the Needs of Customers Understanding the market in which they intend to operate and identifying customer requirements is the first step in the process of marketing, and it involves five basic concepts of marketing: (a) customer needs, wants and demands; (b) market offerings of products; (c) value and customer satisfaction; (4) exchange and building relationships and (5) knowledge of markets.

3.5.1.1 Customer Needs, Wants and Demands Needs, wants and demands are basic tenants of marketing. In fact, a product can be differentiated on the basis of whether it satisfies customer needs, wants and demands. Food, clothing and shelter are basic human needs. In the modern world, other needs are also important: education and healthcare. Products in the needs category do not require a push – a customer purchases them because they are essentials. In the competitive environment, where many brands proliferate, needs category products sometimes need a push. Wants depend on individuals and are not a mandatory part of life. In order to earn a living, one needs to work, but many people want shorter working hours. A baby needs milk but they might prefer or want sweets. A young executive needs clothing but wants a smart suit for better appearance. A workman needs clothing but wants safety gear. A rich person needs shelter but wants a modern house with all amenities. A middle-class earner needs shelter but wants a house with only the bare essentials. A drifter needs shelter but wants only a roof over his head. Wants category products include products for the hospitality industry, electronics, consumer durables, etc. Demand is driven by buying power. The distinction between wants and demands is based on desire. A customer may desire a product or service but they may not be able to afford it. Examples of demands are cruises, luxury cars and five-star hotels.

3.5.1.2 Market Offering Market offerings satisfy customer needs and wants. An offering in marketing is the total offer to a customer. It is more than a product itself and includes associated values that are important for customers. Offerings also include entities such as persons, places, organisations, information, ideas and services that are intangible and do not result in ownership of a product. For example, Kuoni Travel Services markets Egypt as a journey through time discovering dramatic pyramids and imposing temples. Harvard Business School markets their degrees as educating leaders who make a difference in the world. A seller of electronic equipment may think that a customer needs a smartphone but what the customer really needs is to talk to others, take photos, listen to music, play games, etc. Marketers who ignore the benefits and values associated with products in marketing suffer from marketing myopia (Levitt, 1960). Such products will soon be superseded by other products which offer services and experience as well.

3.5.1.3 Value and Customer Satisfaction Value is the customer’s assessment of a product’s capacity to satisfy their expectations. It is the ratio between what the customer receives and what they give. Successful marketers set the right level of expectations. If they are set too low, they may satisfy the buyer but fail to attract enough customers. If the expectations are set too high there will be no buyers. The right balance between value and expectations forms the basis of customer relationships.

Marketing  ◾  53

3.5.1.4 Exchange and Building Relationships The basis of marketing is the satisfaction of customers’ needs and wants through exchange relationships. Exchange is the transaction between some offering and acquiring a desired object or service. Marketers expect a response to a marketing offering which may be more than simply buying or selling products. A community group offers membership; an insurance company offers insurance policies. In order to retain customers and expand the business, companies need to build strong exchange relationships by delivering superior customer value.

3.5.1.5 Markets A market is defined as a set of actual or prospective buyers of a product or service. Buyers have needs and wants that can be satisfied through exchange relationships. Attractive markets are created by sellers looking for buyers, identifying customer requirements, developing good market offerings, setting prices, promoting their products and services and storing and delivering them to customers.

3.5.2 Step 2: Establish a Customer-Oriented Market Strategy An effective marketing strategy focuses on the needs of customers. During the past, marketing activities were developed to generate a sale through advertisements and build market shares but ignoring the actual needs of customers. Today, in the competitive marketing environment, customer-oriented marketing is a necessity for business survival. Understanding the customer and the market place is vital to formulate a marketing strategy, and marketing management can then design a customer-oriented marketing strategy. Marketing management can be defined as: “The art and science of choosing target markets and building profitable relations with them” (Kotler & Armstrong, 2008). To design an effective marketing strategy, the Marketing Manager should identify the target market(s) and determine the best way to serve customers.

3.5.2.1 Identifying the Customers to Serve The company identifies the customers to be served by dividing the market into segments (market segmentation) and choosing the right target market. No company can serve all customers in every way. Instead, it must select only the customers that it can serve well and profitably. Harrods in London focuses on upmarket shoppers. Tesco and Aldi target customers with more modest means.

3.5.2.2 Understanding the Market To understand the market and reduce uncertainty, companies must collect market information. The types of market information necessary (Anderson et al., 2011) for decision-making are: (a) segmentation and alternative ways of segmenting for competitive advantage; (b) the size and growth of each market segment it proposes to serve; (c) an estimate of market share for each market segment; (d) the value of product offerings and augmenting services for each market segment; (e) strengths and weaknesses where actionable improvements enhance customers’ perceptions and (f) knowledge of the most and least profitable products, services and its customers and competitors’ offerings.

3.5.2.3 Determining the Best Way to Serve Customers Companies decide on the best way to serve its customers through product differentiation and their positioning in the target market (Kotler et al., 2013). Therefore, the set of benefits or values

54  ◾  Integrating Business Management Processes

it promises to deliver to customers (value proposition) is very important (Anderson et al., 2011). Value propositions differentiate one brand from another. Singapore Airlines searches for familiar flavours, the softest leather and the films passengers love to make them feel at home, whereas Korean Airlines focuses on “exclusive service on a whole new scale”. The Sony laptop offers “lightweight touch” and Macbook Pro has “more power behind every pixel”. Such value propositions enable the customers to select products according to their needs.

3.5.2.3.1 Choosing the Right Concept There are five concepts that companies can choose to design and carry out their marketing strategy (Akramov, 2011; Kotler & Armstrong, 2009):









a. Production concept: This strategy is based on the concept that companies can produce and market a good quality product or service at a lower cost than their competitors. Such companies focus of improving production and distribution but they lose sight of the real needs of customers. b. Product concept: This is a differentiation strategy of creating a product or service that is perceived as being unique. Companies may offer a brand image, proprietary technology, special features, a more efficient distribution network or other unique aspects and focus on continuous product improvements. c. Selling concept: This strategy offers products and services that customers do not usually buy such as insurance and blood donations and it therefore requires an intensive selling and promotion campaign. The main aim of this strategy is to create a sales transaction, and it is not about building a strong customer relationship. The company sells what it produces and not what the market needs. d. Marketing concept: This is a customer-oriented strategy that focuses on the needs and wants of target markets and delivers better customer satisfaction than its competitors do. The companies adopting this strategy assess the needs and wants of customers, gather new ideas for products and services and test new product improvements. A customer-oriented strategy is a proactive approach and customers often do not know what they want. Proactive companies understand customer needs even better than customers themselves do. They are creative and innovative and introduce new products and services. Digital cameras, mobile phones and computer tablets are some examples. e. Social marketing concept: This concept attempts to balance customers’ short-term wants and customer welfare. It is socially and environmentally responsible marketing that meets the needs of customers and business while preserving the environment for future generations.

3.5.3 Step 3: Marketing Programme – Marketing Mix (7 P’s) A successful marketing programme addresses several key issues: (a) what the company intend to produce; (b) the price structure; (c) the mode of delivery to customers and (d) communication to customers. These issues were known as 4 P’s – Product, Price, Plan and Promotion. As the marketing discipline evolved, a 5th P was added – People. Recently, the 6th and 7th P’s were added – Process and Physical evidence – mainly for the service industry (Chartered Institute of Marketing, 2015).

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3.5.3.1 Product Successful companies make products that meet customers’ needs and wants. A product must have value for the customer, need not be tangible (e.g. insurance policy), provides supporting services and addresses their quality requirements.

3.5.3.2 Price The price has to be competitive and affordable to customers. It is only worth what the customers are prepared to pay for it. This is the only item in the marketing mix that generates revenue for the company.

3.5.3.3 Place The convenience of the customer has to be considered when selecting the outlets for distributing the product – the right place, right time and in the right quantity. In doing so, the company must ensure that inventory, storage and distribution costs are acceptable.

3.5.3.4 Promotion Promotion is the mode of communicating with the customers about the offerings and includes activities such as branding, advertising, public relations, corporate image, sales management, special offers and discounts.

3.5.3.5 People The marketing and sales staff who come into contact with customers must be appropriately trained, well motivated, have the right knowledge and right attitude and create a good impression among the customers. The first impression can have a lasting effect on customer satisfaction.

3.5.3.6 Process The process of providing and delivering a service can have a strong impact on customer satisfaction. Customers consider that factors such as waiting times, provision of information and helpfulness of staff are important for their satisfaction.

3.5.3.7 Physical Evidence Physical evidence of service demonstrated by the company must meet the expectations of customers. They can only experience the service at the time of delivery. Any experience of poor service will certainly be communicated to other customers.

3.5.4 Marketing Plan A marketing plan could be compiled in four phases (McDonald, 2007; Pride & Ferrell, 2010). Table 3.1 presents the four phases of preparing a marketing plan.

56  ◾  Integrating Business Management Processes T Phases

Purpose

Methods Stage 1

Mission

One

Formulate overall direction and goals

Stage 2

Objectives

Two

Evaluate the current market position

Stage 3

Current market position

Stage 4

Market overview

Stage 5

SWOT analysis

Stage 6

Assumptions

Stage 7

Marketing objectives

Stage 8

Strategy

Stage 9

Resource requirements

Stage 10

Implementation and control

Three

Four

Strategy formulation

Resource allocation and performance measurement

3.5.4.1 Stage 1 and Stage 2: Formulate Overall Direction and Goals This is the introduction and mission statement of the marketing plan. In this section, a brief statement of the following should be included: (a) the essence of the business; (b) vision; (c) overall strategy; (d) key actions areas for exploitation and (e) major factors affecting the plan.

3.5.4.2 Stage 3: Evaluate the Current Market Position A clear understanding of the current position of the business in terms of marketing activity is essential when designing the plan (Table 3.2). It is a systematic appraisal of all external and internal factors that have influenced the commercial performance of the organisation.

3.5.4.3 Stage 4: Market Overview A business is affected by the competitors and the external environment. Therefore, the company should identify its key markets, the likely changes in these markets and business opportunities suitable for the organisation.

3.5.4.4 Stage 5: Strengths, Weaknesses, Opportunities and Threats (SWOT) Analysis An example of a template for Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis is shown in Table 3.3. Based on the finding in the market place, a similar SWOT analysis should be conducted on the company’s competitors.

Marketing  ◾  57 T External Factors

Internal Factors

Business and economic environment

PEST analysis

Marketing operations

Sales Market share Profits Organisation Marketing procedures

Current performance

Market size, growth, value and volume trends Market characteristics developments and trends

Market research

Product management Price Distribution Promotion

Competition

Major competitors, size and coverage and other information relating to products, marketing methods, distribution policies, etc.

T Strengths Skilled staff Successful marketing strategies Reputation for innovation Professional development activities Opportunities New winemaking technology Replacing corks with screw caps in some products Opening a new supermarket in the neighbourhood Market opportunities for products in terms of needs that are not being fully satisfied

Weaknesses Failure to meet deadlines Management of environmental issues High inventory levels Low profits Inability to meet increasing demands Threats Competitor has similar products Single supplier policy Upcoming environmental regulations Consumers demand for environmental-friendly goods

3.5.4.5 Stage 6: Assumptions These assumptions are predictions that affect marketing activities in the future (Table 3.4).

3.5.4.6 Stage 7: Objectives Objectives are a realistic statement of what the company wants to achieve as a result of the analysis carried out. The strategy should describe a plan to achieve them. Objectives may be quantified in

58  ◾  Integrating Business Management Processes T Item

Impact on

Assumptions on

Financial

Product/cost margin Product/service pricing Major contracts to fulfil customer needs

Bank interest Taxes Inflation

Components

Quality Availability

Prices Availability to fulfil needs on time Quality

Manufacturing

Productivity

Labour disputes Plant breakdowns Packaging problems Disruptions

Product

Registration Performance

Newly discovered products

Statutory requirements

Price control Level of expenditure Environment Food safety

Product liability laws Promotional expenditure Delisting products Price restrictions Environmental issues

Human resources

Marketing and sales staff

Loss of staff

Market

Growth rate New product introduction Disposable income

Changes

Competition

Product offerings Services Attracting new customers

Competitor’s similar products Promotional expenditure

Distribution

Distribution network Retail outlets Transport

Number of distributors and retail outlets Transport costs

New product launch

Position, segment, target market Product benefits Sales forecast, sales costs and sales targets Product performance Production

External environment Product failure Product availability

terms of sales volume, market share and customer base. They should be SMART (specific, measurable, achievable, realistic and time-limited).

3.5.4.7 Stage 8: Strategy Market research provides specific market information that will allow the company to select the target market segment and optimum market offering position within the chosen segment. A value

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proposition is thus created and the market strategy then involves: (a) segmentation; (b) target market selection; (c) positioning the product within the market segment and (d) value proposition to the target market.

3.5.4.8 Stage 9: Resource Requirements The marketing plan should include the resources necessary to carry our marketing activities.

3.5.4.9 Stage 10: Implementation and Control Implementation and control involves continuous monitoring of marketing effort. As the market changes, adjustments are made to the marketing mix to accommodate the changes. Minor changes in customers’ wants can be compensated for by changing the advertising message. When changes are significant, the company may have to redesign the products and create a new product. Following conditions (McDonald, 2007) must be satisfied for the marketing plan to be successful; (a) openness – maintain creative response; (b) integration – integrate the plan with other functions; (c) coherence – separation of operational and strategic marketing planning will lead to a divergence of the long-term objectives; (d) leadership – demonstration of commitment by the CEO and (e) time – it can take about 3 years for the marketing plan to be successful. The control phase of the plan should enable the company to take corrective action when a deviation from the plan is observed (Lidstone, 1992). Some of the activities to be monitored are sales force, advertising, promotions, market research, public relations, product plan updates and internal reviews. The marketing team should ask the following questions: ◾ ◾ ◾ ◾ ◾

Is the company meeting plan objectives? What are the deviations from the actual budget? What are the causes of these deviations? What corrective actions are necessary to address the deviations? Is it necessary to reformulate the forecast and the budget?

A template for a marketing plan is shown in Table 3.5. The components of a marketing plan are as follows:



1. Executive summary: Although it does not provide details, it presents an overview of the plan to identify key issues relating to the roles in planning and implementation. 2. Environmental analysis: Current marketing environment, current marketing target(s) and current marketing objectives and performance. 1. Marketing environment: This section describes external environmental forces such as competitive, economic, political, legal, regulatory, technological and socioeconomic that have an impact on marketing activities. 2. Analysis of target market(s): This section includes demographic, geographic, psychographic and product usage characteristics of target markets. Current needs of each of the target markets, anticipated changes of these needs and how well the current products are meeting these needs are also assessed. 3. SWOT analysis: Strengths provide competitive advantages to meet the needs of customers. Weaknesses are internal difficulties that hinder the implementation of the marketing plan. Opportunities offer competitive advantages and can be harnessed to meet the needs of

60  ◾  Integrating Business Management Processes T 1.0 Executive summary 2.0 Environmental analysis 2.1 Marketing environment 2.2 Analysis and target market(s) 3.0 SWOT analysis 4.0 Objectives 5.0 Marketing strategies 5.1 Target market(s) 5.2 Marketing mix (7 P’s) 6.0 Implementation 6.1 Marketing organisation 6.2 Action plan 7.0 Measurement and control 7.1 Performance standards and financial controls 7.2 Monitoring procedure





customers. Threats are barriers that prevent the organisation from moving forward. During the development of the marketing plan, the marketing team matches the strengths to opportunities and transforms the weaknesses into strengths and the threats into opportunities. 4. Objectives: Objectives are formulated using the results of environmental analysis, SWOT analysis, corporate objectives and the available resources. 5. Market strategies: 1. Target market(s): Target markets which the company intends to capture through marketing activities. 2. Marketing mix (7 P’s): Marketing mix provides considerable details about the 7 P’s (Product, Price, Place, Promotions, People, Physical evidence and Process). 6. Implementation: 1. Marketing organisation: This section describes how the company is organised to fulfil the objectives of the plan. It may be organised by functions, products, regions or types of customers. Individual roles are also described. 2. Action plan: It outline of activities to be performed, by whom and by when based on specified schedule. 7. Measurement and control: 1. Performance standards and financial controls: Performance standards and how the activities are evaluated against these standards. Methods of addressing the deviations are also described. Financial controls include the assessment of financial activities against the budget. 2. Monitoring procedure: Procedures needed to carry out marketing activities and those necessary to monitor them are clearly described.

3.5.5 Step 4: Build Profitable Relationships The organisation has to manage its customers in order to manage the demand that comes from new and repeat customers. Traditionally, the focus of marketing has been on attracting new customers

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and generating transactions to make a sale. However, today there are only a few new customers in the market because of intense competition and the changing demographic and economic environment. The cost of attracting new customers is higher than ever before; it costs the organisation five times more to attract new customers than to retain existing customers. Therefore, successful companies change gear by making an effort to retain and build profitable relationships with existing customers. Companies realise that losing a customer means losing not only a single sale but also a lifetime worth of purchases and referrals. For example, the customer lifetime value of a supermarket customer might be more than €1 million. Long-term relationships are more important than losing a specific transaction. It is good marketing sense to focus on retaining customers because retention offers superior value and satisfaction (Kotler et al., 2005).

3.5.6 Step 5: Capturing Customer Value The customer’s perceived value is the customer’s evaluation of the difference between the total benefits and the costs of a market offering relative to those of competing offers. Customer satisfaction is the extent to which the performance of the product matches the expectations of the customer.

3.6 Contingency Planning Contingency planning is an exercise to evaluate how the company responds to significant changes to the assumptions in Table 3.4. The changes may have either a negative or a positive impact (Lidstone, 1992). An example of contingency planning is shown in Table 3.6.

3.7 E environmental Marketing Many organisations concerned with environmental issues have embraced a proactive approach by adopting formal intra-organisational codes of practice or industry-specific codes. Their corporate environmental statements have become models for evaluating the organisation’s commitment and performance towards environmental and social responsibilities (Miles & Russell, 1997). A commitment to address environmental issues gains public confidence in the organisation and its activities. Apple has adopted several initiatives to improve their environmental performance (Apple, 2017) by partnering with The Conservation Fund to protect and create the type of forests they use T Assumptions

Possible Change

Probability of Occurrence

Possible Impact

Proposed Action

Taxes

Increase in tax on product X from 5% to 7%

Significant

Loss of $ x in revenue

Review pricing strategy

Product performance

Improvement of product performance due to new technology

Major

Improvement of performance Advantage over competitors

Price increase from $ x to $ y

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in their packaging, developing a renewable micro-hydro project to power Apple’s data centres in Prineville, Oregon, and building a solar farm in China to offset energy used by their offices and retail stores. In fact, 100% of US operations, 100% of data centres and 96% of global operations are run on renewable energy. Competitive advantage is achieved by segmenting markets on consumers’ level of environmental involvement and through a strategic response to public environmental concern. The company’s commitment to environmental issues can be assessed on: (a) eco-labelling; (b) life cycle analysis and (c) environmental design.

3.7.1 Eco-Labelling Eco-labelling is an effective way of informing customers about the environmental impacts of selected products so that they can make informed decisions. It empowers customers to distinguish between products that are harmful to the environment and those that are compatible with environmental protection. It is a voluntary method of environmental protection certification based on life cycle assessment (LCA). Environmental performance labelling is the basis of eco-labelling, and there are many different environmental performance labels and declarations that are being used around the world. An eco-label is awarded by an impartial third party to products that meet specified environmental performance criteria. The green symbol, on the other hand, represents a claim by manufacturers or service providers that the product or service is compatible with some environmental criteria. The International Organisation for Standardisation (ISO) has identified three types of voluntary labelling (Sbicinski et al., 2007): Type 1 (Eco-labelling): It is a third-party voluntary multiple criteria-based programme that grants the use of environmental labels on products within a product category that meet environmental criteria based on LCA. Type 2: Informative environmental self-declaration claim. Type 3: A third-party programme that provides quantitative environmental data about a product under specified categories based on LCA and verified by a third party.

3.7.2 Life Cycle Assessment LCA is a tool that is designed to evaluate the environmental aspects of a product or service through all stages of its life cycle. The four phases of LCA are: (a) goal and scope definition; (b) inventory analysis; (c) impact assessment and (d) interpretation of results (United Nations Environment Programme (UNEP), 2009). Goal and scope definition: This phase defines the products and/or services to be assessed, the functional basis for comparison, the desired level of detail and system boundaries. Inventory analysis: This step involves creating a list of all the components of the life cycle that fall within the defined system boundary. Raw materials and their processing for use, manufacturing processes, packaging, transport, consumption, waste management and disposal methods are identified. Data on energy use and emissions to air, water and soil are quantified for assessment. Impact assessment: The effects of the resource use, processing, consumption and disposal and emissions generated are grouped and quantified into a limited number of impact categories on the basis of significance.

Marketing  ◾  63 T Process

Uses

Environmental Impact

Raw material: Growing cotton

Water, fertilisers, chemicals

Large amounts of water, polluting the air and soil with toxins

Processing cotton: Ginning. Extracting the seed from cotton using a machine. Then drying to reduce moisture. Colouring cotton using dyes

Electricity, chemicals (dyes)

Energy Chemicals (toxins)

Manufacturing the T-Shirt

Specially designed machines assembles and stitches

Energy

Packaging

Paper, plastic, sometimes T-Shirts are wrapped in tissue paper

Create waste. Redundant packaging

Transportation

Trucks and delivery vehicles

Release of CO2 emission, pollution, uses fossil fuels, energy

During use

Detergents and bleaching chemicals, washing in machines

Water, toxic, chemicals, energy

Recycling

Repetitive use. Use as rags, eye glass wipers, donate to charity

Water, chemicals, energy, create waste

Disposal

To landfill and incinerates

Uses land, leach leachate. Produces toxic fumes

Interpretation of results: The results of the environmental impact are analysed and the need and opportunities to reduce the impact of the products and services on the environment are evaluated. Table 3.7 and Figure 3.2 show the life cycle of making a T-shirt (UNEP, 2009; Novak, 2012). During its production from growing cotton to the delivery to the consumer, large amounts of water, fossil fuel, energy and toxic chemicals are used, generating CO2 and waste, polluting the atmosphere, creating waste and using landfill.

3.7.3 Eco Design Eco design is a means of effectively minimising environmental impact throughout the product’s life cycle – from processing of raw materials to manufacture, packaging, transport, its usage and final disposal (UNEP, 2004). Table 3.8 presents possible solutions at various stages of manufacturing, transport, use, recycling and disposal.

64  ◾  Integrating Business Management Processes

Raw Materials

Recycle Reuse Disposal

Use

Energy, cleaners, dyes, water

Detergents, bleach, energy, water

Fertiliser, pesticides, energy. water

Ginning

Energy, manufacturing waste

Transport

Production

Energy, emissions, fossil fuel

Packaging

Paper, plastic cardboard

Paper, plastic cardboard

Figure 3.2

Life cycle of making a t-shirt.

T Stage

Process

Possible Solutions

1. Processing raw materials

Extracting and processing constituent parts. Consumes natural resources, energy and pollutes the soil and atmosphere

Reduce quantities, choose most appropriate material, transform waste into raw materials. Use renewable materials and products that use only one type

2. Manufacture

Consumes large amounts of energy, because of complex technological processes

Optimise production processes, assemble products to enable easy separation into different components for repair and recycling



Uses bottles, boxes, cans, natural corks and other packaging which account for over half the volume of household waste in developed countries

Reduce the amount of packaging. Use recyclable material

4. Transport

Products travel long distances before consumption. Uses trucks and other delivery vehicles

Choose manufacturing locations closer to final destination, use combined transport and deliveries, alternative fuels and optimise loads

(Continued )

Marketing  ◾  65 Table 3.8 (Continued) Eco Design Stage

Process

Possible Solutions

5. During use

Using products, appliances and their preventive maintenance require water, energy, etc. Present day goods are increasingly fragile designed to be replaced, which generates waste

Design products that last longer, safe and easy to maintain and repair



Used and damaged products are easy to recycle. But multiple component alloys and other combinations from which they are made are costly to remake, assemble and process

Develop reusable and recyclable products and components

3.8 Food Marketing Food marketing includes all activities that take place within the food system between the farm and the final consumer. These include manufacturing, wholesaling, retailing, food service and transportation functions. The marketing system performs the services necessary to move the product from the producer to the consumer. As the products move through the marketing channels, they are processed, labelled, packed and transported. The extent and the type of these services depend on the nature of the product and the location relative to the final destination. General marketing approaches and techniques that apply to other products and services also apply to food products. In food marketing, activities such as test marketing, segmentation, positioning, branding, targeting, market research and market entry strategy are highly relevant. In addition, food marketers face other challenges such as dealing with perishable products. Food marketers have to consider the demographics of the population, the consumption pattern of consumers, international competition and food outlets. The challenges faced by food marketers are: (a) brand building; (b) leveraging existing brands and (c) maintaining brand loyalty (Perner, 2008). Brand building through advertisement and promotions increases the consumer demand or the price they are willing to pay for the product. Coca Cola invests a great deal of money in perfecting its formula and promoting the brand, which allows them to charge more for its product than for cans made by other producers. Leveraging on existing product lines is another marketing tool used to develop new brands. Originally, Heinz was a household name for pickles but they soon extended their range to ketchups. Brand loyalty refers not only to the tendency for the consumer to buy the same product consistently but also to resist attractive offers by competitors. It may also extend to a few preferred brands on display. For the food marketing programme to be effective, food marketers have to be aware of the food market environment which is affected by external factors such as sociological, statutory regulations, international competitions and trade conditions, technology, weather, harvesting conditions and economic cycles. The efficiency of food marketing depends on the level of service offered by the food company. The aim should be to add the needed value steps as efficiently as possible.

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Consumers are more aware than ever before of the quality of the food they buy. They are aware of pesticide contaminations, added preservatives, microbiological contamination, added chemicals, etc. Product-related attributes of a food are taste, nutrition, price, appearance, calories and fat content, presence of allergens, ease of preparation or reconstitution, packaging, recipe options, quality and consistency. In addition, other issues such as organic food, environmental production, animal treatment, country of origin and food safety are also important. An effective marketing campaign uses these attributes to position the product so that consumers are aware of the product attributes, immediately recognise its benefits and are able to assess it in comparison to their competitors’ products (Van Trijp & Meulenberg, 1996). Marketing provides an opportunity for the organisation to satisfy customers’ requirements profitably while being socially and ethically responsible to the community it serves.

References Akramov, T. (2011). Marketing strategy: Concepts and implications. European Journal of Business and Economics, 4, 52–53. Anderson, J. C., Narus, J.A., Narayandas, D. and Seshadri, D. V. R. (2011). Business Market Management (B2B): Understanding, Creating and Delivering Value (3rd Ed). Noida: Pearson Education. Apple. (2017). Environmental Responsibility Report 2017. Retrieved April 8, 2018 from https://images.apple. com/environment/pdf/Apple_Environmental_Responsibility_Report_2017.pdf. Baines, P., Fill, C. and Page, K. (2011). Marketing. Oxford: Oxford University Press. Burrow, J. (2009). Marketing (3rd Ed). Mason, OH: South Western Cengage Learning. Chartered Institute of Marketing. (2015). Marketing the 7Ps. Retrieved May 25, 2020 from https://www. cim.co.uk/media/4772/7ps.pdf. Drucker, P. F. (2004). The Practice of Management. New York: Harper & Row. Enright, M. (2002). Marketing and conflicting dates for its emergence: Hotchkiss, Bartels, the ‘fifties school, and alternative accounts. Journal of Marketing Management, 18, 445, 461. Fahy, J. and Jobber, D. (2012). Foundations of Marketing. London: McGraw-Hill. Jobber, D. and Ellis-Chadwick, F. (2013). Principles and Practice of Marketing (7th Ed). New York: McGraw-Hill. Kotler, P. and Armstrong, G. (2009). Principles of Marketing (12th Ed). New Jersey: Pearson Prentice Hall. Kotler, P., Armstrong, G., Harris and Piercy, N. (2013). Principles of Marketing (6th European Ed). London: Pearson. Kotler, P., Wong, V., Saunders, J and Armstrong, G. (2005). Principles of Marketing (4th European ed.). London: Pearson Education. Levitt, T. (1960). Marketing myopia. Harvard Business Review, 38 (4), 45–56. Lidstone, J. (1992). Managing a marketing department. In D. M. Stewart (Ed.), Handbook of Management Skills (2nd Ed), pp. 340–361. Aldershot: Gower Publishing. McDonald, M. (2007). Marketing Plans: How to Prepare Them, How to Use Them (6th Ed). Cambridge, MA: Elsevier Ltd. Miles, M. P. and Russell, G. R. (1997). ISO 14000 Total quality environmental management: The integration of environmental marketing, total quality management, and corporate environmental policy. Journal of Quality Management, 2 (1), 151–168. Novak, J. (2012). Life-cycle analysis of t-shirts. Retrieved April 20, 2014 from http://prezi.com/cyqzpg87a-wi/ life-cycle-analysis-of-t-shirts/. Perner, L. (2008). Food marketing, consumption and manufacture. Retrieved April 20, 2018 from http:// www.consumerpsychologist.com/food_marketing.html. Pride, W. M. and Ferrell, O. C. (2010). Marketing. Mason, OH: South-Western Cengage Learning.

Marketing  ◾  67 Sbicinski, I., Stavenuiter, J., Kozlowska, B. and van de Coevering, H. (2007). Product Design and Life Cycle Assessment. Uppsala: Baltic University Press. UNEP. (2004). Resource kit on sustainable consumption and production. Retrieved April 14, 2018 from http:// www.unep.fr/scp/publications/details.asp?id=WEB/0008/PA. UNEP. (2009). Guidelines for social life cycle assessment of products. Retrieved April 14, 2018 from http:// www.unep.fr/shared/publications/pdf/dtix1164xpa-guidelines_slca.pdf. Van Trijp, H. C. M. and Meulenberg, M. T, G. (1996). Marketing and consumer behaviour with respect to foods. In H. L. Meisenman and H. G. H. Macfie (Eds.), Food Choice, Acceptance and Consumption (pp. 262–292). London: Blackie Academic. Wood, M. B. (2007). Essential Guide to Marketing Planning. London: Pearson Education.

Chapter 4

information Systems and technology 4.1 I introduction The dawn of the year 2000 marked a new era in information technology (IT). As the church bells began to toll at midnight on December 31, 1999, sceptics expected aircraft to fall from the sky, all communications to fail, bank transactions to crash and so on because of the Y2K problem, which was also known as the millennium bug. But nothing of the sort happened. Advances in IT were able to cope with the change successfully and there was a smooth transition to the new millennium. Today IT has permeated every aspect of our lives, and it is hard to imagine a world without it. Over the past few decades, we have witnessed rapid changes in the nature and organisation of industries, businesses and the general structure of the society. The internet revolution and IT have had a tremendous impact on all spheres of human activity. In the business sector, IT has brought about profound changes in production technology, healthcare systems, education, communication, to name only a few. Email, e-commerce and teleconferencing are commonly used in the business environment today. One of the most important contributions of IT is barcode technology. Merchants can scan products and the data can be processed to produce useful reports for sales and marketing activities. For some time, robots have been “employed” in many industries, including the motor and the pharmaceutical industries. Robotic technology has advanced to such a stage that Japan has now presented the world’s first robot which can sense human emotions (Gross, 2014). In the domestic sphere, IT and the internet have changed the world around us. Rapid advances in communication have enabled us to have prompt access to information. Teleshopping allows us to order the desired product(s) at the touch of a button. Bank transactions can now be conducted through the internet (internet banking) or using the mobile phone (phone banking). We can now pay our electricity bills, council rates and other dues online without having to wait in the queue at the service provider’s facility. Our groceries can be ordered from any supermarket to be delivered at our door step.

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The industrial revolution in the 18th century changed the way we used to live in the preindustrial era. We are now experiencing yet another revolution of information and communication technology. Therefore, to meet this challenge we must embrace and understand the art and technology of acquiring, storing and transmitting information and the methodology for processing it for effective use.

4.2 Data Data is defined as facts and figures which have been acquired systematically for one or more specific purposes. It can exist in several forms: linguistic expression (e.g. name, age, address), symbolic expression (traffic signs), mathematical expression (E = mc 2) and signals (electromagnetic waves). There are different types of data (Yeung, 1998; Rajaraman, 2006): Text: Systematically collected material consisting of written, printed or electronically published words. Numeric: Representation of data in numeric characters (e.g. 1, 2, 3). Image: Picture, drawings, paintings, photos, image transferred via satellite, x-ray and other medical imaging, etc. Image data are generally two-dimensional and static. Audio: Songs, speeches, telephone conversations, noises, etc. Audio data types are continuous (change with time) and cause sound waves that impact on our ears, enabling us to hear the sound. Video: These are moving images, each one being slightly different and shown at a rate of 30–60 images per second producing an illusion of movement. This technique is used in animation in computer games. Often, a video image is combined with an audio signal to produce an image that can be seen and heard.

4.2.1 Data Acquisition Data acquisition consists of: (a) reading the data using a device; (b) converting the data to a form which can then be stored in computer memory and (c) transforming the acquired data to reduce the amount of space required for storage. Data is read using different input devices. Textual data is read using the computer keyboard, scanners, magnetic ink character readers, barcode scanners, etc. Image data is captured using scanners and photo devices which can directly feed the data into the computer. Similarly, audio and video data are captured by various audio and video devices. In the computer, the data that is read is encoded into a binary form for storage in memory. Sometimes it is necessary to process this encoded data to reduce the space needed to store it (Rajaraman, 2006).

4.3 I information Information is data that has been organised, analysed and processed in some meaningful way. In fact, it is a value-added process that produces meaningful information for decision-making. For example, the Sales Manager of a company might compare one week’s sales data to the previous week’s or the sales targets. The manager of a supermarket could compare the inventory levels of items to determine fast and slow-moving items. In community pharmacies, the Pharmacy Manager could study the number of items correctly dispensed daily as a way of determining a trend.

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Although their objectives and operations differ, the Sales Manager, the Supermarket Manager and the Pharmacy Manager are evaluating the respective information on four parameters: (a) timeliness; (b) quality; (c) quantity and (d) relevance (Stoner et al., 2007). a. Timeliness Timeliness refers to receipt of information before it ceases to be of any use to those who depend on it for decision-making. The Production Planner at Montana Wines Limited in New Zealand had access to daily production reports, the inventory levels of raw materials and warehouse information to enable him to prepare weekly and monthly production schedules. Air traffic controllers need minute-by-minute information on arrivals and departures of aircraft to grant permission for these to happen. b. Quality The cost of the quality of information depends on the desired accuracy. The higher the accuracy of the information, the greater is the cost. The desired quality depends on the needs of those who will use the information. For example, the Production Planner in a manufacturing organisation needs precise information on inventory levels of raw materials. On the other hand, the Marketing Manager or the Sales Manager who is preparing a 5-year forecast will have less precise information such as market trends and sales projections. c. Quantity Quantity refers to the amount of information available for decision makers. More information is not always useful, particularly if it is not relevant for decision-making. Information costs time and money, irrespective of relevance. More information leads to information overload which lowers the efficiency of the organisations. d. Relevance Information that is not useful for decision-making is not relevant information. Managers and employees often receive information unrelated to their activities. A Production Manager needs to know information such as production delivery dates, inventory levels and production schedules to allocate staff. Production targets and production figures are of no use to the HR Manager. Sometimes information can be of interest to employees, although its impact is not important for their daily tasks. Employees may be interested in the financial position of the company, but it may not affect their daily activities. Information is available and communicated in many forms: databases, accounting packages, logistic programmes, email, intranet, etc. Effective information management refers to how people use information rather than how people use computers or machines. Successful organisations use a human-centred approach for information management (Davenport, 1999).

4.3.1 Human-Centred Approach to Information Management 1. Build flexibility and disorder into information systems (ISs): Most ISs do not fit into common definitions. Different departments of the organisations do not share common definitions for information terms. For example, the manufacturing department may use the term “production” for the process, while the sales team may use the term for the quantities produced. Technologists focus on computerised data. A human-centred approach focuses on broad definition types and assumes multiple meanings of terms.

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2. Focus on how people actually share information: Information technologists are drawn to a common assumption that “if you build it, they will use it”. IT systems are planned on the basis of this fundamental assumption. Managers often make the mistake of assuming that different departments, and professional and line managers will use the technology to share information. Information architecture focuses on the provision of data and information. But what is needed is a change in mindset from the provision of data and information to the sharing of information. 3. Change the information culture: Simply developing an IT system does not alter the information culture of the organisation. The information culture is composed of the elements of an organisation’s culture that influence its management and the use of information. It is expressed in the organisation’s values, norms and practices that have an impact on how information is perceived, created, processed and used (Choo et al., 2008). For the IT programme to be successful, a humancentred approach calls for a change in the information culture achieved by altering the basic behaviours, attitudes, values, management expectations and incentives that relate to information and its use.

4.3.2 Information Maps and Information Guides Companies usually possess a vast amount of information, often embedded in databases, but only a few employees know the location of desired information. Only a few companies have information maps that describe such locations. Pointers to people who own the information is more useful than pointers to information maps in a computer or in a library. Information guides can also be employed to assist information seekers. They are people who can locate the right kind of information in the right place and describe the intended uses and the limitations. Their skills enable them to direct uses to other sources of information. Traditionally, libraries employ special librarians who perform this function. They direct research students and other information seekers to various sources of information, both internal and external, to satisfy the needs of the user (Davenport, 1999).

4.4 I information Systems ISs are systems, people and processes that collect, manipulate, store, analyse and distribute information for a specific purpose or objective. Often people do not distinguish between ISs and IT because all ISs are assumed to be computer-based. But ISs were employed by businesses before the invention of the computer. The four basic functions of ISs are: input, processing, output and feedback (Turban & Volonino, 2011). Table 4.1 shows the basic functions of an IS. An IS uses computer technology and network systems to perform some or all of the tasks.

4.4.1 Types of Information Systems ISs can be classified on the basis of functional departments or the support they provide for the organisation’s activities. Traditionally, organisations are made up of divisions, departments and work units organised in a hierarchical fashion. Some are organised on the basis of cross-functional teams. Functional ISs support a specific function in the organisation such as accounting, marketing, production and HR.

Information Systems and Technology  ◾  73 T IS Component

Description

Functions

Input

Data and information on business transactions are acquired or collected by point-of-sale (PoS) scanners and websites and transferred to other input devices

User interface: Keyboard, mouse, audio and video devices Data sources: Network, CD-ROM

Processing and storage

Data is transferred, processed and analysed for storage or transferred to an output device

Process: Calculate, modify Storage: RAM, hard drive, cloud

Output

Data and information are distributed as reports to computer screens, hard copies, audio files or transferred to other ISs through communication networks

Output devices: Monitor, printer, network, speakers

Feedback

Feedback mechanism

Monitors and controls

Another classification of ISs is based on the type of support provided, regardless of functional area. An IS can support office staff in any location. Managers working in various geographical locations can be supported by a computerised decision support system (DSS) (Turban et al., 2008; Laudon & Laudon, 2003, Shelly et al., 1999). The main support ISs (Table 4.2) are described below.

4.4.1.1 Transaction Processing Systems A transaction processing system (TPS) monitors, collects, stores, processes and distributes an organisation’s basic transactions. The TPS was among the first computerised systems utilised for processing business data. It provides input data for several applications such as a DSS and sometimes companies use more than one TPS. Transactions were earlier processed in batches called “batch processing”. With batch processing, transaction data collected over a certain period were processed later as a group. Today, online processing is more common, with transactions being processed in real time. Examples of TPS are purchasing materials, calculating pay cheques and printing invoices.

4.4.1.2 Management Information Systems A management information system (MIS) is an IS that provides timely, organised information for managers to make decisions, solve problems, supervise activities and monitor the progress of the organisation. An MIS generates three types of information: detailed (e.g. detailed summary report), summary (e.g. inventory summary report) and exceptions. Exception information filters information that is outside the normal conditions. In order to retrieve exception information, exception criteria have to be defined. These reports bring exceptions to the attention of managers and help them focus on situations that need immediate action.

4.4.1.3 Decision Support Systems A DSS is an IS designed to help users reach decisions in a decision-making situation. It is a collection of software and hardware to support decision-making in a specific situation. The DSS uses

Operation level

Management level

Management level

Operational level

Strategic level

Knowledge levels

Knowledge levels

TPS

MIS

DSS

ES

ESS

OAS

KWS

Design specifications

Documents, schedules

Accumulated data, internal and external

Expert knowledge

Low volume data

High volume data

Transactions, events

Inputs

Modelling

Document management, processing, scheduling, communication

Interactive

Interactive

Interactive

Simple models

Updating, monitoring

Processing

Designs, graphics

Documents, schedules

Projections

Decisions for the user

Decision analysis

Summary reports

Reports as required

Outputs

Staff, professionals

Clerical workers

Senior managers

Non-experts

Professional, staff

Middle managers

Operational staff, managers

Users

Structured

Structured

Highly structured

Structured

Semi-structured

Structure and semi-structured

Highly structured

Decision-Making

TPS, transaction processing system; MIS, management information system; DSS, decision support system; ES, expert system; ESS, expert support system; OAS, office automation system; KWS, knowledge work system.

Support

IS

T

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data from internal or external sources. Internal sources of information include sales, manufacturing, inventory or financial data from an organisation’s database. External sources include interest rates, value-added tax, population trends, raw material prices, etc. The DSS is typically employed by tactical-level management and provides a “what if” analysis. Examples of a DSS include mathematical modelling, simulations, queries “what if” and data mining.

4.4.1.4 Expert Systems Experts systems (ESs) provide the stored knowledge of experts so that non-experts can use these systems to solve difficult or time-consuming problems. TPSs are based on data, and MISs and DSSs are focused on processing information. With ESs, systems generate decisions for users based on built-in expertise and knowledge. ESs are composed of two elements: a knowledge base which stores the knowledge and expertise of human experts; and an inference base composed of a set of logical judgements applied to the knowledge base when a user raises a query. ESs are an application of a branch of computer science known as artificial intelligence (AI). It is the application of human intelligence to computers and provides a solution by identifying your actions and using logical assumptions and prior experience.

4.4.1.5 Executive Support Systems An executive support system (ESS) is a strategic-level IS of an organisation that addresses unstructured decision-making through advanced graphics and communications. Originally, ESSs were implemented to support the senior managers of the organisation and now they have been extended to support the activities of other managers. ESSs support the strategic activities of organisations that deal with situations that may change the way the business is conducted.

4.4.1.6 Office Automation Systems An office automation system (OAS) is an IS that uses hardware, software and networks that facilitate work and communications among employees. An OAS supports a range of business activities including creating and distributing images and/or documents, sending messages, scheduling, accounting, etc. All levels of users utilise and benefit from OASs. Some of the software programmes employed in OASs are word processing, spreadsheets, databases, presentation graphics, email, web browsers, etc. Communications technology used in OASs include voice mail, facsimile, video imaging and electronic data interchange (EDI) for communicating text, graphics, audio and video messages. Computers equipped with modems and/or WIFI, video cameras, speakers, microphones, scanners and facsimile machines are some of the hardware used in OASs.

4.4.1.7 Knowledge Work Systems A knowledge work system (KWS) is an IS that enables workers to create and integrate new knowledge in the organisation. A KWS is a tool employed to capture the knowledge of professionals and workers in the organisation. A KWS supports the use of search engines, ESs, web-based computeraided design (CAD) and sophisticated data management systems.

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4.4.2 Information System Development Owing to the rapid progress of IT, ISs are being continually upgraded and expanded in most organisations. Organisations which do not embrace the advanced technology will soon lose their competitive edge. The development of MISs goes through five stages of maturity (Gavin, 1992): Stage 1: Using TPSs to manage routine data processing operations such as payroll, inventory control, accounts payable and accounts receivable. Stage 2: Implementation of MISs within functional units, mainly by studying historical data, e.g. sales and marketing data. At this stage, the transfer of data takes place using external storage devices and integrations between such applications are performed manually. Stage 3: The automatic integration of functional data into corporate IS for control purposes. DSSs that incorporate probability theory, modelling and simulation techniques with “what if” capabilities are used for planning within functional departments. Stage 4: Incorporation of external environmental data that influence the organisation, which can support decision-making at the strategic level. Planning at the corporate level depends on such systems. Stage 5: Totally integrated MIS. Applications such as knowledge management (KM) and ESs are integrated into the MIS to deal with uncertainty and risk at the highest level. The user is involved in the decision-making process. Such systems are capable of suggesting optimum solutions and explaining how solutions are reached.

4.5 I information technology IT can be considered as a field that has developed out of the combination of telecommunication and computer technologies. These two branches of modern technologies have demonstrated phenomenal advancements during the last two decades. IT in simple terms is the technology of acquiring, storing, managing, compressing and transmitting, as well as processing, accessing and interpreting the information (Ray & Acharya, 2004). IT employs computer technology (hardware and software) to process and store information and communications technology (voice and data networks) for transmitting the information (Brown et al., 2012). Included in IT (North Dakota Information Technology Department, 2014) are: ◾ Computers with human interface ◾ Computer peripherals connected to computers ◾ Voice, video, data networks and equipment, staff and purchased services needed to operate them ◾ Salaries of technology staff ◾ Technology services provided by vendors and contractors ◾ Operating costs associated with providing IT services to users ◾ All costs of developing, purchasing, licensing or maintaining software.

4.5.1 Knowledge Requirements and Techniques of IT Information technologists need to possess knowledge of the following elements of IT (Ray & Acharya, 2004):

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1. Database systems: Data acquisition, storage and database management in various application sectors form important techniques of IT. An information technologist should have knowledge of database management systems to create an appropriate database using acquired information in a specific application area, e.g. accounting, production and management. 2. Transmission of data: IT should enable the transmission of all types of data from one location to another using computer network systems. Therefore, information technologists should have a sound knowledge of telecommunication engineering and computer network systems, including optical network systems. 3. Processing visual data: All kinds of data (text files, images, videos, animations and multimedia information) are transmitted through the network. Therefore, information technologists should be aware of the techniques of processing visual data. 4. Data compression: Another important task of IT is data compression and multimedia communications using various text and image compression techniques. Audio and speech compression are also essential components of IT. Information technologists should be aware of these techniques, as well as the principles of communicating multimedia data through communication networks. 5. Interpretation of data: Knowledge of various DSSs and ESs are useful to interpret the data when it reaches the destination. 6. Soft computing techniques: Sometimes the information is presented to the user in an imprecise and ambiguous way, and soft computing techniques are employed by computer technologists to analyse and interpret all kinds of soft information. 7. World wide web (www): This world wide web is now widely used all over the world to access all sorts of information. Viewing it through graphs is an important area of IT study. Therefore, information technologists and computer scientists should structure and design the world wide web properly for efficient utilisation. 8. Security considerations: In designing computer network systems, security issues have to be carefully considered. 9. IT applications: IT is applied in almost all business activities, and users should be aware of the application areas such as healthcare, network sensing and geographical information systems (GIS), industries and cloud computing. 10. Using IT to gain competitive advantage: IT applications in business have given a competitive advantage to organisations. Information technologists should be aware of how IT can be utilised for this purpose. Important applications in this area are rapidly advancing e-commerce and cybermediary. 11. Traditional applications: Traditionally, IT has been employed in the engineering discipline and in industry. IT specialists should have a sound knowledge of how IT can be applied in traditional areas such as power systems, mining, geology, production, logistics and inventory management.

4.5.2 Application of IT IT has been a major influence in facilitating business activities in the private and public sector, improving the quality of life of people, sharing information and improving access to information sources (Reynolds, 2010; Mishra et al., n.d.). Some of the applications of IT are listed below.

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4.5.2.1 E-commerce Electronic transactions using the internet have become very popular and users can view, order and pay for goods online. The banking sector uses IT extensively, and most banking transactions can be carried out online. Other examples of online internet transactions are online trading, travel bookings, customer services, marketing and advertising, conducting auctions and electronic shopping.

4.5.2.2 E-learning IT is effectively used in the education sector to communicate and share knowledge material. E-learning systems include a number of computer-enhanced learning techniques such as computerbased simulations, multimedia CD-ROMs, web-based learning materials, podcasts and webcasts. The rapidly changing business environment today requires employees to keep pace with developments. E-learning offers an ideal opportunity to enhance knowledge. IT enables virtual universities to be established to provide self-paced learning modules with traditional instructor teaching. The company’s corporate portal can be accessed by employees for company information. IT also facilitates the use of virtual libraries which enables library professionals to store and manage information.

4.5.2.3 Web Conferencing Web conferencing employs IT to conduct meetings or presentations in which participants in different locations are connected via the internet. The most basic form of web conferencing is screen sharing or video conferencing where every participant sees what is on the screen. Conferenced participants can communicate via voice or text. Webcasting is another technique in which audio or video information is broadcast from the presenter to the participants. Webinar is a live internet presentation that enables interactive communication between the presenter and the participants.

4.5.2.4 E-judiciary and E-legislature IT applications in judiciary system enable internet access to case lists, copies of rulings, judgements, etc. by lawyers, plaintiffs and the public. In addition, users can download court forms, search archives, track the progress of their cases and locate court officials. A website for the legislature would publish information on the working of the legislature to the public and provides facilities for commenting on prospective legislature.

4.5.2.5 E-health In the healthcare sector, IT has been a valuable resource. IT supports the efficient exchange of information between health professionals. An e-prescription service uses electronic technology to transmit prescriptions electronically to a pharmacy chosen by the patient. Patient case records can be shared between different locations, such as between the hospital from where the patient was discharged and the local general practitioner, which improves clinical service, continuity and quality care by health professionals.

4.5.2.6 E-protect and E-security E-protection is a digital way of storing documents and files that helps individuals, organisations and corporate bodies not only to secure these but also to retrieve them in case of natural disasters

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like fire and floods. IT converts stored documents into digital electronic documents using a secured electronic format with a robust web solution. It is a convenient way to document encryption. E-security refers to the process of ensuring the confidentiality, integrity and available of electronic information and protect it against malicious attackers. They could use or modify the information to their advantage and disrupt critical national infrastructure and industry. E-security risks include viruses, worms, Trojans, spyware, adware, scams, spam, phishing and pop-ups. IT offers innovative methods of policing, which enables security personnel to conduct a complex analysis and search all the collated data. E-security providers identify the threats that challenge the organisations and then implement appropriate solutions.

4.5.2.7 E-transport and Advanced Transport Telematics In the transport sector, IT applications are utilised to improve road, air and rail transport. The purpose of advanced transport telematics is to improve road safety, maximise road transport efficiency and manage environmental issues by monitoring and controlling traffic congestion, pollution and resource consumption.

4.5.2.8 Knowledge Management IT is a tool used for KM. IT provides solutions to KM and increases its efficiency and capability. IT facilitates document management, data storage, access to information and distribution, the exchange and sharing of ideas and information. A KM programme uses web portals where employees can contribute their tacit and explicit knowledge, discussion forums, groupwares, video conferencing, ESs, search and retrieval agents, data warehousing/mining and document repositories or document management systems.

4.5.2.9 Cloud Computing Cloud computing is a new tool for manipulating, configuring and accessing applications online. The term “cloud” refers to a network or internet that is present at a remote location. It can provide a wide variety of services over public networks or private networks, e.g. VAN, LAN, VPN, applications such as email, web conferencing and customer relations management (CRM) are run using the cloud. Cloud computing makes applications mobile and collaborative as they are stored in a cloud and can be accessed by a user. The data and information are also stored in the cloud.

4.5.2.10 Robotics IT has been used in robotic technology for many years, and in fact robots have been used in motor industry for over 50 years. The first robot was used in the motor industry by General Motors for materials handling. Today, many industries employ robotic technology, and the five most popular applications are: (a) robotic handling operations; (b) robotic welding; (c) robotic assembly; (d) robotic dispensing and (e) robotic processing (Kawasaki, 2017). In the car manufacturing industry, robots are used for welding, the assembly of the body, the motor and gear-box and painting and coating. In the pharmacy sector, robots have been utilised for dispensing prescriptions. ScriptPro in Kansas has developed SP 200 and SP 100 prescription dispensing systems, which can dispense up to 150 prescriptions per hour (ScriptPro, 2014). The system counts, fills and labels the medications for each patient. The advantages of robotic systems are cost-effectiveness, efficiency, safety, accuracy and physical capacity.

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4.6 impact of it In 2003, Nicholas Carr published a controversial paper (Carr, 2003) entitled “IT does not matter”. According to Carr, IT has become “ubiquitous”, universally used and therefore does not offer a strategic advantage. Since everyone has access to it, it is no more than a commodity and it has been applied to all facets of business from the supply chain to CRM. The cost of IT has declined sharply and it is no longer an issue. As more and more companies incorporate IT into their business, it is strategically unimportant. Long-term strategic advantage can be achieved by using proprietary technologies that cannot be exploited by competing organisations. However, the adoption of universal technical standards makes proprietary technologies obsolete. In addition, best practices are built into the infrastructure. Many IT professionals have responded to Carr’s arguments (Brown & Hagel III, 2003; McFarlan & Nolan, 2003; Strassmann, 2003; Lewis, 2003; Pisello, 2003; Gurbaxani, 2003). A summary of their arguments is given below:

1. Although IT may have become ubiquitous, the knowledge necessary to use its potential ability to create economic value is scarce. IT can be strategically important for those who cannot access or afford. 2. The IT economic impact occurs in incremental innovations and its potential typically proceeds in short-term operating initiatives, allowing room to test and refine specific innovations in business practices. 3. Along with short-term wins and long-term goals, incremental innovations lead to competitive advantage. 4. IT facilitates performance improvements that create new possibilities and opportunities. It offers possibilities of differentiation by service, product features and cost structure for some time to come. 5. Its widespread availability makes IT a valuable resource that creates new business opportunities. 6. The value of IT is not about technology itself, but how it is applied to improve business processes.

4.6.1 Impact on Productivity Since 2004, IT has made a significant contribution to labour productivity growth in the USA, but much less than it did between 1995 and 2004. Innovations for semiconductors, a key component of IT, have continued to advance rapidly. In the non-farm business sector, the labour productivity projection of growth is about 1.75% per year (Byrne et al., 2013).

4.6.2 Impact on Well-Being Effects The Gallup World Poll (GWP) run by the Gallup Organisation in their annual survey has evaluated the well-being effects of access to a range of ITs worldwide (Graham & Nikolova, 2012). It included 120 countries worldwide since 2005. The survey has a wide coverage from more than 4,000 household interviews in China every year to 500 in Puerto Rico. The GWP captured dimensions ranging from the positive to negative effects of living experiences, life satisfaction and the best possible life evaluation.

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Access to IT demonstrated positive effects for well-being, but decreased with greater access to these technologies. Among those for whom access technology was a new experience, some signs of stress and anger were shown.

4.6.3 Impact on the USA Economy The Computing Technology Industry Association (CompTIA), a non-profit trade association representing over 2,000 IT companies in the USA, produced a research report that provides an overview of the size, shape and the growth factors of the industry and the IT channels (CompTIA, 2018). Growth rate: According to the CompuTIA’s consensus forecast, a growth of 5% across the global technology sector is predicted. Key contributors to this positive outlook are robust customer demand and the uptake of emerging product and service categories. Revenue growth is also expected to rise. If all goes well, the growth rate may reach 7%. The research consultancy, IDC, expects global technology spending to top $4.8 trillion in 2018 with the USA accounting for approximately $1.5 trillion of the market. Labour market: Evolving technology market will present new challenges and opportunities. Organisations will have to review their approaches to recruiting, training and talent management, because the demand for technology talent will exceed supply. The challenges surrounding skill gaps, diversity, alternative education and career paths and the future of work demand more meaningful focus and resources. Incremental transitions: Adopting incremental transitions, upgrading or adding technology progressively, followed by changing workflows, CEOs and boardrooms across the economy by organisations are inadequate to meet the rapidly changing industry and customer dynamics. Instead, organisations need to embrace a proactive approach to plan for a digital future. Among the other trends are: (a) the creation of breakthrough models; (b) cloud computing reaching a maturity stage; (c) AI driving changes to the IT ecosystem; (d) shifting security mindset from technology-based defences to proactive steps that include technology, processes and education; (e) evolution of “new collar” jobs mindset; (f) online marketplaces offering business advice, application customisation, integration, security and other services and (g) investing in skills training, workforce development in order to deliver extra services such as authentication as a service, analytics as a service and drones.

4.6.4 Impact on Supply Chain Performance A study of the supply chain performance in 150 textile companies in Jordan indicated that they are aware of IT and use it for their managing supply chain performance (Al-Fawaeerl et al., 2013). In the textile companies studied, there is a significant impact of IT on the supply chain from logistics to CRM. IT has been used effectively to improve supply chain performance in these companies.

4.7 Problems of implementing it As more and more companies embrace IT to address many organisational activities, several problems have emerged during the design and installation phase. Managers should be aware of people’s

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concerns that are important. Unless they are understood and addressed, a computerised IS is bound to fail (Stoner et al., 2007). Some of the concerns are listed below: 1. Disruption of departmental boundaries: Implementation of an IT system can result in changes in organisational units or departments. For example, production and engineering may be merged to make more efficient use of resources. Similarly, inventory and purchasing units may be combined to provide more efficient services. The changes may affect the way that employees do their work. Employees may resent changes to the reporting structure. 2. Disruption of informal systems: Informal communication is a valuable communication channel and cannot be ignored. Implementation may require formal communication channels to be established for gathering and distributing information. Employees may view such formal channels with caution. 3. Challenging specific individual characteristics: People with many years of service have knowledge about the existing system and how things are done. Employees generally resent new ways of doing things. 4. IT and the organisational culture: If employees have not been consulted about the IT system during the initial phase, or if the managers are isolated form the rest of the staff, the introduction of a new IT system will be difficult. The culture of the company has to support flexible behaviour for the successful implementation of IT. 5. Lack of involvement of staff: Changes can easily be adopted if the people who are affected by the change are involved during the consultation phase. However, if managers and employees make change decisions together, changes are more likely to be accepted.

4.8 Managing it Costs IT costs are generally not transparent because they are complicated, essential to the core operations of the organisation and integral to change efforts. Cut backs during economic downturns do not usually affect the IT budget, but unless these costs are monitored, waste cannot be minimised. Companies generally overspend on IT because frontline managers are reluctant to interfere with the IT budget. Cramm (2009) has listed seven truths about IT costs which have to be addressed to make better investments and leverage invested capital (Table 4.3).

4.9 organisation of the it Department The organisational structure of the IT department depends to a large extent on the size and complexity of the organisation and the exact nature of responsibilities. Two distinct levels in the IT department can be identified: systems development and operations control (Gavin, 1992). Systems development includes all systems analysis, programming, IT centre activities, and the staff who are involved with the design and developments of new IT applications and the improvement of existing technology. Operations control deals with the day-to-day operations of the IT department such as data preparation, database maintenance, security, training of users and computer operations activities. The IT department provides users with support in operating their own equipment involving the following tasks: (a) establishing standards for PC hardware and software; (b) providing training, technical assistance and advice to users; (c) managing corporate data; (d) reviewing cost

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Solution

1

Results of enhancements are not often cost effective

Establish a fixed budget for enhancements to meet goals and do not extend funding

2

Projects are too big and take too long to implement, because unnecessary functions are incorporated into the applications

Deliver measurable value for applications Review application functions before granting approval and before allowing the use of funds at each stage Link compensation of IT specialists to realisation of measurable value

3

Existing applications and infrastructure are often underutilised

Use existing technology before introducing new ones Counterbalance the cost of new infrastructure with reasonable reductions in maintaining the basics

4

High IT project failure rates

Limit the scope of projects to minimise the duration and risk Establish rules to terminate the project, if the budget has been modified twice and beta deployment has not occurred

5

Information technologists do not have an incentive to achieve high quality, and it is not often a measure

Establish accountability for operational costs associated with defects including emergency requests for change and help desk calls

6

Managers do not know much about the applications that support their area

Charge cost centre of the units for “helpless” help desk calls

7

IT is too risk averse

IT to review the costs and benefits of extending refresh cycles, delaying upgrades, terminating maintenance contracts and using open-source platforms and applications.

control criteria for applications and (e) maintaining data security and integrity to comply with regulatory controls.

4.9.1 Control of IT Department The control of systems development and the control of operations are two important aspects of IT department control (Gavin, 1992):

a. Control of systems development: Regular departmental meetings should be held to review the systems development activities against the master plan. Brief summary reports are presented on the progress of each project for keeping everyone informed about the overall progress of the department. The IT Manager will use the opportunity to adjust resources and priorities when necessary to achieve targets and resolve problems that arise.

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b. Control of operations: Operations are monitored daily and reported at the regular meeting. The report includes a summary of downtime on computers, time spent on operational activities, throughput trends and issues that need resolution. Some of the operational activities are: (a) establishing standards for PC hardware and software; (b) providing training, support and technical assistance to users; (c) recommending appropriate software for users; (d) controlling access to corporate data and ensuring the integrity and security of data and (e) applying cost control criteria for application.

4.10 Designing information Systems Factors to be considered when ISs are designed are: (a) information needs; (b) system constraints; (c) goals; (d) stages of development and (e) implementation issues (Hellriegel et al., 2002).

4.10.1 Information Needs A thorough knowledge of information needs is required during the initial stages of designing an IS. Basic issues are information on the proposed change or an addition to the customer base or goods and services, financial constraints, competitors’ use of technology and the type of information currently used by employees. The designer must bear in mind that information needs vary by organisational level, function, individual employee and according to the type of decisions to be made.

4.10.2 System Constraints A number of limitations may be imposed, both internally and externally. Externally imposed constraints include government regulation, supplier requirements, global competition and changing customer demands. Internal constraints are those created by the organisation itself, e.g. the cost and lack of employee and management support.

4.10.3 Goals Goals are essential for setting the direction for developing and implementing the IS and they define the purpose of information, users of such information and the manner of using it. Cost issues and the number and type of operational staff involved have to be taken into consideration in establishing the goals.

4.10.4 Development Stages The four stages of IS development are shown in Figure 4.1.

4.11 environmental issues of it IT is progressing at an alarming rate and has been adopted in all aspects of business. About 30 years ago, information flows were mediated by postal deliveries, landline telephones, radio and television. Today, a variety of devices such as smartphones, flat screen displays and video links enable more efficient and faster communication across the globe. The progress of the semiconductor

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Identify requirements

Conceptual design

Detailed design

Testing Feedback loop Implementation

Determine information needs, cost estimations, limitations and goals Involvement of users with support from technical specialists. Develop alternative designs and evaluate Establish performance standards. Select and develop hardware and software components. Create information flows, specialised programmes and databases. Create a prototype which is evaluated, tested, refined and re-evaluated until the needs are satisfied. If issues remain unresolved return to conceptual design stage. Integrate various modules and test by users. Operational issues are identified and corrected. Modules are added until the whole system is assembled. Problems are identified and resolved. The information system performance criteria are satisfied. Information system is now ready for full-time use. User is involved during the implementation phase. It is introduced in phases, testing on individual modules as the system is assembled. Provide executive management support and evaluate time and cost requirements. Prepare documentation and provide training for users. Establish backup procedures.

Figure 4.1

Stages of iS development.

industry follows Moore’s law, according to which the number of transistors that can be packed into an integrated circuit board doubles every 18 months. IT, which uses silicon-based integrated circuits, will soon be superseded by materials such as germanium and carbon, new architectures such as fin field-effect transistors (FinFETs) and new conceptual modelling such as quantum computing (Williams, 2011). However, improving the efficiency of a technology does not necessarily reduce its environmental impact. IT interacts with the environment at four levels: 1. Physical level: IT is used in an infrastructure and a set of devices whose manufacturing methods, operation and disposal have environmental impacts. 2. Application level: Applications such as smart buildings, teleworking and optimised manufacturing tend to reduce the environmental impact. 3. Economic level: IT contributes towards economic growth and shifting consumer demands. 4. Technology convergence level: At this level, IT such as info-nano-robotics-bio technology are expected to transform industries and society.

4.11.1 Sources of Exposure Computer systems usually consist of several units: Central Processing Unit (CPU), integrated circuit board, DVD/CD drive, hard drive, casing, monitor and keyboard. These major units are

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made up of various materials containing a wide range of chemical elements. Some of these such as platinum have high recovery efficiency (95%), while others such as mercury, arsenic and barium cannot be recycled. The largest environmental hazards are due to monitors containing cathode ray tubes (CRTs) and flame-retardant plastics (Adamson et al., 2005). Exposure to hazardous materials takes place during the production, operation and disposal of products (Adamson et al., 2005). Manufacturing: Raw materials used in manufacturing IT devices, as well as the operation and disposal of such devices consume much energy and cause other environmental issues. Raw materials: Product manufacturing activities include the mining and smelting of raw materials, purification and the refining of petroleum to provide the vast amount of energy required to produce and use computers. Microchip fabrication requires elements such as silicone, aluminium and solvents. Several steps are involved in the manufacture, and at each step of processing, ultra-pure water is required. In addition, chemicals such as hydrochloric acid, hydrofluoric acid, benzene and hexavalent chromium are used to ensure purity. Materials such as copper, lead, silver, tin and chromium as well as flame retardants are also used in the manufacture of circuit boards. The process of their manufacture is similar to that of microchip fabrication. The CRT of a typical monitor contains a wide range of elements including tin, oxygen, potassium, barium, aluminium, iron and lead. Liquid Crystal Display (LCD) monitors contain a significant amount of mercury (4–12 mg/unit). Of the large range of chemical elements present in LCD monitors, 26 pose a potential health hazard (Adamson et al., 2005). Most electronic equipment uses plastic cases to protect the components inside the housing. These casings incorporate plastics such as polybrominated diphenyl ethers (PBDPEs), which are part of brominated flame retardants (BFRs). Other resources used in manufacturing IT equipment include fossil fuels and water. Packaging material used during manufacture includes cardboard and Rigiform. Energy use: Semiconductor processing materials and the environment demand stringent purity standards, which also require high energy use. A 2-g dynamic random access memory (DRAM) chip consumes at least 1.2 kg of fossil fuel (Williams, 2011). It has been estimated that the final production (including material production and manufacture) of a desktop computer consumes at least 240 kg of fossil fuel, 22 kg of chemicals and 1,500 kg of water (Matthews & Matthews, 2003). Operation: Owing to the billions of personal computers (PCs) used worldwide, the ratio of IT contribution towards the emission of greenhouse gases is expected to increase at an alarming rate (Javad, 2013). PCs and monitors contribute 39% of the total IT contribution to carbon emissions. The heat emitted by these devices increases the demand on air conditioning in facilities that use IT equipment, which in turn increases power consumption. A DRAM chip consumes at least 73% of the energy during manufacture and 27% in operational activities. The life cycle analysis (LCA) of laptop computers has shown that 64% of the lifetime energy is used during manufacturing and 36% in operational activities. Manufacturing computers is energy intensive, and rapid obsolescence due to advanced technology leads to computers being purchased more often than other equipment (Williams, 2011). Studies have shown that on average newer computers consume 70 W when active and 9 W in the low power mode. The figures for older computers are 55 W and 25 W, respectively. Monitors vary in their power requirements. The average CRT monitor requires between 66 W and 135 W in active mode, 0 W and 19 W in low power mode

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and 0 W and 5 W when switched off. In contrast, LCD monitors consume 15 W in active mode, 1.5 W in low power mode and 0.5 W when switched off (Bray, 2013). Disposal: Hazardous chemicals such as lead and cadmium are liberated or generated after disposal in three ways: leaching from landfills, incineration and recycling. When IT devices are incinerated with municipal waste, BFRs are converted to hazardous compounds such as brominated dioxins and furans. When recycling is carried out in regulated disposal facilities, efforts are made to ensure the safety of workers and the public. However, in developing countries, recycling is done in non-regulated facilities with no environmental controls in place. Recycling valuable metals has been a profitable business. Copper is recovered from wires by open burning the insulation releasing dioxins, furans and other toxic chemicals. Gold, for example, is recovered from circuit boards by hydrometallurgical treatment using cyanide and acid without any regard for environmental pollution (Williams, 2011).

4.11.2 Possible Solutions 4.11.2.1 Green Procurement ◾ Green procurement is the environmentally responsible selection of products and services, taking into consideration the impact on the environment throughout the various stages of the life cycle such as the procurement of raw materials, manufacturing, transporting, storing and disposal (Adamson et al., 2005). Other features of green procurement are as follows: ◾ Designing computers with material less hazardous to recycle due to lower levels of toxic substances ◾ Designing efficient systems, which effectively separate and recover recyclable components from obsolete items ◾ Using corporate systems with internal energy-regulating devices ◾ End-of-life management through policy and public education.

4.11.2.2 Reduction in Use of Toxic Substances These are manufacturing operations that employ fewer toxic chemicals in the various processes of manufacturing and purifying computer chips. Use of polybrominated diphenyl ethers (PBDE)free plastic casings is another attempt to recognise the adverse environmental impacts of IT. Computer components that contain lead-free soldering are also being developed as a means of reducing toxic and harmful substances.

4.11.2.3 Power-Saving Techniques Energy Star symbol: This symbol was introduced to reduce the amount of energy used by the computers, and this is a feature in many operating systems. The power management feature puts an inactive computer into a “sleep mode”, which consumes 15% less power than the in-use mode. Eco-labelling: An eco-label is a mark or symbol that can be applied to products that meet environmental standards. It is a voluntary scheme, which is intended to make it easier for

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consumer to take into consideration the environmental impact of products. Many countries use various eco-labels for laptops and desktops.

4.11.2.4 End-of-Life Management ◾ Purchase longer lasting equipment that will last for a greater period of time. ◾ Reuse: Donate equipment to a charitable organisation or pass it on to your family as this will reduce the amount and frequency of e-waste. ◾ Resell the equipment. ◾ Upgrade instead of discarding the equipment. ◾ Recycle according to regulated practices: Disposal of old computers in landfills is no longer an option. Several countries have adopted electronic recycling programmes to help protect the environment by keep this type of equipment away from landfills. ◾ Intelligent liberation: This is a means of accurate mechanical separation of computer scrap components such as printed circuit boards for further recycling. CRT monitors require careful recycling measures due to the high lead content. Separation is achieved by using an electric wire heating method or gravitational fall method (Adamson et al., 2005). ◾ Use recyclable packaging.

4.12 Use of it in Food Safety Many of the food processing steps are repetitive in nature and workflows are well established. They require routine actions which have to be revised regularly as new developments and food safety issues emerge. Global legislation and commercial standards need to recognise the role that IT can play in food safety practices. Web-based cloud computing is a useful platform in delivering food safety solutions. Software solutions should fulfil the following criteria (Howlett, 2012): ◾ User-friendly, intuitive, satisfies the needs of consumers, retailers, consultants, inspectors and auditors and designed with real value-adding and time-saving enhancements. ◾ Fully integrated and meet the global food safety standards using best practices. ◾ Enables quick updating in keeping with changes in global food standards and regulations. ◾ Provides real-time data on food safety issues such as recalls, outbreaks and changing legislation. ◾ Enables real-time monitoring of multiple sites in a large corporate structure. ◾ Allows remote access to the user on their food safety system. ◾ Capable of generating quick reports. The USA’s Food Safety Modernisation Act (FSMA) 2011 incorporates two new rules relating to product safety and preventive controls (Acheson, 2013). Information and data handling are solutions for preventing food safety problems successfully. The FSMA focuses on preventive controls for human food and produce safety that can be provided by technology. IT can be employed to address the following issues: Process control: Process control of hazards which have been identified as “reasonable likely to happen” have to be managed properly to prevent food safety problems. In many instances, thermal processing can be used to control such hazards. IT can be employed to implement these controls and record the process parameters.

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Testing results: Technology can be used to determine what to test (raw materials, finished products and environmental samples, etc.), how much and how often to test. The results can be conveniently analysed and interpreted so that action can be taken on test results. Product tracking: The source of products used in processing, processing steps and the distribution of the final product can be monitored using tracking systems. IT can identify products, capture information associated with them and share it with others if necessary.

References Acheson, D. (2013). Using technology to aid the FMSA implementation. Food processing. Retrieved July 24, 2018 from http://www.foodprocessing.com/articles/2013/technology-aid-fsma-implementation/. Adamson, M., et al. (2005). Environmental impact of computer information technology in an institutional setting: A case study at the University of Guelph. Retrieved July 22, 2018 from http://citeseerx.ist.psu.edu/ viewdoc/download?doi=10.1.1.466.5378&rep=rep1&type=pdf. Al-Fawaeerl, M., Alhunity, S. and Al-Onizat, H. (2013). The impact of information technology in enhancing supply chain performance: Al applied study on the textile companies in Jordan. Research Journal of Finance and Accounting, 4 (8), 104–111. Bray, M. (2013). Review of computer energy consumption and potential savings: White paper. Dragon Systems Software Limited. Retrieved July 23, 2017 from http://www.dssw.co.uk/research/computer_energy_ consumption.html. Brown, C. V., DeHayes, D. W., Hoffer, J. A., Martin, E. W. and Perkins, W. C. (2012). Managing Information Technology (7th Ed). Upper Saddle River, NJ: Prentice Hall. Brown, J. S. and Hagel III, J. (2003). Does IT matter: An HBR debate (Letters to the Editor). Harvard Business Review, 81 (6), 2–4. Byrne, D. M., Oliner, S. D. and Sichel D. E. (2003). Is the Information Technology Over? Finance and Economic Discussion Series, Divisions of Research and Statistics and Monitory Affairs, Washington, DC: Federal Reserve Board. Carr, N. (2003). IT doesn’t matter. Harvard Business Review, 81 (5), 41–49. Choo, C. W., Bergeron, P., Detlor, B. and Heaton, L. (2008). Information culture and information use: An exploratory study of three organisations. Journal of the American Society for Information Science and Technology, 59 (5), 792–804. CompTIA. (2018). IT industry outlook 2018. Retrieved July 11, 2018 from https://www.comptia.org/ resources/it-industry-trends-analysis#section4. Cramm, S. (2009). Seven truths about IT costs. Harvard Business Review, 87 (3), 28. Davenport, T. H. (1994). Saving IT’s soul: Human centered information management. Harvard Business Review, 72 (2), 119–131. Gavin, J. (1992). Managing the MIS department. In D. M. Stewart (Ed.), Handbook of Management Skills (2nd Ed), pp. 406–424. Aldershot: Gower Publishing. Graham, C. and Nikolova, M. (2012). Does Access to Information Technology Make People Happier? Insights from Wellbeing Surveys from Around the World. Global Economy and Development Working Paper. Washington, DC: The Brooklings Institution. Gross, D. (2014). Meet pepper, the emotional robot. Retrieved June 17, 2017 from http://edition.cnn. com/2014/06/06/tech/innovation/pepper-robot-emotions/. Gurbaxani, V. (2003). Does IT matter: An HBR debate (Letters to the Editor). Harvard Business Review, 81 (6), 14. Hellriegel, D., Jackson, S. E. and Slocum, J. W. (2002). Management: A Competency-Based Approach. Cincinnati: Southern Western. Howlett, G. (2012). IT solutions for food safety management. Food Quality and Safety Magazine, October/ November. Retrieved January 24, 2018 from http://www.foodqualityandsafety.com/article/ it-solutions-for-food-safety-management/.

90  ◾  Integrating Business Management Processes Javad, S. (2013, February). Impact of information technology on the environment: A critical analysis. Paper Presented at the 3rd International Conference on Business Management, School of Business and Economics, University of Management and Technology, Lahore, Pakistan. Kawasaki. (2017). Robotic applications. Retrieved January 28, 2018 from https://robotics.kawasaki.com/en1/ applications/. Laudon, K. C. and Laudon, J. P. (2003). Essentials of Management Information Systems. Upper Saddle River, NJ: Prentice Hall. Lewis, M. S. (2003). Does IT matter: An HBR debate (Letters to the Editor). Harvard Business Review, 81 (6), 12. Matthews, H. S. and Matthews, D. H. (2003). Information technology products and the environment. In R. Kuehr and E. Williams (Eds.), Computers and the Environment: Understanding and Managing Their Impacts, pp. 17–40. Dordrecht: Kluwer Academic Publishers. McFarlan, F. W. and Nolan, R. L. (2003). Does IT matter: An HBR debate (Letters to the Editor). Harvard Business Review, 81 (6), 5–6. Mishra, A., Adebayo, O. S., Abdullahi, S. Y. and Mabajoje, M. A. (n.d.). Application of information technology and its challenges. Retrieved January 5, 2018 from https://www.scribd.com/document/259534861/ Application-of-Information-Technology-and-Its-Challenges. North Dakota Information Technology Department. (2014). Definition of information technology. Retrieved July 05, 2018 from http://www.nd.gov/itd/about-us/definition-information-technology. Pisello, T. (2003). Does IT matter: An HBR debate (Letters to the Editor). Harvard Business Review, 81 (6), 13. Rajaraman, V. (2006). An Introduction to Information Technology (4th Ed). Bangalore: Prentice Hall. Ray, A. K. and Acharya, T. (2004). Information Technology: Principles and Applications. New Delhi: Prentice Hall. Reynolds, G. W. (2010). Information Technology for Managers. Boston, MA: Course Technology. ScriptPro. (2014). Perfect integration. Retrieved July 09, 2018 from http://www.scriptpro.com/. Shelly, G. B., Cashman, T. J. and Vermaat, M. E. (1999). Discovering Computers 2000: Concepts for a Connected World. Cambridge: Course Technology. Stoner, J. R. F., Freeman, R. E. and Gilbert Jr, D. R. (2007). Management. New Delhi: Prentice Hall. Strassmann, P. A. (2003). Does IT matter: An HBR debate (Letters to the Editor). Harvard Business Review, 81 (6), 7–9. Turban, E., Leidner, D., McLean, E. and Wetherbe, J. (2008). Information Technology for Management (6th Ed). Hoboken, NJ: John Wiley & Sons. Turban, E. and Volonino, L. (2011). Information Technology for Management (8th Ed). Hoboken, NJ: John Wiley & Sons. Webb, B. and Schlemmer, F. (2008). Information Technology and Competitive Advantage in Small Business Firms. New York: Routledge. Williams, E. (2011). Environmental effects of information and communication technology. Nature, 479, 354–358. Yeung, A. K. (1998). Unit 051: Information organisation and data structure. Retrieved January 10, 2018 from http://www.geo.upm.es/postgrado/CarlosLopez/materiales/cursos/www.ncgia.ucsb.edu/giscc/units/ u051/u051.html.

Chapter 5

Human Resource Management 5.1 I introduction Managers depend on employees to get the jobs done, and in the process managers meet a multitude of challenges. A constantly changing workforce drives companies to be more efficient and effective in order to meet the demands of the external environment, government regulations, advances in technology and global competition (Mondy, 2012). Good human relations are essential for the efficiency and performance of the staff and to foster their commitment to the objectives of the organisation. Managers must understand good management practices and how to mobilise the skills of the workforce for mutual benefit. Gratton (2000) put forward four propositions that emphasise the importance of people as the most important asset of any organisation: 1. There are fundamental differences that exist between people as an asset and the traditional assets of finance and technology. 4. Strong dialogue across the organisation is necessary to create a strategic approach to people. Human resource management (HRM) is a planned approach to manage the workforce effectively to motivate and develop them, so they give their best to support the mission of the organisation. It embraces the philosophies, policies and practices of the organisation that influence the behaviour of people who work for it. Strategic HRM is an approach that defines the way the goals are achieved through people by means of human resource (HR) strategies and integrated HR policies and practices (Armstrong, 2009).

5.2 evolution of HRM During the course of evolution of HRM (Kavanagh et al., 2012), employees’ role has changed from just contributing to production in the 20th century to being a key partner in gaining a competitive advantage in the 21st century. In the early 20th century, prior to World War II, HRM was designated as personnel management. The main function of the personnel department was merely 91

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keeping the information about the employees of the organisation. “Scientific management” during this period through time and motion studies determined the most efficient use of human capabilities in production. There were no government influences in employee relations, and organisations were left to devise their own employment practices. This led to child labour and unsafe working conditions. Labour welfare and administrative departments monitored the health and safety of workers and kept a record of hours worked. The post-war period (1945–1960) saw the active mobilisation of labour that had a great impact on the development of the personnel function. Employee productivity and motivation was realised as a major contributing factor in enhancing the profitability of the organisation. Employees were motivated not only by financial rewards but also by social and psychological factors such as recognition of their achievements and work norms. Job descriptions were created which specified the tasks, duties and responsibilities attached to the job. In order to prevent the abuse of labour, employees started forming trade unions. Governments introduced laws defining the roles of trade unions and their relationships with management. The trade unions and the laws governing them triggered organisations to be more proactive in employee relations. This trend influenced the creation of specialist divisions under the personnel department for recruitment, labour relations, training, benefits and communication with government departments. With the introduction of computer technology, more employee information could be recorded, stored and retrieved when needed. Social issues started to emerge between 1963 and 1980. A vast amount of labour legislation was introduced which prohibited discriminatory practices and unsafe working conditions and promoted retirement benefits. Tax legislation was also introduced. Companies burdened with many regulatory requirements relating to employee relations saw the need to maintain comprehensive accurate and up-to-date data on employees and automate data collection, analysis and report generation for compliance purposes. Together with the progress of information technology (IT), the personnel department was recognised as an HR function and the field of HRM was born. Three factors dominated this period: (a) the trade unions started to bargain for better employment terms; (b) labour costs increased, which justified cost increases against productivity improvements, and (c) with greater employee participation and empowerment, the HR department changed its focus from maintenance to the development of employees. The period from 1980 to the early 1990s can be regarded as a cost-effective era of HRM. The USA’s multinational companies started to focus on cost reduction through automation and other productivity improvement processes to meet the challenges of competition from emerging European and Asian economies. IT enabled these organisations to shift the focus from transactional record-keeping to transformational activities that added value to them. From the 1990s to the present, massive technological advancements led to the emergence of strategic HRM. Employees were regarded as a valuable asset, and creative and innovative employees were the key to organisational knowledge that supported competitive advantage. HRM functions added value to the organisation’s products and services and the HR department came to be a strategic partner in the organisation (Kavanagh et al., 2012).

5.3 objectives of HRM The main objective of HRM is to provide a committed and competent workforce and to utilise their skills and capabilities effectively for the mutual benefits of the organisation and its employees. Other objectives are as follows (Randhawa, 2007).

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5.3.1 Societal Objectives The organisation is ethically and socially responsible for the needs of the wider community while minimising the adverse influence of such needs on the organisation. Regulations governing HR activities of the organisation ensure the health and safety of all employees.

5.3.2 Organisational Objectives The HR department functions as a strategic partner in the organisation and promotes organisational effectiveness and assists it to achieve its primary objectives.

5.3.3 Functional Objectives Meet the service demands of the organisation and align its service with the needs of the organisation.

5.3.4 Personal Objectives Train and develop the staff to enable them to achieve their personal goals in order to maintain, retain and motivate them.

5.4 HR Competencies The shift from personnel management to HRM has changed the view of HR, and over the years, needed competencies and the results have differed. HR professionals at all levels require: (a) strategic knowledge and impact means; (b) legal, administrative and operational capabilities and (c) technology and usage abilities (Mathis & Jackson, 2010). Senior HR personnel need additional competencies such as business, strategic, HR and organisational knowledge, as well as the ability to lead changes and ethical behaviour. Changes in organisations and the workforce will mould the future of HR, and extra effort is needed by HR professionals at all levels (Lussier, & Hendon, 2012). The competencies required by HR Managers can be classified as: (a) technical skills; (b) HR skills; (c) conceptual and design skills and (d) business skills.

5.4.1 Technical Skills Technical skills refer to the ability to use methods and techniques to perform a task. Managers need to gain competencies in laws, rules and regulations relating to HR, technological knowledge, equal opportunity reporting requirements, reward schemes and cultural knowledge.

5.4.2 HR Skills HR skills can be defined as the ability to understand, communicate and work with individuals and teams by developing effective relationships. The relationships with employees, workers and supervisors inside the organisation, and those with customers, suppliers and others outside the organisation enable it to secure the resources needed to get jobs done. Therefore, strong people skills are essential. HR personnel interact with all other departments. The ability to work with others in teams, influence them, mediate and resolve conflicts, collect information from others

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and jointly analyse, negotiate and arrive at a collective decisions are key requirements. The information relating to employees and their problems can be very sensitive and HR managers have to be empathetic to understand their viewpoints.

5.4.3 Conceptual and Design Skills Conceptual and design skills are based on decision-making. Progressive organisations train their staff to improve their decision-making skills. These skills include the ability to assess a situation, develop alternatives, select the most effective alternative and implement the solution to a problem. The ability to see the bigger picture and assess the situation is the conceptual part of the skill. Design skills refer to the ability to create new and innovative solutions to a problem.

5.4.4 Business Skills Business skills are easier to develop than technical or conceptual and design skills. They refer to the analytical and quantitative skills needed to grasp an in-depth knowledge of how the organisation operates and of the budgeting and strategic planning process that contributes to profitability.

5.5 HRM Functions HRM involves several interlinked functions within the organisation. The design, management and changes in HR functions are influenced by external forces, such as statutory requirements, economic environment, technological changes, global changes, demographics and political and cultural changes (Sharma, 2009; Civil Service Branch, 1995).

5.5.1  Manpower Planning HR planning enables the identification of the required human capital to meet the demands of the organisation. Job analysis, recruitment and selection have to be carefully planned to seek the best candidates for the job. The organisation must create a good image of it as a good place to work among the community. Further, it must review the labour market from which the organisation hopes to draw its candidates, the staff advertisement procedure to attract the best candidates, the recruitment procedure to deal with potential candidates promptly, courteously and efficiently, and the selection procedure. Manpower planning involves the identification of short-term and long-term HR needs on the basis of individual department’s requirements. The aim of manpower planning is to adjust the HR requirements to meet changing needs due to environmental factors. Effective manpower planning shows: ◾ The number of people required to meet the short-term and long-term requirements and the availability of talent ◾ Early identification of recruitment and retention difficulties ◾ Shortage and surplus of staff in certain ranks and grades ◾ The availability of the qualified and talented people needed to plan for succession planning. The two key components of manpower planning are: succession planning and staff turnover.

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5.5.2 Succession Planning Succession planning involves: (a) the identification of turnover in key positions; (b) the identification of available talent to fill the vacant positions and (c) ensuring that they have the requisite training and exposure to meet challenging future needs. Generally, succession planning is confined to executive positions, i.e. those immediately below the General Manager in the hierarchy, and those created due to business expansion and growth. Succession planning is essential to recognise the early warning signs of the need for skilled and talented people to fill key positions. Ideally, the planning spectrum should cover a period of 3–5 years. The aims of succession planning are to identify key positions and likely candidates for succession, competencies and training needs for potential candidates and identifying positions for which there are no potential candidates so that an action plan can be developed to resolve the issues. The succession plan should then be integrated into the overall training and development plan of the organisation.

5.5.3 Turnover Turnover is due to retirement, resignation or redundancy. While retirement can be anticipated in advance, resignations and redundancies can occur anytime and therefore planning for such events is difficult. A major function of the HR department is to monitor the staff turnover and take early steps to address issues by motivation, training and career development opportunities. External and internal factors influence the succession and turnover process. Job opportunities in the market and the economic conditions determine the availability of talented, experienced and qualified people at the right time to fill the vacant positions. Individual departments review the staffing needs with the changing business and environment. The internal factors that influence the succession and turnover process are the strength of the current workforce and future work commitments, which may lead to an increase or decrease in the current HR.

5.5.4 Recruitment The manpower planning process enables the organisation to identify the type of staff it needs of the right grade and rank and the timeframe in which they are required. The recruitment process should: (a) adopt effective procedures for recruitment; (b) be fair, providing opportunities for those with minimum stipulated qualifications for selection and (c) select candidates on merit and ability. Wherever possible, opportunities should be given to internal candidates who fulfil the requirements for the job. The four stages of the recruitment process are (Armstrong, 2009): (a) establishing terms of application; (b) recruitment planning; (c) attracting candidates and (d) selection of suitable candidates. a. Establishing terms of application: The terms of application include decisions on the grade and rank of the staff required, training requirements, the nature of duties to be performed and the overall manpower deployment of the department. The organisation may offer: a permanent and pensionable position, a position on an agreement, a part-time position, a temporary position or a consultancy. Individual Department Managers in consultation with HR personnel should establish the qualifications and experience for each position. The organisation should design a job specification that includes the following:

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– – – – – – –

Knowledge requirements Skills and abilities Behavioural competencies Qualifications and training Experience Job-specific requirements Special requirements.

b. Recruitment planning: A recruitment plan includes: (a) the number of types of candidates required; (b) likely sources of candidates; (c) alternative sources and (d) method of conducting the recruitment programme. c. Attracting candidates: Candidates are attracted by identifying, evaluating and using the most appropriate sources of applicants. Recruitment takes place through advertisements in newspapers, journals or online to attract the right type of candidates. Another source of recruitment is universities from where suitable candidates are chosen for training and development. At this stage, the organisation should undertake an evaluation of its strengths and weaknesses, which include its reputation, pay, benefits, working conditions, job security, career development opportunities and the location. This analysis indicates improvement opportunities. In recruitment, the candidates are not only selling themselves but also buying what the organisation has to offer. d. Selection: The recruitment process allows the organisation to find people who are potential employees. The selection process involves deciding which of the applicants should actually be employed and for what position. Among the factors to be considered are the person’s ability to do the job and how well they are likely to fit into the organisation’s culture (Hellriegel et al., 2002: Armstrong, 2009).

5.5.4.1 Selection Process Step 1: Short-listing the applicants based on their resume. Candidates who do not fulfil the criteria are rejected by HR personnel. Other applications are forwarded to the Departmental Manager who is responsible for selecting a few candidates for interview. Step 2: Reference checks are conducted prior to the interview. If they are done over the phone, the manager must keep notes of the discussion with the referee for future reference. Step 3: Interview. Most organisations rely on the results of more than one interview to select the final candidate. Interviews are conducted face to face or via a video link. Selection by interview is not always perfect, as the interviewer forms favourable impressions based on superficial similarities with themself. The rest of the interview seeks information from the candidate to support the preconceived impression. Despite these drawbacks, the interview process can be useful if a structural and systematic approach is employed. Today, situational interviews are common. In a situational interview, the candidate is asked to respond to a hypothetical situation. Interviews are either conducted by a panel or by individual managers on a one-to-one basis. Individual managers are those who will be working closely with the applicant. An interview by a panel can be a stressful experience for a potential candidate. Panel members tend to use their own knowledge over the other panel members. Interviews by individual managers on a one-to-one

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basis are less stressful and can be beneficial to the candidate as well as to the manager. It is possible to extract more useful information from the candidate in a non-threatening manner. One of the interviewers should be the manager or the supervisor to whom the candidate will report, if selected.

5.5.4.2 Tests Many organisations now subject potential candidates to various types of tests to select the ideal candidate. Cognitive ability tests measure general intelligence, verbal communication and numeric and reasoning ability. Such tests can predict the suitability of a candidate for specific types of jobs. Personality tests and psychometric tests measure the characteristics that define an individual. These include attributes such as the ability work in a team environment, achievement orientation and motivation. Performance tests are conducted to determine the candidate’s ability to perform simulated tasks. An applicant for a computer programming position may be asked to write a code for a programme. Pilots may be subjected to simulated flight tests. Interviews, references and tests by themselves do not produce satisfactory results. However, if all three selection methods are adopted, the organisation is more likely to find the right candidate for the job.

5.5.5 Training and Development Opportunities for further training and development are regularly identified to create a learning organisation where learning new skills and attitudes and adapting to change are a natural and continuous process for all employees. Advancement opportunities are provided through career planning, succession planning and performance management. Training and development are essential roles of HRM. During times of skill shortage, companies may be forced to hire staff who do not necessarily meet the needs of the organisation. In such instances, companies must help them develop the competencies needed for the job. Effective training programmes help employees overcome their limitations and increase their productive capability. Organisations must create career pathways by providing development opportunities (Hellriegel et al., 2002: Armstrong, 2009). Training programmers may include orientation training and training in basic skills, new technology skills, cross-cultural skills and teamwork skills. Orientation training refers to on-the-job training that enables the employees to carry out the jobs expected of them. Basic skills training is provided for employees who are unable to read, write, do arithmetic or solve problems effectively. Often new employees may be exposed to new technology, and the employer has to provide the necessary training to master it. Employees generally work in a team environment irrespective of the type of job they perform. Training programmes that enhance teamwork competency create a more productive work environment. The availability of people from different ethnic and cultural backgrounds permits employees to create a culturally diverse workforce. Cross-cultural training enables employees to work in a team environment where trust and understanding prevail.

5.5.6 Career Development The aim of career development programmers is to improve the competencies of employees in preparation for future job opportunities. An effective career development programme starts with needs assessment to identify the strengths and development needs of employees.

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5.5.7 Performance Appraisals A performance appraisal is a structured system for measuring, evaluating and influencing an employee’s job-related attributes. The aim of a performance appraisal is to assess the performance of employees and determine how they can improve their performance and contribute to overall organisational performance. This assessment influences their promotion, demotion, transfer or dismissal. Several appraisal methods have been used by organisations over the years. Managers have to identify the most appropriate method, or a combination of methods, depending on the circumstances (De Silva, 2013).

5.5.8 Compensation Employees are a significant part of achieving competitive advantage. An important function of HRM is the motivation of employees through money, status, recognition of achievements, self-fulfilment and companionship. The organisation has to review and offer market rates of pay in order to retain skilled employees. The fairness of the pay system has to be transparent to all employees. Employees have a strong sense of equity and justice in pay differentials. Nonfinancial benefits such as holiday pay, medical benefits and childcare facilities should also be considered. Organisations offer compensation packages to induce motivation among the staff. Traditionally, compensation has been associated with financial benefits. Financial rewards offer a short-term “boost of energy”, but they are still practised by organisations such as banks. The three highest rated financial incentives are cash bonuses, higher base pay and stock options. Non-monetary compensation includes employment security, job status, friendship, flexible work arrangements, recognition and praise from superiors and career development opportunities (De Silva, 2013).

5.5.9 Risk Management and Employee Protection All employees should be treated as a valuable resource, and a safe working environment benefits employees and the organisation. The working conditions should be regularly reviewed to address health and safety issues that affect employees. A disaster recovery plan must be in operation to deal with risks.

5.5.10 Safety and Well-Being The HR department must work with all other departments to ensure that employees are provided with a safe working environment. Employees should be trained to follow the safety guidelines issued by the Occupational Safety and Health Administration (OSHA, 2016). It is essential that employees are provided with adequate protection against hazards that are likely to cause physical injury or ill health. The hazards include dangerous equipment, unsafe work practices and exposure to toxic chemicals or fumes. First aid staff should be present in the organisation whenever staff are working. First aid procedures should be communicated to all employees. The staff who handle toxic chemicals and those who are exposed to excessive noise should have their health monitored regularly (Mathis & Jackson, 2010).

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5.5.11 Managing Legal Issues There are numerous laws and regulations that affect the working conditions of employees and their employment. A major role of the HR department is to identify all legal issues that affect employment and ensure that all rules and regulations are complied with. Acts and regulations influencing HRM have been formulated to prevent discrimination in hiring, promotion, compensation and treatment of protected employee groups such as those with disabilities and elderly employees. Governments have formulated laws that prevent discrimination on the basis of colour, sex, ethnicity and other attributes that identify individuals. Questions posed at an interview should be within the legal framework, protecting the rights of individuals (Daft, 2011).

5.5.12 Progressive Discipline Progressive discipline refers to a series of steps taken by the management in response to the unacceptable performance or behaviour of employees. Its aim is to improve the behaviour or performance of an employee through an incremental series of disciplinary actions. These actions become increasingly severe until the employee’s performance improves or the employee is dismissed for failure to demonstrate any improvement. Unacceptable performance and behaviour includes discourtesy to customers or colleagues, tardiness, consistent absenteeism, unsatisfactory work practices, violation of company rules and procedures and causing damage to company property. The incremental steps of progressive discipline are: verbal warning, written warning, suspension and termination (Desselle, 2005). Verbal warnings are fairly common and often the employee’s performance improves subsequent to this. It is an informal disciplinary measure in response to unsatisfactory behaviour or performance. A written warning is the first formal step in a disciplinary procedure. It is issued when the performances does not improve in response to a verbal warning. A written warning is a legal document that may be cited as evidence in a court of law. It describes specific instances of unacceptable performance or behaviour, a warning issued previously and expected performance or behaviour to be achieved within a given timeframe. Suspension: At times, an employee’s behaviour or performance does not improve even after a written warning. The next step is suspension, which is a punitive action to demonstrate the seriousness of the situation. Notice of suspension includes the details of previous warnings, expected performance and the consequences of not achieving the expectations, e.g. dismissal. Dismissal is difficult for the employer as well as for the employee. It has an impact on the individual’s self-esteem, reputation and their financial position. It is an undesirable experience for the employee leading to confrontation and much emotion. Termination can lead to legal action by the terminated employee, and therefore, companies treat termination as a last resort when all other avenues for correction have exhausted. Employees on probation can be dismissed during the probationary period if there is evidence that the individual’s performance is unsatisfactory (Desselle, 2005). In all other instances, managers must ensure that: ◾ The termination is in response to poor performance or violating company rules and procedures ◾ The reasons for termination can be cited in measurable terms ◾ The employee has been given feedback about their unsatisfactory performance

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◾ The company’s policies and procedures relating to progressive discipline have been rigidly followed ◾ The employee had been given ample opportunity to improve ◾ The company has been consistent in applying progressive discipline procedures across all levels of staff ◾ The HR department has been consulted at each step and HR policies have been correctly followed.

5.5.13 Promotions and Transfers Promotion is a very significant way of recognising superior performance, and it is based solely on merit and needs to be devoid of favouritism. Management has to be aware that promotions can lead to resentment by those who have been bypassed for it. In promoting employees, management has to comply with legal requirements and avoid discrimination of any sort. Transfers are the means of providing employees with broader experience as a part of an employee’s development programme. Those who have no further avenues for promotion may also be transferred to other positions compatible with their skills. Management must avoid transfers as a means of avoiding a conflict. The root cause for the conflict should be identified and resolved before a decision is taken to transfer the staff (Sharma, 2009).

5.6 employee and Labour Relations Since the HR department does not produce anything, it is often considered as an overhead. HRM functions should be developed to promote good relationships with all employees and their trade unions. Employees’ rights have to be respected.

5.7 ethics and Sustainability A key function of HRM is to ensure that the organisation acts in an ethical and socially responsible manner. A code of ethics defines the way all employees behave in and outside the organisation. Environmental issues and sustainable development are major issues that companies face. To maintain sustainability, organisations have to use the resources wisely and responsibly. HRM has a key role to play to educate employees to follow the code of ethics and act in a responsible manner in resource utilisation (Mathis & Jackson, 2010). Employee relations refer to working relationships between the management and the workforce that promote a high degree of trust and cooperation. It occurs at two levels: the trade union level and individual employee level. Until a decade ago, trade unions have been perceived as a threat to the progress of the organisation. Now trade unions have taken a more proactive approach to flexible working practices and contribute towards the success of the organisation. Employee relations with management include such areas as consultations, communication and conditions of employment. Involving employees in the decision-making process tends to strengthen the relationship. Both upward and downward communication should be encouraged. The primary aim of employment relations is to promote honesty and good faith. The HR department has to continuously monitor employee attitudes to ensure that trust and confidence are being maintained. Supervisory

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Line Managers need support and guidance from the HR department to promote good human relations (Armstrong, 2009).

5.8 HR Planning HR planning involves designing efficient ways of organising HR and facilitating appropriate changes. Planning starts with a thorough examination of the demand and supply of staff. It is achieved through HR metrics, HR technology, and the development of new cultures and value systems.

5.8.1 Strategic Approach to HRM In the modern business environment, the HR department is considered to be a valuable partner in the organisation, which not only supports the firm’s strategic objectives but also pursues an ongoing integrated plan for enhancing its performance. Effective HRM has been shown to have a positive impact on strategic performance including higher employee productivity and a stronger financial outcome (Daft, 2010). There are three key elements to the strategic approach to HRM: (a) all managers in the organisation are involved in HRM; (b) an effective workforce (not buildings and equipment) provides the competitive edge and (c) HRM integrates with the organisation’s strategy and goals and effectively manages human capital. HR Managers of successful companies are able to build teams committed to excellence, create a culture that promotes competitive advantage, employ the right people that fit the culture, develop training programmes and retain good performers. Strategic HR decisions are concerned with finding the right people to become more competitive for the global market, improving quality, innovation and customer service; retaining staff during the difficult times of mergers and acquisitions and applying new IT for the business. These strategic decisions determine the organisation’s need for skilled and competent employees. HR strategies define the HR policies and practices and how they should be integrated with the business strategy and each other. They have a bearing on the long-term performance of the organisation. HR strategies cannot be considered in isolation, and they have to meet the business needs and human needs of the organisation. Although HR strategies differ from company to company, two basic strategies can be identified (Armstrong, 2009): general strategies and specific HR strategies.

5.8.2 General Strategies General strategies involve the overall system and the bundle of complementary HR practices adopted by the organisation in order to improve its performance. Three main approaches are high performance management, high commitment management and high involvement management.

5.8.2.1 High Performance Management High performance management practices include thorough recruitment and selection procedures, extensive and relevant training and development practices and incentive pay and reward systems. These practices have an impact on the performance of the organisation in fields such as quality level of customer service, productivity, growth and profits. Benefits of high performance

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management practices are employee involvement, skill enhancement, motivation and employee collaboration in problem-solving.

5.8.2.2 High Commitment Management One of the key features of HRM is the focus on the importance of enhancing mutual commitment. High commitment management aims to promote a commitment that leads to self-regulation, rather than being controlled by forces external to the individual, and a high level of trust. Recommended approaches for achieving high commitment are: Development of career progression opportunities Adopting functional flexibility Encouraging teamwork Job design that promotes job satisfaction Adopting a policy of non-compulsory lay-offs Developing a new method of assessment and pay systems that includes merit pay and profit sharing ◾ Encouraging employees to participate in decision-making ◾ Reduction of hierarchies in management structure.

◾ ◾ ◾ ◾ ◾ ◾

5.8.2.3 High Involvement Management High involvement management involves work practices that focus on employee decision-making, power and access to information, training and incentives. These work practices are based on involvement and commitment in contrast to an authoritative model based on control. Employees perform better if they are given the opportunity to control and understand their work. Employees are considered as partners whose interests are respected by the management. Communication between the management and employees promotes mutual understanding so that information can be shared and the company’s mission, values and objectives further defined.

5.8.3 Specific HR Strategies Specific HR strategies define human capital management, corporate special responsibility, organisation development, engagement, knowledge, management, resourcing, talent management, learning and development, reward schemes, employee relations and employee well-being.

5.8.4 Implementation of Strategies ◾ Analyse the business needs of the organisation and define how the strategies will help maintain them. ◾ Communicate the strategy clearly and what it is expected to achieve. ◾ Involve those responsible for implementing the strategies, identifying issues and resolving them. ◾ Develop a realistic action plan. ◾ Develop a programme to monitor the action plan and results.

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5.9 HRM Models HRM models encompass all HR activities, and when they are implemented effectively, a competent and willing workforce that will help realise organisation’s goals can be developed. The HR function is influenced by both internal and external factors such as economic, technological, political, legal, organisational and professional conditions. The models provide an analytical framework for studying HRM, legitimate certain HR practices, establish a foundation for research and explain the nature and significance of key HR activities. The following six models of HRM are discussed here (Shabnam, n.d.):

1. 2. 3. 4. 5. 6.

Harvard framework Guest’s model of HRM Best practice model Storey’s hard and soft HRM Patterson’s model of HRM Best fit/contingency model.

5.9.1 Harvard Framework Model The Harvard framework has two characteristic features: Line Managers accept more responsibility to ensure that the competitive strategy is aligned with personnel policies, and the mission of HRM is to set policies that govern how HR activities are developed and effectively implemented. HR policy areas of employee influence, HR flows, reward systems and work systems are influenced by stakeholders and situational factors such as workforce characteristics, business strategy and conditions, management philosophy, labour unions, technology and government regulations. HR policies achieve the 4C’s: commitment, congruence, competence and cost-effectiveness. In the long term, these policies result in individual well-being, organisational effectiveness and societal well-being.

5.9.2 Guest’s Model of HRM Guest’s model has six dimensions: HRM strategy, HRM practices, HRM outcome, behaviour outcome, performance outcome and financial outcome. The model is prescriptive and idealistic. The outcomes of this model are HRM outcomes: commitment, flexibility and quality; behaviour outcomes: effort, motivation, cooperation, involvement, identity with the organisation, performance outcomes (high productivity, high-quality innovation, lower absenteeism, conflict and customer complaints) and financial outcomes (profit and return on investment).

5.9.3 Hard and Soft HRM Models Hard HRM focuses on costs incurred by the HR of the firm and the soft approach stresses the human aspect of HRM. The hard approach is task oriented, as employees are expected to perform their jobs quickly as directed and the roles are firmly defined with narrow scope for change. In contrast, the soft approach is people-focused and employees are considered as a valuable asset. Recruitment is based on attitude, and a high degree of multi-skilling is allowed. It supports the development of people, and teamwork is encouraged.

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5.9.4 Best Practice Model These practices are high-performance work practices, which are universal and enhance positive effects on organisational performance. Major elements of this model are employment security, efficient recruitment and training, teamwork and decentralisation, narrow status differentials and communication and employee involvement.

5.9.5 Patterson’s Model According to this model, HRM practices improve performance by enhancing employee skills and abilities, promoting a positive attitude towards work and increasing motivation and providing opportunities for development.

5.9.6 Best Fit/Contingency Model The best fit/contingency model considers the influence of the business context and the environment. An HR strategy becomes more efficient when it is aligned with the surrounding context and business environment and has two elements: (a) external fit – this fit is linked to the operations strategy, marketing strategy, competitive strategy and financial strategy; and (b) internal fit – coherent HR policies and practices.

5.10 Gaining a Competitive Advantage A company has a competitive advantage when it implements a value-creating strategy that the current or potential competitors cannot duplicate. When other firms are unable to duplicate this strategy and gain the benefits associated with it, the firm which devised the strategy gains sustained competitive advantage. Therefore, companies devise ways and means of competing with strategies that cannot be imitated and last a long time. HR is characterised by unique historical conditions, causal ambiguity and social complexity (Schuler & MacMillan, 1984). Because of the nature of HR practices and its successful implementation, competitors find it difficult to imitate. Competitive advantage can best be achieved by making improvements in the management of people through better utilisation of HR. Recruiting employees with exceptional skills and productive talent and retaining outstanding employees contributes towards gaining human capital advantage (Schuler & MacMillan, 1984). In a static environment, higher levels of human capital create productive advantage for an organisation over its competitors. Another factor of importance is the cognitive ability of employees (Mathur, 2015). It enables individuals to create the most efficient strategy for performing their tasks. In a dynamic or more complex environment, the human capital resource enhances the effectiveness of the firm by adapting to changing environmental requirements. Flexibility, communication and cohesiveness are factors that enable competitive advantage. When HRs are utilised in a productive way by identifying environmental control variables, developing strategies that respond to these variables and effectively and rapidly implementing these strategies, companies gain a competitive advantage. A high level of human capital resources enables the firm to monitor the complexity of the environment. Individual departments develop their own strategies in keeping with the firm’s strategic direction to function effectively. Implementation of these strategies requires employees to be flexible and demonstrate adaptability to the changing environment.

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The conditions that must be satisfied to gain a competitive advantage through employees are: (a) employees should be regarded as a value-adding entity; (b) seek employees who are “rare” or “unique” and (c) create HRM policies that cannot be imitated by your competitors. HRM practices should be designed to make it difficult for competitors to imitate them. Also, recognise the talents of employees and capture exceptional individuals from a pool of talent. Therefore, managing the HR capital is a key factor in achieving a sustained competitive advantage (Hellriegal et al., 2002).

5.11 Challenges and Gaining organisational excellence The business environment today is constantly changing, and organisations face numerous competitive challenges. Therefore, to survive in this threatening environment, organisations need to achieve organisational excellence through learning, quality teamwork and re-engineering. HR is a partner in the delivery of organisational excellence, and it can be achieved by (Ulrich, 1998; Narkhede & Joshi, 2007) the following means: 1. HR should be involved in strategy execution together with Senior and Line Managers, thereby supporting the mission and vision of the organisation. 2. HR should efficiently plan and execute HR activities and ensure administrative efficiency to reduce costs. Planning should motivate employee commitment, education, communication and involvement. Top management must demonstrate total commitment to the HR philosophy which should be communicated to all employees. 3. HR should become a champion for all employees addressing their concerns and enhancing their contribution to deliver expected results. They must create a learning organisation that generates structures and shares knowledge. Organisational effectiveness depends on attracting, utilising and retaining employees who make a difference. 4. HR should be a change agent focusing on a continuous transformation improving processes and developing a culture that facilitates organisational capacity to change and value and support individuals. Employees have to be empowered to utilise their talents and capabilities and recognise their achievements. Empowering enables employees to search for problems and design effective solutions.

5.12 Measuring and Managing the HR Function Until recently, the HR function was considered an overhead, as it did not offer a tangible, marketable product. However, with the integration of the HR function into the organisational framework, it is seen to play a key role in the growth of the company. HR is a partner in the strategic planning process and needs to support the mission and vision of the organisation. Continuous improvement of HR services can be achieved by measuring its contribution towards the growth of the company (Belcourt, 2001).

5.12.1 Reasons for Measuring the Effectiveness of HRM 1. An organisation’s largest controllable expenses are labour costs. 2. The success and failure of projects and organisations depends on the performance of employees and they do make the difference.

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3. Organisations have to comply with laws governing the employer–employee relationship. 4. Evaluations are necessary to identify effective HR practices. 5. Continuous improvements can only be achieved by measuring and benchmarking HR activities. 6. The HR function is yet another department which has to comply with regular assessments.

5.12.2 The 5C Model The 5C model shows the judgement areas that Senior Managers, investors, customers and HR executives utilise to measure the effectiveness of HR functions. They are compliance, client satisfaction, culture management, cost control and contribution. 1. Compliance: Employment standards such as hours worked, overtime payments, leave, health and safety requirements, equality and industrial relations are highly regulated. The HR function has to ensure that managers, employees and clients understand and comply with the regulations to avoid high legal costs, penalties and bad publicity. 2. Client satisfaction: Customers’ or shareholders’ perceptions are increasingly used to measure the effectiveness of the HR function, and customer satisfaction surveys have been found to predict financial performance. These surveys identify the gaps between customers’ expectations and the level of satisfaction. 3. Culture management: The HR function has to initiate and develop a culture that perpetuates optimum performance. HR performance can have a positive influence on employee attitudes, which in turn has an impact on employee behaviour, tardiness, work performance, absenteeism and strikes. 4. Cost control: The HR department can reduce labour costs by: (a) reducing the workforce and getting the same job done with fewer employees; (b) increasing the efficiency by increasing the ratio of results achieved (output) over resource inputs (c) and reducing the cost of employment levels by lowering absenteeism, staff turnover and workplace injuries.

The HR function can no longer be treated in isolation – it has to align itself with other departments and the goals of the organisation. It is accountable and must demonstrate its contribution towards the growth of the organisation.

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References Armstrong, M. (2009). Armstrong’s Handbook of Human Resource Management Practice (11th Ed). London: Kogan Page. Belcourt, M. (2001). Measuring and managing the HR function: A guide for boards. Ivey Business Journal, 65 (3), 35–39. Civil Service Branch. (1995). Human resource management. Retrieved January 17, 2018 from http://panosa. org/wp-content/uploads/2015/01/resource1.pdf. Daft, R. L. (2011). Management (10th Ed). Mason, OH: South-Western Learning. Gratton, L. (2000). Living Strategy: Putting People at the Heart of Corporate Purpose. London: Pearson Education. Hellriegel, D., Jackson, S. and Slocum, J. W. (2002). Management: A Competency Based Approach. (9th Ed). Cincinnati: South-Western. Kavanagh, M. J., Thite, M. and Johnson, R. D. (2012). Human Resource Information Systems: Basics, Applications and Future Directions (2nd Ed). Thousand Oaks, CA: Sage Publication. Lussier, R. N. and Hendon, J. R. (2012). Human Resource Management (2nd Ed). Thousand Oaks, CA: Sage Publication. Mathis, R. L. and Jackson, J. H. (2010). Human Resource Management (13th Ed). Mason, OH: South Western Cengage Learning. Mathur, P. (2015). Achieving competitive advantage through employees. International Journal of Arts, Humanities, and Management Studies, 1 (8), 66–70. Mondy, R. W. (2012). Human Resource Management (12th Ed). Cranbury, NJ: Pearson Education. Narkhede, P. A. and Joshi, S. P. (2007). Challenges to human resource management in a borderless world. Global Journal of Management Science, 1 (2) 167–173. OSHA. (2016). Recommended practise for safety and health programs. Retrieved March 25, 2019 from https:// www.osha.gov/shpguidelines/docs/OSHA_SHP_Recommended_Practices.pdf. Randhawa, G. (2007). Human Resource Management. New Delhi: Atlantic Publishers. Schuler, R. S. and MacMillan, I. C. (1984). Gaining competitive advantage through human resource management practices. Human resource management, 23 (3), 241–255. Shabnam, S. (n.d.). Models of human resource management (HRM). Unit 10, SHRM, Session 2. Retrieved June 4, 2018 from https://www.scribd.com/document/207746462/Unit-10-Session-3-Models-of-Hrm. Sharma, S. K. (2009). Handbook of HRM Practices: Management Policies and Practices. New Delhi: Global India Publications. Ulrich, D. (1998). A new mandate for human resources. Harvard Business Review, 78 (1), 124–134.

Chapter 6

Skills and tools for Management System Development 6.1 I introduction Montana Wines Limited with wineries in four regions is the largest winery situated in West Auckland in New Zealand. After the takeover of another winery, Penfolds Wines Limited in Montana embarked on a challenging journey towards the development of management systems for process efficiency and to gain competitive advantage. At the time of takeover of Penfolds Wines in 1980s, Montana did not have documented quality management systems (QMSs) as such, but there was a fairly descriptive wine management procedure. Quality control activities were performed by two quality control technicians. The CEO who was totally committed entrusted the task of developing and implementing a QMS to me in my role as the Corporate Quality Assurance Manager. Several simultaneous activities were undertaken in the early 1990s, but priority was given to the development of competencies. Procedures were developed for all the activities, and deficiencies detected during the internal audits were quickly addressed. Soon a fully functional QMS was ready for external assessment, and by 1993, Montana Wines became the first winery in Australasia to get its QMS certified to ISO 9000 standard. A few years later, its food safety programme was certified to ISO 22000 standard. This chapter deals with the successful training programme which was adopted by wineries. Table 6.1 shows a summary of the training programme. Three categories of competencies were developed: management competencies for managers and supervisors, a personal development programme for supervisors and operators and technical competencies for operators.

109

110  ◾  Integrating Business Management Processes T Participation

Competency Category

Competencies

Training Provider

Managers Supervisors

Management

Planning Organising Leading Coordinating Risk assessment

In house

Supervisors Operators

Personal Development

Communication Team work Delegation Empowerment Problem-solving Motivation

In house External consultant

Operators

Technical

Quality tools Hazard Analysis and Critical Control Point (HACCP) Process control Environmental awareness

In house

6.2 Management Skills 6.2.1 Planning Planning involves the identification of tasks to be completed, how they can be accomplished, providing the necessary resources to carry out the activities and finally monitoring the progress to ensure that they have been completed successfully. Plans help determine future success, minimise uncertainty and avoid potential pitfalls. The planning process enables managers to understand where resources, people and money are to be deployed so that the staff can make the best use of them to accomplish the goals of the organisation. Planning competency includes (Hellriegel et al., 2002) collating information, analysing it and problem-solving, planning and organising projects, time management and budgeting and financial management. The steps in the planning process are as follows: 1. Identify the purpose or the desired result. 2. Assess the current situation using a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. 3. Establish goals and identify strategies to reach them. 4. Establish objectives that support the strategies. 5. Define roles and responsibilities and a timeline for the objectives. 6. Document and communicate the plan. 7. Monitor progress and provide support if necessary.

6.2.2 Organising A primary function of organising is to establish an organisational structure. The four basic elements of organising are: (a) specialisation; (b) standardisation; (c) coordination and (d) authority (Hellriegel et al., 2002).

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Specialisation is the process of identifying the tasks to be accomplished; assigning them to individuals, teams, department and divisions and determining how and when tasks have to be accomplished. During the development phase of management systems, the manager may assign engineering activities to the Engineering Manager, process control operations to the Production Manager and laboratory activities to the Laboratory Manager. Standardisation involves the development of uniform practices that employees have to follow in their day-to-day activities. These practices ensure consistency of operations and are communicated through written procedures, job descriptions, instructions and rules associated with positions within the organisation, performance criteria and expected employee behaviour. Standardisation enables managers to: (a) evaluate the performance of employees in relation to assigned responsibilities and established performance indicators; (b) apply uniform procedures for employee selection and (c) develop standardised skills for training programmes. Management systems require consistency of operations, and the development of a set of uniform procedures for the activities is a major task. Coordination is the process, and mechanisms are used to integrate the tasks and activities of employees and organisational units. For a further discussion, see Section 6.2.4. Authority allows individuals to make decisions of varying importance. Assigning responsibility without authority is meaningless. Authority to initiate expenditure is generally based on the level of hierarchy in the organisation. Line Managers may be given authority to spend up to £2,000 without consulting the Senior Manager, whereas a Senior Executive may be allowed to initiate expenditure up to £10,000 without further approval.

6.2.3 Leading Leading is the process of directing, influencing and motivating employees to perform essential tasks. Relationships and time are important components of leading activities. Leading influences others to join the managers to accomplish the goals of the organisation. It creates a harmonious environment where employees establish trust with the manager and as a result help them do their best (Stoner et al., 2007).

6.2.4 Coordinating During the development phase of the management system, several activities take place simultaneously, and therefore, it is essential for the leader to have coordination skills. Coordination facilitates the employees to focus on their roles within the organisation and avoid pursuing their own departmental interests at the expense of organisational goals. The extent of coordination depends on the types of tasks performed and the required degree of interaction between various units or departments. A high degree of coordination is required for: (a) tasks that require or benefit from communication between units; (b) non-routine or unpredictable work or work influenced by the environment; (c) work in which interdependence is high and (d) work that requires high performance. However, when the information exchange between units is not important, work may be completed more efficiently with less interaction between them and a high degree of coordination is not warranted. Coordination can also occur among people working in different organisations or different locations. When management systems have to be developed across the entire organisation spread over different locations, a high degree of coordination is needed to create uniformity (Stoner et al., 2007).

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6.3 Personal Development Skills 6.3.1 Communication Communication is an everyday occurrence. Whether it is in business or in family, interaction between individuals or groups is inevitable and is often taken for granted. It is a key factor in an organisation’s ability to achieve its objectives. Unless a manager can effectively communicate with the staff, the likelihood of objectives being completed is greatly diminished (Ehlert, 2004; Ellis, 2005). The process of communication is discussed in Chapter 2.

6.3.1.1 Promoting Effective Communication The American Management Association (AMA) (Fajardo, 1997) has issued ten guidelines to promote effective communication:

1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

Clarify the ideas before communicating. Establish the purpose of communicating. Consider the physical environment and the human setting. Consult others, when appropriate, in planning communication. Be aware of the “symbols” such as tone, facial expression, choice of words, message content, eye contact and personal appearance. Consider the receiver’s needs and interests that are of immediate benefit. Encourage feedback from the receiver. Communication should be consistent with the long-range vision and goals of the organisation. Deliver what has been promised (“walk the talk”). Develop active listening skills.

6.3.1.2 Applicability to Management Systems Development Skills essential for the development of management systems are listening, observation, translation to a “language” that the receiver can understand and written and oral communications. Proficiency in communication competency enables organisations to: (a) develop the steps for effective communication; (b) understand the importance of internal communication; (c) implement an effective communication programme throughout the organisation and (d) successfully address issues on external communication.

6.3.2 Teamwork Teamwork has become an integral part of management, and more and more organisations are replacing traditional hierarchical roles and formal positions with teams and teamwork. A CEO may appoint a marketing team to revive the market share of the products. A supervisor may select a team from the floor to develop operational procedures. Katzenbach and Smith (2005) define a team as: “A small number of people with complementary skills who are committed to a common purpose, set of performance goals and approach for which they hold themselves mutually accountable”. Often the groups are also referred to as teams. There is a distinct difference between groups and teams. An Engineering Manager may appoint a group of technicians who work with individual machines to develop a preventive maintenance programme. A group is defined (Mackin,

Skills and Tools for Management System Development  ◾  113 table 6.2

Difference between Groups and teams Groups

Teams

Leadership

Strong and clearly focused

Shared

Accountability

Individual

Individual and mutual

Purpose

Same as organisation’s mission

Specific and delivered by the team

Outcome

Individual products

Collective products

Meetings

Conducted efficiently

Open-ended discussions and active problem-solving sessions

Evaluation

Indirectly by its influence on others in the organisation

Directly by evaluating collective work products

Working

Discusses, decides and delegates

Discusses, decides but work together

2007) as: “A small group of people with complementary skills and abilities who are committed to a leader’s goal and approach and are willing to be held accountable by the leader”.

6.3.2.1 Types of Teams The essential differences between groups and teams are summarised in Table 6.2 (Katzenbach & Smith, 2005). Organisations form different types of work teams to perform its functions (Hellriegel et al., 2002). Four types of work teams are: (a) problem-solving; (b) functional work; (c) multidisciplinary and (d) self-managing.

6.3.2.1.1 Problem-Solving Work Teams Problem-solving work teams include employees from different units of the organisation in order to resolve and issue and bring about an improvement. Quality circles are problem-solving teams focused on resolving quality issues. A taskforce is formed to achieve a specific, highly important task for the organisation. Organisations may appoint a taskforce to resolve a recurrence of a product failure and it disbands once the task is accomplished.

6.3.2.1.2 Functional Work Teams Functional wok teams are stable teams formed for the purpose of solving problems common to their area of responsibility and expertise. They operate with the same basic structure.

6.3.2.1.3 Multidisciplinary Teams Multidisciplinary teams are formed to improve the design process, production and service provision and enhance creativity and innovation. The team consists of employees from various functional units and sometimes several organisational levels who are accountable for specific goal oriented tasks. An organisation’s product development team is a multidisciplinary team consisting of employees from production, quality assurance, sales and marketing.

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6.3.2.1.4 Self-Managing Teams Self-managing work teams generally consist of employees from the same unit who work together to manufacture a product or deliver a service. Sometimes it may be necessary to include employees from other functional areas. The main functions of self-managing work teams are: (a) selection of new employees; (b) train new staff; (c) order resources as required; (d) communicate with suppliers; (e) set goals and plan work and (f) develop new processes. Montana Wines Limited in New Zealand formed a self-managing team in its production unit to improve the efficiency of processes. The team consisted of production operators, supervisors, engineers and wine production operators. Their task was to monitor daily efficiency through unplanned downtime, machine breakdowns, product failure and other indicators. The issues were addressed and resolved daily. Soon, the team was able to demonstrate an improvement in efficiency.

6.3.2.2 Stages of Forming Teams More than two decades ago, B.W. Tuckman proposed that teams go through five stages of development (Stoner et al., 2007): (1) forming; (b) storming; (c) norming; (d) performing and (e) adjourning. Forming: During this initial stage of awareness, team members learn what behaviour is acceptable. This stage is a period of orientation and the members commit themselves to the purpose, goals and the programme. Storming: Team members are comfortable with each other, but may oppose the formation of a group structure and may become hostile. Norming: During the norming stage, conflicts that arose in the storming stage are addressed and resolved. Group unity develops and the members are able to establish common goals, norms and ground rules. Performing: The team begins to function as a unit supporting group dynamics and performance. Adjourning: The adjourning stage is the stage of disbanding when activities are completed.

6.3.2.3 Benefits of Team Approach Although teams have not been always successful, they have been proved to be more effective than individuals working alone (Whetten et al., 2000). The benefits of a team approach are as follows: ◾ Generates a greater number of ideas than individuals working alone, and there is therefore more effective problem-solving ◾ Enhances understanding and acceptance among team members, improving decision-making ◾ Due to social interaction, members have higher motivation and demonstrate better performance ◾ Able to overcome biases, prejudices and inhibitions ◾ Entertains more new alternatives and novel ideas than individuals acting alone ◾ Greater fun in working together.

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6.3.2.4 Applicability of Team Approach to Management Systems Development A team approach is essential for the development of management systems. While the senior management demonstrate commitment, the employees have to work in teams to solve problems, resolve issues and conflicts, develop procedures and improve performance. In the late 1980s, Montana Wines Limited in New Zealand experienced a rapid decline in the market share and the share prices declined to such an extent that job security itself was threatened. The newly appointed CEO was very concerned about the situation. He summoned a team consisting of managers from marketing, sales and production and instructed them to come up with a programme for turn-around. A marketing consultant facilitated the discussion. Within days, a programme was developed, and with the approval of the CEO, it was implemented. Departments adopted stringent measures for financial spending, and within 1 year, the share prices increased and the company regained its market share. The success was due to the commitment of the CEO and the dedication of the entire team.

6.3.3 Delegation The manager who takes the lead in introducing management systems has to delegate tasks to various teams. Delegation is the process of assigning authority and accountability to another individual for carrying our specific activities. Organisations cannot function without delegation because no manager can personally achieve or completely supervise all their employees. According to the “acceptance theory of authority” (Whetten et al., 2000), individuals will accept and fulfil the tasks assigned to them only if four conditions are satisfied: (a) understand clearly what they have to accomplish; (b) perceive that the assignment is aligned with the purpose of the organisation; (c) believe that the assignment is compatible with their own interests and goals and (d) be able to accomplish the assignment.

6.3.3.1 Effective Delegation An important element in delegation is the trust between the two parties involved. Trust improves the working relationship between them. For delegation to be successful, managers must be willing to give employees the freedom to accomplish the tasks, allow them to select their own methods and solutions and must create a “no blame” culture where the employees learn from their mistakes. Managers must have the ability to analyse the organisation’s goals, the requirements for assignments and the competency of the employees, so that they can realistically decide what tasks can be delegated. The following guidelines are useful for achieving effective delegation (Hellriegel et al., 2002): 1. Clarify goals, standards and measure of performance: The participation of individuals or teams is essential when goals they are expected to meet are developed. 2. Ensure clarity of tasks assigned: Individuals or teams to whom the tasks have been delegated must have a clear understanding of the task ahead, the scope and the accountability. 3. Involvement: Managers should motivate their individuals or teams by allowing them to participate in decision-making, keeping them informed and by providing resources to enhance their skills and abilities. 4. Accept completed assignments only: Individuals or teams are expected to carry out their assignments to completion by providing them with guidance, help and information. Managers should discourage upward delegation.

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5. Provide training: Managers should continuously evaluate the skills needed to perform the work and provide training to enhance their skills and overcome difficulties. 6. Regular feedback: Accurate and timely feedback is essential for individuals or teams who are engaged in assignments so that they can evaluate their performance against the expectations and rectify the deficiencies.

6.3.3.2 Barriers to Delegation Managers often fall into the trap of assuming that others are not capable of fulfilling the tasks to their expectations and that “they can do better”. Some of the barriers are listed below (Luecke & McIntosh, 2009): 1. Fear of losing authority: The manager never loses control or authority when tasks are delegated because they are ultimately responsible for achieving the goals of the organisation. 2. Lack of trust in employees: Employees cannot handle all the jobs done by the manager. However, their skills and expertise in specific areas can be utilised for the success of the organisation. With appropriate training and instructions, they will be prepared to accept challenges. 3. Lack of confidence: Managers should avoid doing jobs which can be handled by employees. By delegating such tasks, the manager’s time is better spent by utilising their own skills and expertise for achieving the goals of the enterprise. 4. Lack of time: Managers should be prepared to develop the competencies of employees by offering them new challenges and they should always have time for employees so they can offer encouragement and support. 5. Failure to give up previous roles: This is a common failure among individuals who have been promoted to management positions from “lower” levels of hierarchy. They are quite comfortable to carry out previous tasks which are familiar to them. New managers must be prepared to let go of former roles and accept new challenges to achieve the organisation’s goals.

6.3.3.3 Applicability of Delegation to Management Systems Development During the development phase of Montana’s* management systems in the 1990s, many tasks were delegated to teams or individuals. For example, the engineering team was assigned to develop a preventive maintenance programme, the IT team was given the task of preparing a company-wide IT programme and the production team was busy preparing operational procedures. Guidance, support and resources were provided by the management. The Quality Assurance Manager monitored the progress and held training sessions regularly.

6.3.4 Empowerment Empowerment is not a new concept, but during the last few years, it has been used widely from team building to decentralised structures. The term has been so overused that its very meaning has been obscured. Since the 1950s, its meaning has taken various forms. During this period, according to the human relations school, managers should be friendly to employees. However, in the 1960s, sensitive training prompted the managers to be sensitive to the needs and motivations *

Montana was the largest winery in Auckland in New Zealand with wineries in three other regions.

Skills and Tools for Management System Development  ◾  117

of individuals. Employee involvement schemes were encouraged in the 1970s. By the 1980s, teams and quality circles were common. Although its true meaning has evolved currently, the ability of managers to empower employees is still an uncommon skill (Whetten et al., 2000).

6.3.4.1 Defining Empowerment Empowerment is a state of mind created when managers push down power, information, knowledge and rewards to the employees of the organisation (Bowen & Lawler, 1995). Pastor (1996) defines empowerment as the ability to change one’s behaviour and take responsibility for one’s own actions and decisions. In relation to business consultants, Wing (1996) defines empowerment as a strong self-analytical tool which enables them to understand and address their personal biases, differences of opinions and experience with clients to promote change efforts successfully. It is the concept that an organisation is most productive when its employees are allowed to make and take decisions on their own when authority is transferred down to all levels of the organisation (Hindle, 2008).

6.3.4.2 Dimensions of Empowerment Managers should foster the following six attributes in others for successful empowerment (Whetten et al., 2002): 3. Self-determination Self-determination is the feeling that people enjoy when they have been offered the opportunity to initiate and make decisions. Empowered individuals voluntarily and intentionally involve themselves in an organisation’s tasks and they take ownership and responsibility. 4. Personal control Personal control is the ability of an individual to make a difference by influencing the environment in which they work and devising a method of working. Personal control empowers individuals to overcome the obstacles in the external environment. 5. Meaning A sense of meaning refers to the ability of an individual to appreciate the purpose and goals in which they are engaged. Empowered individuals have a purpose, passion or mission for accomplishment. 6. Trust Managers who are successful in empowering employees are able to create a harmonious environment where mutual trust is appreciated. The individuals are confident that they will be treated fairly and equitably.

6.3.4.3 Developing Empowerment The development of an effective implementation strategy is essential for empowerment. The following five steps have been used to create a culture of empowerment within the organisation (McCoy & Associates, 2006):

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Step 1: Clearly define the intended outcome. Empowered employees are required to understand and accept responsibility for their actions and therefore they need the skills, competence and authority to do so. Step 2: Provide the necessary skills. Empowered individuals do not possess all the skills necessary to accept new challenges. Management must be prepared to offer further development facilities, training and coaching as appropriate for the tasks ahead. Above all, management must demonstrate commitment to the empowerment programme. Step 3: Develop employees. Empowered individuals have to accept greater challenges and responsibility to accomplish their tasks. Therefore, management must provide skills such as critical thinking skills (setting goals, decision-making, problem-solving and risk management), performance analysis and feedback (collection of data, analysing and action upon them) and coaching skills (relationship skills and skills to influence others in the organisation). Step 4: Develop a common understanding. Empowered employees feel that they can make a change, and therefore, everyone in the organisation should share the concept of empowerment, performance objectives and their impact on the organisation. In order to create an empowerment culture in the organisation, everyone has to subscribe to its beliefs and values. They form the basis on which individuals make and prioritise their decisions. The mission, vision and goals have to be clearly communicated because they give directions to the workforce. They can celebrate even small accomplishments so individuals feel that their efforts are recognised. Step 5: Clarify accountability. It is essential for empowered individuals to understand their roles, responsibilities and accountability. Allow responsibility to match accountability.

6.3.4.4 Barriers to Empowerment Many managers and employees are reluctant to accept empowerment and even more reluctant to offer this due to personal attitudes. Barriers fall into three categories (Whetten et al., 2002): 1. Attitudes, beliefs and assumptions about employees: Managers believe that employees are not capable of accepting greater responsibility, not competent enough to accomplish the work or should not be involved in tasks typically done by the managers. 2. Personal insecurity: Managers feel insecure about offering greater challenges to employees and fear that they might lose the recognition and rewards associated with their accomplishments. They are reluctant to share their expertise for fear of losing control and therefore prefer to work alone. 3. Need for control: Managers who are reluctant to offer empowerment feel the need to direct and control the activities of the organisation. They incorrectly assume that the absence of clear direction and goals from the manager leads to confusion, frustration and failure. These barriers prevent managers from achieving the success associated with successful empowerment. A successful empowerment programme not only involves the manager’s willingness and courage to offer responsibility but also a skilful implementation programme.

6.3.4.5 Applicability of Empowerment to Management Systems Development The crucial ingredients of a successful management programme are involvement of the staff, commitment by the management and dedication to work. Therefore, empowerment plays a key role

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in the development of management systems. At Montana Wines, the empowerment programme included the granting of responsibility and accountability to operators to perform process control activities hitherto undertaken by the quality assurance technicians. With appropriate training, the operators gladly accepted the challenge and were proud to make their decisions. The supervisor commented, “Before the programme we were only workers now we feel we can make a difference.”

6.3.5 Problem-Solving Managers in their day-to-day tasks deal with problems and opportunities, and by solving the problems successfully, they are able to make the correct decisions. Effective managers solve problems both rationally and creatively. During the R&D phases of product development, managers use both techniques to solve problems. They often begin by solving problems rationally and apply creative problem-solving (CPS) techniques (Whetten et al., 2002; De Silva, 2013). Problem-solving and decision-making are important managerial skills, and the resolution depends on the effectiveness of decision-making. By improving the quality of decision-making, effective solutions can be achieved (Chapman, 2010). It is common for unskilled managers to solve problems by reacting to them. Time constraints push them to take rapid decisions which have worked before. Problems are unique, and this process results in an endless cycle of recurring problems and decisions which are doomed to failure (McNamara, 2003).

6.3.5.1 Types of Problems Managers and supervisors face different types of problems from relatively common, simple and well-defined ones to more unusual ones. The supervisor who deals with an operator who is unskilled to operate a machine faces a common and a simple problem. On the other hand, a manager who is confronted with a food product containing metal pieces deals with a more complex problem. Various types of problems are described below (Hellriegel et al., 2002):

6.3.5.2 Creative Problem-Solving (Osborn-Parnes Problem-Solving Model) CPS involves a way of thinking and behaving. Therefore, CPS as a process system or method is an imaginative way of resolving a problem and achieving a successful outcome (Mitchell & Kowalik, 1999). This model involves six steps: 1. Mess finding: Identifying the problem that poses a challenge. 2. Data finding: Collecting all the facts and information relevant to the situation. 3. Problem finding: Identifying all the possible problems and isolating the most significant one.

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4. Idea finding: Identifying all solutions to the problem. 5. Solution finding: Selecting the best option using a set of criteria. 6. Acceptance finding: Gain support for the solution, create a plan of action and implement the plan.

6.3.5.3 Rational Model of Problem-Solving The rational model of problem-solving is a seven-phase process that increases the likelihood of resolving the problem successfully through logical decision-making (Hellriegel et al., 2002): Phase 1: Defining and diagnosing the problem. Identification of the real problem is crucial for generating the correct solution. Often the problem itself is identified with the symptoms. In order to identify the real problem, one has to determine how it occurred, its nature (whether people, operational or technical) and whether it is an existing problem, a potential problem or a previous problem that has not been resolved satisfactorily. Diagnosing involves finding the causes of the problem. Often the causes are confused with the symptoms of the problem. A delay in the delivery of a product to a customer is not the problem. Rather it is a symptom of a problem such as manufacturing issues, equipment failure and lack of raw materials or other causes that contributed to the delay. If the problem is not diagnosed correctly, the resolution will focus on irrelevant actions. Problem definition and diagnosis involves three basic skills: (a) noticing; (b) interpreting and (c) incorporating. Noticing: Identifying and monitoring the internal and external environment factors and identifying the factors that contribute to the problem. Interpreting: The assessment of identified factors to determine the causes of the problem rather than the symptoms of the problem. Incorporating: Linking the interpretations to the current or expected goals of the department or the organisation as a whole. Phase 2: Setting goals. Goals refer to the results to be achieved, which indicate the directions for decisions and actions. General goals provide broad directions for decision-making in qualitative terms while operations goals specify intended results in quantitative terms. Customers, shareholders, suppliers and external agencies play a key role in defining the goals. Phase 3: Generate options. Individuals or teams who are involved with the problem-solving process should generate alternative ways to achieve the goal. At this stage, further information may be sought. Several tools are available for generating alternative options such as the multiple cause diagram, fish bone diagram and brainstorming. Phase 4: Evaluate the options. Various options are compared and evaluated. Selection criteria are established and may include the cost, ease of implementation and the timeframe required to implement each solution. Phase 5: Select the best option. The best option is selected on the basis of established criteria. Phase 6: Implement the solution. The selected option is implemented. If the solution cannot be implemented, another alternative should be considered. Managers have to provide the necessary resources and assign responsibilities for specific tasks. Phase 7: Follow-up and control. The individual or the team must continuously monitor the progress of the project and identified “road blocks” have to be addressed. Monitoring is an ongoing activity because the external environment can change.

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6.3.5.4 Barriers for Implementation A number of obstacles can arise during the implementation phase of the solution. Managers have to be aware of possible obstacles so that they can devise ways to overcome them. Some of the common obstacles are: (a) lack of resources to carry out the action plan; (b) diversion of individuals or resources due to other causes; (c) procrastination; (d) power struggles among the team members and the management and (e) resistance to change.

6.3.5.5 Applicability of Problem-Solving to Management Systems Development Problem-solving and decision-making are complementary to each other. The development and implementation of management systems requires decision-making. There is interaction among the various functions of the organisation and problems have to be identified and resolved.

6.3.6 Motivation Factors that motivate employees have been a subject of interest to managers and researchers for a long time. It is a psychological state that exists whenever internal and/or external influences initiate, direct or maintain goal-directed behaviour. Many theories about work motivation have been proposed, but no single theory adequately addresses all attributes of work motivation. Motivation is defined as the: “state of being stimulated to take action to achieve a goal or to satisfy a need” (White & Generali, 1984). In terms of ability within an individual, Agomo (2008) defines it as “some driving force within individuals by which they attempt to achieve goals in order to fulfil some need or expectation”.

6.3.6.1 Needs Theory of Motivation Although there are several theories of motivation, only the needs theory is discussed here (Stoner et al., 2007). According to this theory, individuals have the desire to satisfy a need or needs, which drives them to fulfil the need or needs. Goals are established and implement ways of achieving the goals. Fulfilment of the need is the fourth phase of the theory which brings satisfaction to the individual. However, the cycle starts again with the desire to acquire more needs (Figure 6.1).

6.3.6.2 Motivating the Team Managers have to demonstrate leadership skills to motivate the team. Adair (2009) has proposed eight principles for motivating others: 1. Motivate yourself: Unless you motivate yourself, you cannot motivate others. The reasons for the inability to motivate yourself include the lack of interest in the job, desire to arrive late and leave early, desire to leave the job, feeling of dislike to the job and feeling out of place. 2. Select people who are highly motivated: Seven key indicators of motivated people are alertness and quiet resolve, commitment to the task, staying power, skill, single mindedness, enjoyment and willingness to take responsibility. 3. Demonstrate empathy and treat each person as an individual: Find out what motivates individuals, and do not rely on assumptions or theories. In each person cultivate a sense of trust,

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Trigger: the drive to acquire Deprivation

Needs

Achievement Fulfilment of needs

Figure 6.1

4. 5. 6.

7.

8.

Drive

Actions Goal directed approach

needs theory of motivation.

autonomy, initiative, industry, integrity and security through encouragement, inspiration, support and stimulation. Goals have to be achievable and realistic: Understand the organisation, its aims and the purpose. Goals have to be specific, measureable, achievable, realistic and time-bound. Targets must be agreed between the parties and monitored to enable changes to be made, if necessary. Progress motivates the team: Provide feedback on the progress to realise the achievements, and it should be accurate, sincere, generous, specific, spontaneous and fair. Give information first before encouraging them. Establish an environment to foster motivation: A motivating environment can be created by not overemphasising on controls, avoiding public criticism of individuals, satisfying physical and psychological needs, introducing controls only where necessary, providing opportunities for participation in decision-making, keeping units and subunits small, proper job design, giving autonomy and creating an awareness of the importance of tasks individuals perform. Celebrate achievement and offer fair rewards: Celebrate achievements however small they are. Provide incentives such as cash, vouchers, merchandise and travel coupons. Avoid offering incentives which are no use to individuals. For example, a membership subscription to a tennis club is of no use to a person who does not play tennis. Give due recognition and praise when necessary: Appreciation for achievements can be expressed in many forms and can be formal or informal. In giving recognition ensure that everyone is treated in an equal and fair manner, real achievements and contributions are rewarded, core values of the organisation are reflected, everyone is encouraged, they are given in public and offered in a sincere manner.

The task of motivation is complex because individuals have different sets of needs. Some guidelines to foster motivation among the team are as follows (Longest, 1984):

1. 2. 3. 4.

Clarify the objectives and the purpose of the task to be accomplished. Understand the needs and expectations of the team by demonstrating empathy. Communicate the expectations to the team. Match the needs of the individual with those of the organisation. Success depends on the alignment of individual goals with the goals of the organisation.

Skills and Tools for Management System Development  ◾  123

5. Support the staff by providing necessary skills, training and other resources. 6. Encourage teamwork which is an essential ingredient of motivation.

6.3.6.3 Why Motivation Attempts Fail Managers often struggle to motivate the staff because of the misconceptions about motivation and focusing on the wrong things. They make wrong assumptions about what actually motivates their staff. Some of the misconceptions are cited below (Shanks, 2007; Dewar & Keller, 2011): 1. Managers believe that employees do not care about the company. 2. Assuming that big bonuses are better motivators than gifts. Bonuses are purely transactional while gifts create a relationship between the parties. 3. Develop active listening skills and listen more, talk less. 7. Some people cannot be motivated. 8. Employees are always motivated by financial rewards. 9. Motivation is assumed to be a manipulation of the staff by the management.

6.3.6.4 Applicability of Motivation to Management Systems Development At first, employees are enthusiastic about the new challenges offered to them. But the interest dwindles rapidly unless the management show support and develop motivation among the staff. In order to gain the commitment and involvement of the staff throughout the development and implementation phases of the management system, managers must demonstrate leadership qualities and motivate the staff. People develop management systems, and therefore, they need the skills necessary to meet new challenges. It is the responsibility of the management to provide the necessary skills.

References Adair, J. (2009). Leadership and Motivation. Philadelphia: Kogan Press. Agomo, C. (2008). Understanding what motivates staff. Pharmaceutical Journal, 280, 545–548. Bowen, D. E. and Lawler, E. E. (1995). Empowering service employees. Sloan Management Review, 36 (4), 73–84. Chapman, A. (2010). Decision-making and problem solving. Retrieved April 05, 2018, from http://www. businessballs.com/problemsolving.htm. De Silva, T. (2013). Essential Management Skills for Pharmacy and Business Managers. Boca Raton, FL: Taylor & Francis. Dewar, C. and Keller, S. (2011). Four motivational mistakes most leaders make. HBR Blog Network. Retrieved April 07, 2018 from http://blogs.hbr.org/cs/2011/10/four_motivation_mistakes_most. html.

124  ◾  Integrating Business Management Processes Ehlert, D. A. (2004). Managing professionals. In A. A. Peterson (Ed.), Managing Pharmacy Practice, pp. 39–55. Boca Raton, FL: CRS Press. Ellis, C. W. (2005). Management Skills for New Managers. New York: Amacom. Fajardo, F. R. (1997). Management. Quezon City: Rex Printing. Hellriegel, D., Jackson, S. E. and Slocum, J. W. (2002). Management: A Competency-Based Approach (9th Ed). Cincinnati: South Western Hindle, T. (2008). The Economist’s Guide to Management Ideas and Gurus. London: Profile Books. Katzenbach, J. R. and Smith, D. K. (2005). Discipline of teams. Harvard Business Review, 83 (9), 162–171. Longest, B. B. (1984). Management Practices for the Health Professional (3rd Ed). Reston, VA: Reston Publishing. Luecke, A. and McIntosh, P. (2009). The Busy Manager’s Guide to Delegation. New York: Amacom. Mackin, D. (2007). The difference between a team and a group. The Side Road. Retrieved November 02, 2018 from http://www.sideroad.com/Team_Building/difference-between-team-and-group.html. McCoy, T. J. & Associates. (2006). Empowerment: Five Steps that Develop a High-Involvement, HighPerformance Workforce. Problem Solver Series. Kansas City, MO: TJ McCoy & Associates. McNamara, C. (2003). Field Guide to Leadership and Supervision for Non-Profit Staff (3rd Ed). Robbinsdale, MN: Authenticity Consulting, LLC. Mitchell, W. E. & Kowalik, T. F. (1999). Creative Problem Solving (3rd Ed). New York: Suny-Birghamton Press. Pastor, J. (1996). Empowerment: What it is and what it is not. Empowerment in Organisations, 4 (2), 5–7. Shanks, N. H. (2007). Management and motivation. In S. B. Buchbinder and N. H Shanks (Eds.), Introduction to Healthcare Management, pp. 23–36. Burlington, MA: Bartlett Publishers. Stoner, J. A. F., Freeman, R. E. and Gilbert, Jr., D. R. (2007). Management (6th ed.). New Delhi: Prentice-Hall. Whetten, D., Cameron, K. and Woods, M. (2000). Developing Management Skills for Europe. London: Pearson Education. White, S. J. and Generali, J. A. (1984). Motivating pharmacy employees. American Journal of Hospital Pharmacy, 41 (7), 1361–1366. Wing, L. S. (1996). Personal empowerment: Self as tool. Empowerment in Organisations, 4 (3), 34–36.

Chapter 7

training and Development 7.1 I introduction Progressive companies are realising the significance of learning for business improvement and for meeting the competitive challenges of the external environment. The process of learning has a broader focus of creating and sharing knowledge. Learning is the acquisition of knowledge by employees who are motivated to apply it for personal development, decision-making and performing tasks more effectively. Traditional training focuses on gaining specific skills to perform tasks. While traditional training programmes are essential, in order to improve employee performance and meet business goals training has to evolve to include an emphasis on learning as well as creating and sharing knowledge. The emphasis on learning has several requirements (Noe, 2008):

1. Effective learning helps employees improve their performance and achieve business goals by motivating them and directing the limited resources to help business succeed. 2. Learning needs to occur as and when needed with an emphasis on job experience and webbased training to teach the skills needed to improve performance and focus on business problems. 3. Informal learning through mentoring, classrooms and job experience has to be encouraged to acquire tacit knowledge. 4. Managers must support learning by providing physical and technical resources as well as psychological support. An essential part of learning is creating and sharing knowledge about the company, its customers and the business processes. The organisation must provide physical resources and technology (emails, websites) to promote employee collaboration and knowledge sharing.

7.2 Definitions Learning is the acquisition of knowledge by employees or groups of employees who are willing to apply knowledge to improve the performance of tasks and achieve business goals (Noe, 2008). 125

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Training is the process of increasing the knowledge and skills of an employee for performing a particular task or job (Sahu, 2005). Development encompasses all the activities and programmes that enable an employee to broaden their sphere of knowledge and skills leading to improved performance and gain promotion (Sahu, 2005).

7.3 Different Perceptions of training and Development The significance attached to training and development influences the way it is perceived by the management of the organisation. Those who view expenditure on apprenticeship schemes, induction courses, refresher courses and other training programmes in the same way as expenditure on the maintenance of buildings and facilities consider them as recurring items and are prepared to reduce the budget in time of financial pressure. However, the organisations that describe training and development activities as human resources (HR) development contributing towards the organisation’s strategy and achieving its objectives will not be ready to cut the budget in times of financial difficulties. Therefore, the allocation of the budget for training and development and what types of programmes will be funded are closely linked to organisational internal politics and cannot be considered in isolation (Stoddart, 1992).

7.4 Factors Affecting training outcome Individual differences in capabilities, demographics, personality traits and values and interests influence the training outcome through a set of intervening mechanisms. General mental ability and specific talents, capabilities or skills are capabilities that influence the training outcome. Demographics include physical or observable characteristics of individuals such as gender, ethnicity and age. Personality traits that influence training outcome are the Big Five: extroversion, emotional stability, agreeableness, conscientious and open to experience. Career orientation, vocational interests and education are values and interests. These individual differences influence the training outcome through certain process mechanisms. Intervening mechanisms include information processing capacity, attentional focus and metacognitive processing, motivation and effort allocation and emotional regulation and control (Gully & Chen, 2010). These factors are described in Table 7.1. Information processing capacity as an intervening mechanism involves the manner in which individuals process and organise information during learning. It helps explain the differences between trainees and experts and people of different ages in their ability to process information. Attentional focus in the second intervening mechanism refers to cognitive resources engaged and applied to particular aspects of the task or task environment. Metacognitive processing refers to the ability to plan, monitor and revise the goals and self-monitor the intellectual functions. Training is also influenced by motivation and effort allocation mechanism which can be conceptualised as the direction, effort, intensity and persistence that trainees put into learning-oriented tasks before, during and after training. During task engagement and learning, anxiety and other negative emotional reactions may arise and the emotional regulation and control mechanism control these emotions and create a positive emotional response. These mechanisms intervene in varying degrees in the factors that influence training and development (Gully & Chen, 2010).

Training and Development  ◾  127 T Factor

Description

General cognitive ability

Ability to learn. Associated with increased ability to acquire, process and synthesise information

Specific abilities, talents and skills

Metacognitive and self-regulatory ability: Ability to develop a plan for achieving a goal and evaluating the effectiveness of reaching it Analytical ability: Ability to reason, process information and solve problems Creative ability: Ability to create, discover, invent and imagine Practical ability: Ability to select and adapt to changing environment Job specific aptitudes: Specific sets of knowledge, skills and abilities to perform tasks Job knowledge and work experience: Job-specific knowledge, expertise and work experience Emotional intelligence: Ability to perceive and express emotions, understand and use them and managing emotions

Demographics

Gender Race, nationality and ethnicity Age

Personality traits

Extroversion: Ability to socialise, be assertive, talkative and energetic Emotional stability: Not being anxious, depressed or embarrassed Agreeableness: Being polite, flexible, trusting, cooperative, forgiving and tolerant Conscientiousness: Being careful, thorough, responsible and organised Self-concept traits: Person’s own perception Goal orientation: Desire for enhance competence and skills General self-efficacy and self-esteem: Self-evaluation of fundamental ability to cope, perform and be successful Locus of control: Degree to which one perceives events to be under his or her control

Interests, values and styles

Individual differences that capture involvement, valuation and general approach towards career development

7.5 the need to train Staff Organisations train their staff for many reasons (Barrett, 2003; Noe, 2008): 1. Changes in consumer behaviour: Consumer needs and wants change with changing economic environments. Successful companies identify the needs and wants of consumers and train their staff to meet any challenges. For example, people are becoming more aware of their health and well-being and their lifestyle changes determine their needs and wants. 2. Technology: Advanced technology has been widely applied to business processes and techniques. In order to keep pace with the changes, staff need to update their skills and knowledge. Computer technology has been used in almost all business processes and the operators now require new skills to understand these processes.

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3. Competition: The survival of a business depends on the ability of an organisation to meet the challenges posed by its competitors. Effective training can help the company cope with the demands of competition. In the current business environment, employees need a wider range of skills. 4. Statutory changes: Numerous statutory regulations protect employees and customers. Firms have to comply with statutory regulations to remain in business. Employees have to be trained to understand the regulations that affect their tasks and to comply with the law. 5. Increase productivity: Fully trained staff achieve improved quality and provide a better service. 6. Reduced employee turnover: Trained staff tend to stay longer and contribute more to the goals of the company. 7. Decreased need for supervision: Trained staff are more efficient in performing their tasks and they need little or no supervision. 8. Globalisation: Accessibility to new communication technology through the internet, email and video conferencing has enabled companies to complete commercial transactions within a short time. Employees are trained locally and in international locations to promote the business. Cross-cultural training is an important element in such training programmes. 9. Succession planning: Companies need to identify employees with managerial talent and help develop the skills needed to succeed. Such training includes providing employees with mentors, job experience and formal courses to develop their skills. 10. Focus on intangible assets and human capital: More and more organisations now focus on intangible assets and human capital to gain a competitive advantage. Intangible assets include human capital, customer capital, social capital and intellectual capital. Intangible assets are difficult to duplicate, and those companies that invest in intangible assets have a greater competitive advantage. 11. Contributing to business strategy: Training and development is now seen by managers as a means of supporting the company’s business strategy by proper planning to meet broad goals such as profitability, market share and quality. Trained managers can design and implement training and development activities tailored towards achieving the company’s goals. 12. Changing diversity of the workforce: Globalisation has brought countries closer, and as a result, the demography of the workplace is new changing. Workplace diversity brings with it new challenges, and organisations have to provide technical and customer service skills to employees to meet the challenges of the new environment.

7.6 the Role of training In order to meet these training needs, the training programme has to fulfil the following functions (Sahu, 2005).

7.6.1 Increase Efficiency Training increases the efficiency of performing tasks by enhancing the skills and competencies of employees. Innovations and technology demand new skills and competencies, and old methods of performing tasks become irrelevant.

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7.6.2 Increase Morale The morale of employees determines the willingness to cooperate and give their best to the organisation. High morale among employees results in staff satisfaction, voluntary conformation to rules and regulations and improved team performance to achieve company objectives. Training enables employees to perform their tasks more efficiently, which in turn leads to the human needs of security, job satisfaction and self-actualisation. Trained employees perceive their jobs in a more meaningful way as they can transfer their newly acquired skills to their tasks.

7.6.3 Improve Human Relations Advances in technology, and the growing complexity and high degree of specialisation, cause various human relations problems such as alienation, depression and interpersonal and intergroup conflicts. These issues can be resolved satisfactorily by appropriate human relations training. The techniques of human relations training are geared to handle many social and psychological problems in the workplace.

7.6.4 Reduce the Need for Supervision Trained employees work independently with little or no supervision. With reduced supervision, managers can increase their span of management, which can result in the reduction of the number of intermediate levels in the organisational hierarchy. This, in turn, improves communication and decision-making while saving costs.

7.6.5 Increase Organisation’s Viability and Resilience Organisational viability and resilience are essential factors necessary to tide over difficult periods in the organisation and sustain its effectiveness despite the loss of some key personnel. Trained employees are the key to succession planning and they can easily move into positions made vacant. An organisation’s greatest asset is its trained and motivated people who are more productive.

7.6.6 Gain a Competitive Advantage Successful organisations adopt many measures to meet the challenges posed by competition. New methods and procedures are introduced to improve the productivity and proficiency of staff and provide a more cost-effective service to their clients. These measures require a skilled and competent workforce and training becomes an expeditious and cost-effective option.

7.6.7 Meet Technological Advancements In the world of advancing technology, organisations need to keep pace to remain in business. Companies may install new equipment, commission new plants and introduce innovative ways of operation. Staff need to be trained to handle these changes.

7.6.8 Comply with Company Policy Companies may adopt a policy to train their staff regularly, but this requirement may be imposed on the organisation by regulatory authorities. Most professional bodies require their members to

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perform a minimum number of continuing professional development (CPD) activities to maintain their registration with the professional body. Unless employees are trained to keep abreast of the latest developments, organisations cannot respond to changes and eventually they will perish.

7.7 Responsibility for training In owner-operated small companies, training is provided by the owner. As companies grow in size from a few employees to over 100 employees, training becomes the sole job or part of the responsibility of an individual in a department. The HR department may be in charge of employee training programmes or a separate training and development unit under the umbrella of the HR department may take over the role. However, training and development programmes are successful only if employees, managers and trainers take ownership of training. If specialised training such as computer technology is required, the HR function may outsource accredited trainers (Noe, 2008). A successful training programme has the following features (hrcouncil.ca, n.d.): ◾ Provides a well-defined job description, which is the foundation for identifying the training needs ◾ Provides the basic training needed to perform the tasks effectively ◾ Identifies the knowledge, skills and abilities that the organisation will need in the future, taking into consideration the long-term goals of the organisation and the implication of these goals for employees ◾ Tailors the training needs for learning opportunities ◾ Communicates the employee development programme to employees and encourages them to develop their own development plans ◾ Supports and designs training programmes when employees identify learning opportunities that benefit the organisation and the employee.

7.8 T training Process Traditionally, performance appraisal and feedback have been used as tools to improve employee performance. But training has been shown to score higher than appraisal and feedback and lower than goal setting in its impact on productivity. According to the Association for Talent Development (ASTD), their US organisation spent approximately $156.2 billion on employee training in 2011. The average direct expenditure per employee was $1,182 in the same year (Miller, 2012). A rational training process widely used is basic analysis–design–develop–implement–evaluate (ADDIE) (Dessler, 2011). The ADDIE training process involves the following steps: (a) analysis: training needs analysis; (b) design: design the overall training programme; (c) develop: develop the programme by collating the necessary material; (d) implement: implement the programme and (e) evaluate: evaluate the effectiveness of the programme.

7.8.1 Assessment of Training Needs Organisations often perceive training needs as not contributing towards the profit margin, and as a result, training courses are not part of the overall strategy for performance improvement. Therefore, training programmes are designed without considering the needs of the participants. Such

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programmes do not result in performance improvement. The full benefits of training programmes can be achieved by assessing the need for training and of participants prior to training. Training needs analysis is the process of identifying the training needs in an organisation for the purpose of improving employees’ job performance. A successful training needs analysis identifies not only those who need training but also what kind of training is required (Silberman & Bieche, 2015).

7.8.1.1 Gathering Information When a problem occurs in an organisation, training is often viewed as the only solution to the problem. However, the root cause of the problem may not be lack of training and it might be due to poor performance feedback due to unclear performance expectations, a lack of resources to perform the tasks, poor financial and other rewards, a mismatch between employees’ skills and job requirements, and job insecurity. If training has been identified as a root cause, in order to design a successful training programme the organisation has to gather information about the training need and the actual or potential participants. Table 7.2 shows the type of information necessary to design the training programme (hr-Guide.com 2015).

7.8.1.2 Benefits of the Assessment A preliminary assessment offers several benefits to the participants as well as for the training provider.

1. Helps determine training content. The groups may need certain information and skills more than others. Some may require advance skills and knowledge. The training provider can understand the problems that participants may face in applying the skills learned. 2. The training provider can obtain case material from the participants themselves. 3. It enables the training provider to develop a rapport with the participants.

7.8.1.3 Types of Needs Analysis Different employment contexts require different types of needs analysis. Table 7.3 shows the sources that help determine which needs analysis is appropriate for the situation (hr-Guide.com, 2015). T Participants How many? Descriptive information about participants Competencies Success and problems How well do they know each other? Voluntary or mandatory? Roles and tasks performed by participants

Topic Familiarity with the subject matter of the topic Attitudes and behaviour relevant to the topic

Supervisor What are the expectations with respect to the training programme?

132  ◾  Integrating Business Management Processes T Type

Description

Outcome

Organisational

Analysis of business needs or other reasons

Identifies: The person who requested the training Need for training Impact of previous training programmes

Personal

Analysis dealing with potential participants and training providers involved with the programme

Identifies: Individuals who need the training Existing knowledge on the subject Learning style Training provider Skills of participants Any changes to policies, procedures and/or equipment

Work/task

Analysis of tasks being performed

Specifies main duties and skills required Enables the training to be tailored to actual needs

Performance

Analysis of employee performance

Identifies the performance gap Can determine whether training will improve performance

Content

Analysis of documents, laws and procedures applicable to the job

Help determine appropriate content

Training suitability

Analysis of whether training is the desired solution

Determine the applicability of training to the job

Cost–benefit

Analysis of the ROI on training

Determine whether the value of training exceeds the investment to produce and administer the programme

7.9 Designing the training Programme Designing the training programme involves developing the training objective, selecting delivery methods and creating evaluation methods. The training provider has to set performance objectives and create a detailed training outline. The most effective delivery method has to be selected and the overall programme needs to be verified by the management. The design plan should ensure the creation of a training environment to motivate the staff to learn and transfer the training to the job. Other issues to be resolved at this stage are the training programme content (workbooks, exercises and activities) and the allocation of a budget for training (Dessler, 2011)

7.9.1 Setting Learning Objectives Learning objectives should specify in measureable terms what can be accomplished by the trainee after completing the training. For example, after completing a training programme on the storage

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of food items, the warehouse person will be able to store various food products according to specified conditions without any errors. The training objectives should focus on the deficiencies identified in needs analysis. The financial constraints of development costs, the direct and indirect overhead costs of the trainer’s time, the participants’ compensation and the cost of evaluation have to be resolved at this stage.

7.9.2 Creating a Motivational Learning Environment An effective training programme takes into consideration both the ability and the motivation of the trainee. The ability includes the required reading, writing and mathematics, educational level, intelligence and knowledge base. Since all the trainees are not homogeneous in their abilities, the training provider needs to design a programme to accommodate all levels of abilities. Top management must support the training programme and promote motivation by: (a) making the learning experience meaningful; (b) making it easy to transfer the skills learnt; (c) reinforcing the learning and (d) ensuring the transfer of learning to the job.

7.10 Developing the Programme Programme development includes the creation of the training content and assembling the materials needed to deliver the programme. Training equipment and materials include iPads, workbooks, lectures, PowerPoint slides, web-based activities, trainer resources and support material. The appropriate delivery method has to be selected depending on the needs of trainees. But the appropriateness of methodology is based on factors such as: (a) current level of available expertise; (b) outcome expected; (c) time availability and (d) availability of financial resources (Saks & Haccoun, 2010; Naik, 2007).

7.10.1 Instructional Methods There are two types of instructional methods: on the job and off the job. On-the-job approaches include job instruction training, job rotation, coaching, mentoring, quality circles, counselling, officiating and deputation. Some off-the-job approaches are classroom training, field training, outward-bound training, seminars, workshops and conferences. Training methods can also be classified as: ◾ ◾ ◾ ◾ ◾ ◾ ◾ ◾

Individually focused training (counselling, coaching, mentoring) Group-focused training (lectures, seminars, workshops) Trainer-controlled programmes (lectures, job instructions) Trainee-controlled programmes (human labs) Time-bound programmes (classroom and on-the-job instruction) Self-learning programmes (self-study and web-based training) Training groups (classrooms) Distant learning programmes (video conferencing, webinars, conference calls).

Often a single approach may not meet training objectives and a combination of approaches may be suitable. Any one of the training methods may be used to train a general group of candidates, while special groups require specific training programmes (Naik, 2007).

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7.10.1.1 On-the-Job Training In this type of training, the trainee receives instructions from peers or a supervisor. Trainees learn through observing peers or a supervisor performing the job and trying to imitate their behaviour. Although on-the-job training has been used, since the Middle Ages, the US Army formalised the approach during World War II.

7.10.1.1.1 On-the-Job Training Methods (a) Job Instruction Method The job instruction method is a formalised, structured and systemic approach that consists of four steps: preparation, instruction, performance and follow-up. – Preparation: The task is divided into several small tasks by the trainer. All the equipment and supplies necessary to do the task are gathered and time is allocated to teach each task. The trainer is at ease and generates an interest in the trainees. – Instruction: This step involves demonstrating and explaining the task to trainees. – Performance: The trainee performs the task allocated under the guidance of the trainer who provides feedback and reinforcement. – Follow-up: The trainee is able to perform the task unsupervised but the supervisor monitors the performance. (b) Coaching Coaching is mainly used to improve interpersonal, communication, leadership, cognitive and self-management skills. Coaching makes it easy for the trainee to apply the skills learnt on the job. Opportunities in the work environment are identified and coaching is planned to improve employee strengths and potential. The objectives of the programme are mutually agreed between the trainee and the trainer. Coaching opportunities can arise as a result of transfers, special assignments, holiday arrangements and conference arrangements. (c) Mentoring Mentoring provides career support and psychological support. Career support activities include coaching, sponsorship, exposure, visibility and the protection and the provision of challenging opportunities. The mentor also provides psychological support by being a friend who listens and counsels. (d) Job Rotation In this method of training, the trainee is exposed to several functional areas within the organisation. Job rotation provides multi-skills, and the main purpose is to provide trainees with a wider organisational perspective and a greater understanding of different functional areas. It helps relieve boredom in those who are engaged in repetitive tasks, while building rapport with a wide range of individuals in the organisation. (e) Apprenticeship Training Apprenticeship training is applicable to specialised occupations such as welding and carpentry, and is generally regulated through a partnership among governments, labour unions and employers. Within an occupation, the training is transferable. This flexibility permits movement when regional fluctuations occur in the supply and demand of skilled labour.

7.10.1.2 Off-the-Job Training Off-the-job training takes place away from the trainee’s familiar workstation where the trainees can concentrate on learning rather than performing. The advantages and disadvantages of

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on-the-job, off-the-job and self-paced training are shown in Table 7.4. Some on-the-job and offthe-job programmes are described below (Saks & Haccoun, 2010; Naik, 2007).

7.10.1.1.2.1 Off-the-Job Training Methods (a) Lectures A lecture is a traditional and a direct method of instruction. The training provider prepares the content to be delivered and presents it orally with little trainee involvement. It will only be effective if it generates interest among the trainees and motivates them. The trainer has an in-depth knowledge of the subject at hand. This learning method is mainly used in colleges and universities. Table 7.4  Advantages and Disadvantages of Some Training Methods Training Type

Advantages

Disadvantages

Suitable for

On the job

Transfer of learning is easy Lower cost Illiterate and handicapped can also learn Attention individually focuses No absence on Mondays at work Easy evaluation

Time-consuming No uniformity of training Involvement of experts minimal Disruptions due to work commitments Possibility of damage to resources while training Disruption of production or service during training Possibility of compromising safety when safety issues are associated with the use of equipment or dangerous chemicals Minimum use of learning aids

Learning practice skills Minimising cost Enhancing the transfer of learning Illiterate and handicapped

Off the job

More trainees and few trainers Learn by interaction with group members Trainer can use a wide variety of instructional methods Trainer can control the training environment (e.g. away from noise) Large number of trainees can be trained at one time Experts can be used

More costly Difficulty of transferring the training to the job because training takes place away from the workstation Absences on Mondays Evaluation is difficult Not ideal for skill-focused outcomes Few trainers

Generic and knowledgefocused outcome Large groups Time-bound outcomes Avoiding workplace interruptions Trainees who require safe and nonthreatening environment

(Continued )

136  ◾  Integrating Business Management Processes Table 7.4 (Continued)  Advantages and Disadvantages of Some Training Methods Training Type

Advantages

Disadvantages

Suitable for

Non-threatening environment Distractions are controllable Time bound No safety, quality or productivity risks Self-paced

Location and time immaterial No absences on Mondays Low cost Full time or part time Manual or computerised Learning at own pace

Control and monitoring is difficult Initial high cost of development No experts for instant advice Learning by interaction with group members is not possible Allocation of time for learning may be difficult Self-motivation is a key factor Common timetable is not possible Learn correctly by self-study Not suitable for illiterate and handicapped or novices

Trainees who are motivated Trainees who are capable of learning on their own Trainees are able-bodied

(b) Discussions The discussion method of training is a two-way communication between the trainer and the trainee. Knowledge is communicated to the trainees in the form of lectures and then their understanding is conveyed back to the trainer. Understanding is conveyed through verbal and non-verbal communication to enable the trainer to evaluate whether the material has been understood. (c) Audio-Visual Methods The audio-visual method of training involves various forms of media that are used to illustrate key points or demonstrate certain actions or behaviour. Interest can be maintained by showing the materials in the form of audio-visuals. The method is easy to handle and explain. It is also easy to include a lot of information in the content. (d) Case Studies The case study method of training provides a problem situation based on a real situation for discussion, analysis and resolution. This method allows the trainees to apply what they know and then develop new ideas to manage a situation or a problem. How the trainees apply the situation is more important than the solution itself. It enhances teamwork, communication and interpersonal skills and improves their analytical skills. (e) Behaviour Modelling In this type of training, trainees observe a model performing a task and then attempt to follow the observed procedure. It is more often used in combination with other techniques.

Training and Development  ◾  137

(f)

(g)

(h)

(i)

The trainer defines the skills that are required and provides an overview of the theory. The trainees are instructed to watch the learning points and critical behaviour. After the demonstration, trainees are instructed to imitate the behaviour and the trainer ensures that trainees appropriately reinforce the behaviour in the workplace. Role Play Role playing is a method of human interaction that involves realistic behaviour in simulated situations. The trainer describes the roles so that participants have to role play the problems they face. This method helps develop interpersonal and communication skills, conflict resolution skills, group decision-making and identifies one’s own behaviour and its impact on others. There are several types of role play: Multiple role plays: Trainees are put into groups, and each one performs the role play simultaneously. After the role play, each group analyses the interactions and identifies the learning points. Single role play: One group takes part in the role play and other trainees observe it, analysing and identifying the learning points. Role rotation: One group participates in the role play and after the interaction of participants it is stopped and discussed. Then the participants are asked to exchange their roles. Games This method requires the trainees to gather information, analyse it and make decisions. Business games are primarily used for developing management skills. Games develop an awareness about how to make decisions with incomplete information. They encourage learning because the participants are actively involved and the games mimic the competitive nature of the business. An important feature of games is that they encourage the development of interrelationships and the ability to work as an effective team in group situations. These games may involve all aspects of management practice in labour relations, ethics, marketing and finance, etc. Simulations Simulations represent real-life situations in which the trainees make decisions, the outcomes of which reflect what would happen if they were on the job. Simulations allow trainees to see the impact of their decisions in an artificial risk-free environment. They are used to teach production and process skills as well as management and interpersonal skills. A part of airline pilots’ training programme involves simulation training that mimics the real environment. Action Learning Trainees accept the challenge of studying and solving a real-world problem and accepting responsibility for their decisions. The process includes: (a) a real-world problem; (b) a diverse problem-solving team; (c) a process that promotes probing, enquiry and reflection; (d) taking action to resolve the situation and (e) a commitment to learning.

7.10.2 Selecting a Training Method Well-trained staff are an asset to the organisation. The primary purpose of training is to motivate the employees and improve their performance. Any training programme involves trainees, the trainer, the content and training aids. For the training programme to be effective, several factors have to be considered (Sahu, 2005), and these are summarised below:

a. Learning objectives A learning outcome is an important factor that guides the selection of a training method. There is a distinct correlation between the training method and the learning outcome.

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b.



c.

d.



e.



f.



g.

h.

A primary consideration in selecting a training method is to ensure that it can achieve the learning objective. The objective of a learning activity is not only to develop knowledge, but also to enhance the competencies of the participants. Therefore, the learning objective of the training activity has to be clearly defined by the organisation. Another aspect of a learning outcome of a training activity is whether it is directed towards promoting learning through interactions within the group (discussions) or through practical work (action). Each of these requires different approaches to training. Characteristics of the training group The nature of the training group and its composition determines the type of training programme. Factors to be considered are the level of comprehension of the group, previous experience of training, the ability to understand the complexities and implications of the training method, the extent of stimulation and participation of the group in the training activity and the number of participants. The training provider has to ensure that the group is adequately prepared for the training method. Time allocation The training schedule includes a time allocation for each training activity. Generally, the activities are interrupted during a training session, and the trainer has to select an appropriate method that can be delivered within the given timeframe. Some methods such as role play and simulation methods require more time that other methods. It may be necessary to modify the particular method to suit the timeframe, but the core requirements should not be ignored. Ability to use the method effectively The trainer should have: (a) ability and expertise in using the method and in handling situatio ns arising out of its application and (b) ability in analysing the data generated by the method to achieve the learning outcome. The training provider should be confident enough to handle any practical issues raised by the participants. Facilities and resources Practical aspects that impact on the delivery of the programme such as noise and interruptions are also important considerations. Operational aspects to be considered are the costs, materials, equipment and other facilities. Style preference Every trainer has a distinct training style and a method of dealing with the delivery of the programme. Some training methods may not be compatible with the training style of the training provider. The effectiveness of the training activity will be adversely affected if the trainer is not fully confident about the training method. Ease of presentation Sometimes training requirements may dictate an easy method with no complexities involved in its application. The trainer may require only a general level of skills and competence. In such instances, the presentation is easy and good results are assured. Stage of the programme Some training methods are more effective when used in early stage of the training activity, while others are more effective when used during the later stage of the programme. For example, role play and simulation games are intensely interactive, and participatory methods are not effective in the initial stages of the programme. Any training method must encourage the development of relationships and support mechanisms during the early stages of the training activity.

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7.11 implementing the Programme There are two basic approaches to implementing a training programme. In the first approach, the trainer controls the programme content and experience. In the second approach, the trainee participates in the programme with the trainer acting as a guide providing the resources. The basis of this latter approach is that individuals are able and willing to learn if they are given the appropriate material in an environment that is conducive to learning. It is a better approach because it is participatory, learning experiences are shared, and participants are able to learn at their own pace. Another aspect of implementing is the follow-up support to the participants and the evaluation of the training outcome. Support may be in the form of supervision, coaching, mentoring, setting up a network support group or simply providing a source of ongoing information (Holland, 2012). The following are some of the factors to be considered in implementing the training programme: (a) the training strategy must be appropriate to the competency level of the participants and the resources available; (b) the programme must be feasible, as time away from work is a concern in organisations where absences result in disruption to day-to day activities and (c) the duration of the training programme and the training institution.

7.11.1 Implementation of Different Programmes Long-term training: It is conducted in a higher learning institution and is most suitable for technical areas. Short-term training: It is usually conducted over a period of 1–3 months in an academic or nonacademic setting away from the usual place. Mentoring–training–planning methodology: This is a type of ongoing training that deals with individual training issues in the short term. Field trips: They are short-term learning programmes and are most useful when implemented with short-term training to reinforce in a practical way the skills learnt. Conferences and seminars: These programmes are implemented to keep abreast of the developments in a particular field.

7.11.2 Training and Presentation Skills For effective implementation of the programme, the trainer should be knowledgeable, possess excellent communication skills and should communicate at the level and in the language of the participants. The training provider should understand the nature of the target group and their level of knowledge and skills (Holland, 2012).

7.11.3 Preparation for the Presentation The trainer should gather relevant information and consulting manuals and other resources relevant to the topic, acquire and prepare guides for participants and prepare audio-visual aids well in advance. Approximately, the time spent on preparation is about four times that spent presenting it. It would be helpful if the presentation material is peer reviewed by a knowledgeable person. The trainer should ensure that the time allocated for the presentation is not exceeded during the presentation.

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7.11.4 Presentation The trainer should arrive at the venue early to check out the room, seating arrangements and the audio-visual equipment. A back-up copy of the presentation should be available in a flash drive or in a CD. A friendly chat with the participants before the presentation creates a comfortable atmosphere. At the beginning of the session, formal introduction should take place. The session should begin by an introduction by the trainer outlining the topics to be covered during the session. The main topics are then expanded using the chosen learning method. At the end of the presentation, concluding remarks should include a summary of the presentation.

7.11.5 Preparation of Audio-Visual Aids The following points should be considered when preparing audio-visual aids: ◾ Present only one idea per visual to avoid cluttering. ◾ Use larger letters and drawings. ◾ Avoid presenting too much information on one slide – try to aim at a maximum of seven lines with seven words per line. ◾ Do not use multiple fonts, sizes and colours. ◾ Keep animations to a minimum. ◾ In using the visual aids, the trainer should test them prior to the presentation, check the audio-visual equipment, face the audience and switch off the equipment during discussion.

7.11.6 Trainer’s Personal Style A trainer’s personal style has a strong influence on the learning ability of the participants. The trainer should adopt the style he or she is most comfortable with. At all times, the trainer should maintain eye contact with the audience. If the interest appears to be flagging, be prepared to be flexible and perhaps change the schedule. A role play or a short intermission will break the monotony.

7.12 evaluation of training Evaluation is the assessment of the effectiveness of the training programme. It is done by collecting data from the participants about their level of satisfaction with the training programme, what they have learnt and whether they are able to transfer the knowledge to their jobs. Initial assessment may be based on: (a) the clarity of presentation; (b) the usefulness to the trainee; (c) whether it encourages further learning and (d) the level of satisfaction. Organisations spend a good amount of money on training their employees, and therefore, the management would be interested to know whether the new skills learnt by an employee have been applied to the job to improve the performance. Similarly, the effectiveness of a behaviour training programme would be evaluated by observing whether there is a change in attitude, learning and ability of participants (Management Study Guide, n.d.).

7.12.1 Benefits of Evaluation Evaluation is a monitoring tool that determines whether the training has been effective in closing the competency gaps of the employees. Some of the benefits of evaluation are as follows:

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◾ Ensures accountability: Evaluation ensures that training programmes are able to fill competency gaps without compromising on deliverables. ◾ Ensures cost-effectiveness: Evaluation of training programmes ensures that they are effective in improving work quality, employee behaviour, attitudes and their skills and are cost-effective. ◾ Feedback to the trainer/trainee: Feedback from trainees can be used to improve the training programmes and learning abilities of trainees.

7.12.2 Evaluation Models There are several models for evaluating training programmes. The most widely used method is the Kirkpatrick Four-Level Model (Kirkpatrick & Kirkpatrick, 2006). He described four levels for evaluating any training: (a) reaction; (b) learning; (c) behaviour and (d) results.







1. Evaluating reaction Reaction is the participants’ level of satisfaction with the programme. Measuring the reaction is important for several reasons: (a) it gives valuable feedback to the trainer for improvement of the programme; (b) it makes trainees aware that trainers are there to help to do the job better; (c) the evaluation sheet provides quantitative information that can be shared with the managers and (d) it provides data to trainers help develop performance standards for the training programmes. Guidelines for measuring reaction: 1. Determine the type of response to measure. 2. Design a form to record the responses quantitatively. 3. Encourage written comments and suggestions for improvement. 4. Obtain honest responses from all the participants. 5. Develop acceptable standards. 6. Compare responses against the standard and take appropriate action. 7. Communicate reactions as appropriate. 2. Evaluating learning Training programmes are designed to develop skills, knowledge and attitudes in trainees. Evaluating learning measures the knowledge acquired, skills developed or improved and changes in attitudes. The measurement of learning is more difficult than measuring reaction. However, the following are some guidelines that help measure learning: (a) if practicable, use a control group; (b) measure skills, knowledge and attitudes before and after the programme; (c) use a paper and pencil test to measure knowledge and attitudes and a performance test to measure the skills and (d) obtain a response from all participants and use the feedback to improve the programme. 3. Evaluating behaviour Measurement of behaviour attempts to evaluate the change in the application of knowledge and skills to the job. Change in the behaviour is more difficult than measuring reaction and learning for three reasons: (a) the trainee has to encounter an opportunity to adopt the changes; (b) it is difficult to predict when a change in behaviour will occur – it may happen at the first opportunity or later and (c) the trainee may or may not apply the changes. Some guidelines for measuring behaviour are: 1. If practicable, use a control group. 2. Allow the trainee to adopt the changes.

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3. Evaluate both before and after the programme. 4. Obtain feedback from trainees, their supervisors, their subordinates or others who observe the behaviour of trainees. 5. Conduct a cost–benefit analysis. 4. Evaluating results Evaluating the outcome of the programme is the most important aspect of the programme. Training providers are interested to determine the following as appropriate: – The extent of quality improvement and increased in profit. – Increase in productivity. – Reduction in staff turnover and wastage. – Improvement of “management by walk around”. – Improving interpersonal communication and human relations. – Tangible benefits. – Increase in sales. – Return on investment (ROI). Kirkpatrick (2006) suggests the following guidelines for measuring the results of training: (a) if practicable, use a control group; (b) allow time for results to appear; (c) measure both before and after the programme; (d) repeat measurements at appropriate times and (e) conduct a cost–benefit analysis. Although Kirkpatrick’s model has been widely used, its effectiveness has been a subject of debate. For example, Bates (2004) points out three major flaws in this model: 1. The model presents an oversimplified view of the evaluation process without taking into consideration contextual factors such as the learning culture of the organisation, organisational goals and values, nature of support for skill acquisition and behaviour change, environment for learning transfer and the adequacy of material resources. All these factors affect the practice and outcome of training. 2. Kirkpatrick’s model assumes a simple causal chain, such as positive reactions lead to greater learning, which leads to greater transfer of learning and subsequently more positive outcomes. However, recent research has failed to confirm such simple causal linkages. 3. The model assumes an incremental importance of information. That is, each level of information produces more data that is more informative than the information produced at the previous level. The assumptions of the model cannot be validated because of weak causal linkages inherent in the model and the data it generates.

7.12.3 ROI Model of Evaluating Training The ROI model of training evaluation is the process of identifying the benefits of training in financial terms. The benefits are then compared with the cost of creating the benefits. It is how the clients perceive the value of training in achieving their perceived goals (Buckberry, 2004). This method is most suitable for following types of training: ◾ ◾ ◾ ◾ ◾

Training programmes with clearly identified outcomes Not one-time events Broad-based and highly visible in the organisation Strategically focused Effects of training can be isolated.

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Two most commonly used formulae for calculating the ROI are as follows: 1.

Benefit/cost ratio (BCR) BCR = programme benefits/programme costs 2. ROI% ROI = (net programme benefits/programme costs) × 100 a. The process 1. Prepare a data collection plan and data analysis plan. 2. Collect data. 3. Isolate the effects of training. 4. Convert data to monetary value. 5. Calculate the ROI. b. Quantifying the benefits of training The benefits of training can be quantified in terms of time savings, increased productivity and personnel performance (Table 7.5) (Kapp, 1999). c. Investments The following are some of the costs to be considered: ◾ Designing and developing the programme ◾ Programme materials ◾ Training provider’s fee for preparing and delivering the programme ◾ Hire of the facility to deliver the programme ◾ Transport, lodging and meals ◾ Salaries plus employee benefits. T Benefit

Measurement

Financial Value

Time savings

Reduction in lead time to reach proficiency Time saved in performing a task Reduction in supervisory time Better time management

Hours saved × $/hour Hours saved × $/hour Hours saved × supervisor’s wages/hour Hours freed × $/ hour × opportunity cost of freed hours

Productivity improvement

Faster rate of performing tasks Time saved in waiting for help Reduction in downtime Reduction in waste Reduction in rejects Gain in market share

$ value of extra units, sales, etc. Hours saved × $/hour + (hours of helper’s time saved × $/ hour) $ value of reduced non-productive time, improved quality of units $ value of scrap × decreased scrap level $ value of rejects × decreased scrap level % increase in market share × $ value of increase

Personnel performance

Reduction in absenteeism/ tardiness Reduction in grievances, accidents and claims Not recruiting new staff

Hours of increased production × $/ hour Cost savings in paperwork, actions, medical claims, insurance, and lost time Salary and benefits savings

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While there are no acceptable standards for ROI, four strategies have been used to establish minimum expected requirements or a hurdle rate for ROI in training programmes (Phillips, 2003). According to the first strategy, the ROI is set using the same values used in capital expenditure investments. For North America, Western Europe and most of the Asia-Pacific region where the cost of capital has been reasonable, the ROI is in the range of 15%–20%. According to the second strategy, the ROI is set above the percentage required for other investments. Using this approach, the ROI is 25% for the regions quoted above. The third strategy sets the ROI at the breakeven point. A 0% ROI represents a breakeven point which is equivalent to a cost–benefit ratio of 1. The purpose of this strategy is to capture the cost of training and development, and there is still value and intangible benefits from the programme. The philosophy of organisations adopting this approach is that the organisation is not attempting to make a profit out of training programmes. The fourth strategy is to allow the client or the programme sponsor to set the minimum acceptable ROI value. This strategy meets the expectations or the financial return anticipated by the programme sponsor.

7.12.4 Other Models of Evaluating Training Programmes Three other models in use are the CIPP (context, input, process, product) model, the IPO (input, process, output, outcome) model and the TVS (training, validation system) approach. Table 7.6 presents the main features of these three models (Eseryel, 2002). T Context, Process, Input, Product (CIPP)

Input, Process, Output, Outcome (IPO)

Training Validation System (TVS)

1. Context: Identify the target population and assess the needs, plan for achieving the needs, identify problems and assess whether objectives meet the needs

1. Input: Evaluate system performance indicators such as trainee qualifications, availability of resources and appropriateness of training programme

1. Situation: Collect pre-training data on the current level of performance in the organisation and identify the expected future level of performance

2. Input: Identify programme strategies that meet the needs; procedural changes to implement strategies; budgets and schedules



2. Intervention: Identify the gap between the current level of performance and future level and its root cause, ascertain whether the proposed training is the solution

3. Process: Assess implementation, provide information for programmed decisions, record and monitor events and activities

3. Output: Gather data on the impact of training

3. Impact: Evaluate the difference between pre- and post-training

(Continued )

Training and Development  ◾  145 Table 7.6 (Continued)  Features of CIPP, IPO and TVS Models of Training Evaluation Context, Process, Input, Product (CIPP) 4. Product: Collect information on outcomes and relate them to objectives, context, input and process and interpret the value

Input, Process, Output, Outcome (IPO) 4. Outcome: Long-term results associated with company’s profitability, competitiveness

Training Validation System (TVS) 4. Value: Measure the difference in financial terms in quality, productivity, sales, etc.

7.13 Features of Adult Learning Most of the training programmes in firms are aimed at adult employees. Therefore, the training provider must have a good understanding of adult learning principles. There are seven guiding principles that help trainers to offer an effective training programme (Sahu, 2005). 1. Adults must be willing to learn: If there is no desire on the part of the trainee to learn, all efforts by the trainer are bound to fail. The top management must motivate their employees to create a desire to learn. 2. Adults want to learn only what they think are important to them: Focus on the skills that the trainee desires to learn. Once the basic foundation is laid, the trainee will be encouraged to expand the scope of desires to learn. 3. Adults learn by doing: Interactive programmes that trainees willingly participate have better impact that classroom lectures. Active participation by doing is the key to success. 4. Adults learn by solving practical problems: Adults respond better when theory is integrated with practical examples, real-world problems and challenges by encouraging them to participate in the programme. 5. Adults consider past experiences are more important for learning: Training programmes must be so designed to integrate the old methods with new ones. A training programme that offers entirely new skills ignoring the current skills will not be appreciated by trainees. Trainees must be able to perceive a logical termination of old ways leading to new and more improved ways. They integrate old experiences with new methods by encouraging feedback and challenging the content. 6. Adults learn best in an informal environment: Adults are comfortable in an environment where they are not graded like in a classroom. Seating arrangements must encourage active participation. Trainees respond better when they are offered a checklist for self-evaluation. Humour and informal discussions help break away from traditional classroom environment. 7. Adults learn better through a variety of training methods: Different adults have different learning preferences. Generally, a variety of methods can easily capture the attention of trainees. For example, lectures may be combined with a video presentation, a demonstration and a practical activity where the trainees can participate.

7.14 training versus Development Two factors are significant when considering the difference between training and development: content and target group. At the operator level, employees need to gain skills to perform their tasks

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Managers

Development Philosophy Concepts Technique principles Training

Supervisors

Job specific skills Operators

Manual skills

Figure 7.1

training and development needs at various levels.

better. Managers at the top end of the organisation’s hierarchy have to perform a wide variety of activities to stay in business. Human relations skills become more important to them than technical skills. Career path planning and redeployment through vertical and horizontal movement in the organisation involve development (Sahu, 2005). Figure 7.1 shows the training and development needs at various levels in the organisation. Essential differences between training and development are summarised in Table 7.7.

T Training

Development

Definition: Learning process to develop skills, competency and knowledge as required by the job

Educational process concerned with growth of employees

Aim: Short term

Long term

Focus: Present

Future

Orientation: Job-oriented

Career-oriented

Motivation: Trainer/employer

Self

Objective: Improve work performance

Prepare for future challenges

Number of individuals: One

Many

Primarily related to gaining technical skills

Related to managerial behaviour and attitudinal development

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7.15 Competence, training and Awareness of environmental issues All organisations have an ethical moral and a social responsibility to prevent polluting the environment as a result of their activities. Day-to-day activities may have an adverse impact on the soil, water and atmosphere. Identification of such potential hazards and addressing them are the responsibilities of everyone in the organisation. Therefore, the organisation has to ensure that employees at all levels in the organisation are competent on the basis of appropriate education, training or experience. In particular, individuals working in the firm and those contracted to work should be aware of: (a) the importance of complying with the firm’s environmental policy and procedures and with the requirements of the environmental management system (EMS); (b) the significant environmental aspects and related actual or potential hazard associated with their activities and the benefits of improved environmental performance; (c) the roles and responsibilities for achieving conformance to environmental issues and (d) the potential consequences of failure to comply with environmental issues. All employees have an important role to play to maintain a clean environment because their activities can have an impact on the environment, and they can contribute ideas for resolving environmental issues. Training is only one element of competence which is typically based in education, training and experience. An effective training programme includes criteria for measuring the competence of individuals performing those tasks (EPA, n.d.; Biswas, n.d.). The training programme must fulfil the following criteria: 1. Training needs are identified: All individuals need some form of training in keeping with their roles and responsibilities. For example, some may require knowledge of the EMS, while others may need specific training in emergency preparedness. 2. Identified training needs are satisfied: Plans should include how the organisation intends to meet the needs on the basis of a broader training strategy. External courses, seminars, workshops and briefings are some of the tools for providing the necessary training. 3. Training has created an awareness of environmental issues: Feedback from trainees, simple tests to measure the effectiveness of training and internal audits are some of the methods of verifying the effectiveness of training. 4. Individuals are competent to apply the skills to their jobs: The effectiveness of applying the skills can be determined by monitoring the work of individuals noting the improvements or identifying persistent failures to absorb the skills, e.g. failure to understand the consequences of departure from a specific work instruction.

7.16 Competence, training and Awareness of Food Safety Physical, chemical and biological contaminations are hazards associated with food production. Personnel involved with food production must have a thorough understanding of food safety issues. They should be competent and have appropriate education, training, experience and skills. Employees should be provided with appropriate training to perform their assigned activities and responsibilities effectively. Hazard Analysis and Critical Control Point (HACCP) training is the most cost-effective means of controlling hazards associated with food production. Implementing an HACCP programme

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in the workplace is a team exercise. Therefore, training and education are essential if full benefits are to be achieved. HACCP training should provide: (a) knowledge of the concepts, principles and benefits of the HACCP programme; (b) practical skills and the knowledge necessary for the implementation of the HACCP programme and (c) the skills needed for further development of the food safety programme. Regulatory authorities, senior managers, shop floor personnel and technical managers should be involved in the training programme. The programme itself should cater to the needs of each of these groups. For example, regulatory authorities need to have knowledge of the concepts, principles and benefits of the HACCP programme while the shop floor personnel should have a thorough understanding of practical skills. Scientific data should supplement the training programme (De Silva, 2007).

7.17 How to Make a Success of training Traditionally, training has focused on the individual rather than on the organisation. During the last few decades, we have seen striking changes challenging the competitive environment: competition from other training and development service providers, advances in training technology that revolutionised the training industry, awareness of accountability encompassing a broader role for the training function and a focus on real-time and cost-effective training. Therefore, a primary aim of training is help the organisation grow, develop and meet the challenges of the competitive environment (Sims, 1998). The following are some guidelines for making a success of training programmes: 1. The training programme should be more holistic and consistent with the organisation’s strategy. Individually focused training programmes have no impact on the organisation. But training programmes designed to focus on corporate strategy are beneficial to the organisation as well as to the individuals. 2. Merely applying technology to the training system is not going to resolve the kind of problems and challenges affecting the training function and their organisation. 3. Training is a continuous process that is linked to the ways that people are developed: by the job challenges, interaction with training providers and peers and by training itself. It is not a one-time event. Technology should be viewed in the context of helping the organisation develop their employees. 4. The evaluation of the effectiveness of training is an essential feature of any training programme. Valid, credible and reliable measures should be incorporated into the programme to measure both customer satisfaction and individual satisfaction. These measures should be continuously monitored to determine the impact on the organisation and on the individual. 5. Communicate the training in a “language” that is understood by the target audience. The context of training should be geared to the needs of the different levels of employees in the organisation. Any type of training and development programme needs meticulous planning and thorough training of any staff who will be used as trainers, mentors or coaches if it is to succeed.

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References Barrett, R. (2003). Training, Developing and Motivating People. Cheltenham: Nelson Thomas. Bates, R. (2004). A critical analysis of evaluation practice: The Kirkpatrick model and the principle of beneficence. Evaluation and Programme Training, 27, 341–347. Biswas, P. (n.d.). ISO 14001 – Clause 4.4.2: Competence, training and awareness. Retrieved January 22, 2018 from http://isoconsultantpune.com/iso-14001/iso-14001-clause-4-4-2/ Buckberry, N. (2004). Summary Process for Measuring ROI of Training. Version draft 5. Prepared for CEdMA Europe. De Silva, T. (2007). Hazard analysis and critical control point (2nd Ed). In M. Shafiur Rahman (Ed.), Handbook of Food Preservation, pp. 969–1010. Boca Raton, FL: Taylor & Francis. Dessler, G. (2011). Human Resource Management. Cranbury, NJ: Pearson Education. EPA (n.d.). Training, awareness and competence, Module 8-1. Retrieved January 22, 2018 from https:// archive.epa.gov/sectors/web/pdf/module_08.pdf. Eseryel, D. (2002). Approaches to evaluation of training: Theory & practice. Educational Technology & Society, 5 (2), 93–98. Gully, S. and Chen, G. (2010). Individual differences, attribute-treatment interactions and training outcomes. In S. W. J. Kozlowski and E. Salas (Eds.), Learning, Training and Development in Organisations, pp. 3–64. New York: Taylor & Francis Group. Holland, R. (2012). Designing and implementing training programmes, MDS-3. In Management Science for Health (Ed.), Managing Access to Medicines and Health Technologies, pp. 52.1–52.17. Arlington, TX: Management Science for Health. hrcouncil.ca (n.d.). Learning, training and development: Implementing an employee training and development program. Retrieved 7 August, 2018 from http://www.ccsc-cssge.ca/hr-resource-centre/hr-toolkit/ learning-training-development/implementing-employee-training-and. hr-Guide.com (2015). Needs analysis: How to determine the training needs. Retrieved August 12, 2018 from http://www.hr-guide.com/data/G510.htm. Kapp, K. M. (1999). Transforming your manufacturing organisation into a learning organisation. Hospital Material Management Quarterly, 20 (4), 46–54. Kirkpatrick, D. L. and Kirkpatrick, J. D. (2006). Evaluating Training Programmes: The Four Levels (3rd Ed). San Francisco, CA: Berrett Koehler Publishing. Management Study Guide (n.d.). Training evaluation – Meaning and its benefits. Retrieved August 25, 2018 from http://www.managementstudyguide.com/training-evaluation.htm. Miller, L. (2012). ASTD 2012 State of the industry report: Organisations continue to invest in workplace learning. Retrieved August 14, 2018 from https://www.td.org/Publications/Magazines/TD/ TD-Archive/2012/11/ASTD-2012-State-of-the-Industry-Report. Naik, G. P. (2007). Training and Development: Text, Resources and Cases. New Delhi: Excel Books. Noe, R. A. (2008). Employee Training and Development (4th Ed). New Delhi: Tata McGraw-Hill. Phillips, J. J. (2003). Return on Investment in Training and Performance Improvement Programs (2nd Ed). Waltham, MA: Butterworth-Heinemann. Sahu, R. K. (2005). Training for Development. New Delhi: Excel Books. Saks, A. M. and Haccoun, R. R. (2010). Managing Performance Through Training and Development (5th Ed). Toronto: Nelson. Silberman, M. and Bieche, E. (2015). Active Training. Hoboken, NJ: John Wiley & Sons Inc. Sims, R. R. (1998). Reinventing Training and Development. Westport, CT: Quorum Books. Stoddart, C. (1992). Developing your people. In D. M. Stewart (Ed.), Handbook of Management Skills (2nd Ed), pp. 192–209. Aldershot: Gower Publishing.

Chapter 8

Customer Relations Management 8.1 I introduction Business divisions of production-oriented companies are generally built on products and product groups. This traditional approach creates its own accounts units, information technology (IT) units and marketing teams. The vertical integration leads to competition among the individual business units as well as with external competitors. The loyalty of those employed in these vertically integrated business divisions to their own units prevents seeing the wider view of the organisation as a whole. In the current global marketplace, companies are increasingly realising the value of managing customer relationships. Companies are recognising the long-term value of potential and current customers and aim to increase revenue, profits and shareholder value through planned marketing activities focused on developing, maintaining and improving company–customer relationships.

8.2 Basics of Customer Relationship Management (CRM) Customer relationship management (CRM) is a comprehensive strategy and is a process aimed at acquiring, retaining and partnering with selective customers in order to create superior value for both the company and the customer. A successful CRM programme integrates marketing, sales, customer service and all supply chain functions of the organisation to achieve greater efficiencies and effectiveness in delivering customer service (Parvatiyar & Sheth, 2001; Bolton & Tarasi, 2007). CRM is a lifetime association that creates new value with individual customers and shares the benefits (Gordon, 2001). The structures and systems designed for CRM focus on providing customers with what they want and not what the company wants them to buy (The Economist, 2009). The concept of CRM depends on the dual creation of value: for shareholders through longterm profitability and for customers through better customer service. Strong relationships are market-based assets that a company continuously invests in order to remain competitive and they are 151

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associated with customer loyalty. The key processes are delivered through people, and they require a clear understanding of the goals of the customer–company relationship. The purpose of CRM is to identify the necessary expectations and capabilities needed to fulfil mutual goals and tasks.

8.3 evolution of CRM The evolution of CRM can be considered in terms of four phases designated as waves (Saarijärvi et al., 2013): Wave 1: Data dispersion In the 1980s, companies started to gather large amounts of customer data, and this explosion of data created enormous challenges when organisations used this for analytical purposes. CRM as a separate research and business tool gained attention in the business sector during the early 1990s. In order to manage the vast amount of customer data, companies such as Siebel introduced commercial hardware and software to analyse and apply it. Initially, the data was applied to sales force automation and customer service and support. Vendors started to recognise CRM as a collection of customer data and other activities related to the customer–company interface. The focus shifted to developing technological solutions to better manage this interface. Essentially, CRM was considered as a technological tool to improve service operations, increase sales efficiency and empower technology. Wave 2: Data organisation During the late 1990s, various definitions emerged to describe the concept of CRM. Some recognised it as a process and others as a strategy, philosophy, capability or technology. In particular, three perspectives on CRM were identified: (a) a technology solution; (b) a customer-oriented technology solution and (c) a holistic approach to manage customer relationships in order to enhance shareholder value. It was considered as an operational and a tactical tool that enabled customer data to be organised for mass customisation and one-to-one marketing. The goals were to reduce the cost of interaction, increase customer retention, improve customer experience and empower data. Wave 3: Data ownership The third wave of CRM emerged during the period 2000–2010. CRM was identified as an integrated strategic tool which applied to the entire organisation. Customer data was considered as a firm asset, and customer loyalty programmes were introduced to better manage customer relationships. Organisations endeavoured to reduce costs, enhance growth, predict customer behaviour, gain competitive advantage and empower firms. Wave 4: Data sharing The final Wave 4 refers to the period from 2010 onwards. Business orientation changed from transaction-based marketing to the management of customer relationships. Customer-centricity was considered the basic building block of CRM. Firms began to explore how customer data could be better utilised and given back to customers. An important viewpoint of co-creation is the framework of social CRM which refers to the evolution of communication technologies. The habits of how companies interact with their customers and prospects, and how customers interact with each other, have changed with the progress of social media. In the modern world, customers increasingly use digital communication technologies to communicate with firms.

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Therefore, firms should focus on harnessing the value potential of customer data for the benefit of the company and its customers. The notion of the dual creation of value and customer-centricity is the basic building block of CRM. Giving customer data back to customers, rather than using them to address an organisation’s own needs, restores the vision of customer-centricity to the CRM framework.

8.4 CRM Strategy A CRM strategy utilises customer knowledge as the most valuable resource for enhancing customer relationships, product innovation and process improvement. Increasing the value of the customer base leads to an increase in the value of the entire company. Therefore, for the CRM programme to be successful, the CRM concept, strategy, technology, processes and employees have to be linked to an integrated approach. This is based on the existing customer-oriented strategy aimed at acquiring the right customers and understanding their needs (Mack et al., 2005).

8.4.1 Elements of a CRM Strategy a. CRM vision defines the basic understanding of the CRM programme and integrates the CRM strategy into the corporate strategy. It also includes the CRM guidelines, customer valuation and customer segmentation. b. CRM guidelines include the basic understanding of the company’s CRM initiatives. These guidelines take into consideration the importance of long-term customer relationships, customer satisfaction and the role of CRM in the overall company strategy. They are defined using four elements: (a) profitability; (b) differentiation; (c) customisation and (4) integration and systematisation. 1. Profitability: CRM is an approach to increase customer profitability. Specific tools are needed to analyse and manage the customer base in real time. 2. Differentiation: The CRM programme enables the differentiation between valuable customer groups utilising specific programmes. 3. Customisation: A basic element of the CRM programme is the customisation of products and services offered to customers through specific programmes. The right value proposition is designed for each customer or customer group. 4. Systematisation and integration: Systematisation refers to the systemic analysis of data and implementation programmes to develop long-term profitable customer relationships. Integration refers to how existing and new data are integrated and analysed in real time to design a marketing plan aimed at satisfying and retaining customers. c. Customer valuation: Customers are rated in terms of customer lifetime value (CLV), which integrates customer-specific costs and other relevant factors such as potential sales and communicating with customers. d. Customer segmentation: The CRM strategy should define how actual customer segmentation is verified. A benefit- or preference-oriented approach is more beneficial than the traditional socio-demographic segmentation. An internal orientation approach defines what the company can deliver based on customer value. e. CRM activities: CRM activities include the amalgamation of four CRM activity cycles: better information (customer intelligence management), different sales channels (customer

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transaction management), product and service programme (customer product/service management), and long-term customer relationships (customer life cycle management). i. Customer intelligence management is the collection and analysis of existing data available throughout the company. It also includes the generation of new customer insights that produce as much information as possible about customers, their behaviour and needs, so that the knowledge can be used to develop CRM activities. ii. Customer transaction management focuses on the interaction between the customer and the company during each transaction and the customer complaints management. iii. Customer product/service management refers to the continuous improvement of the company’s products and service to meet the needs of its customers. This includes: (a) a customer benefit-oriented products/service design that not only offers improved products and services but also processes the transactions faster, provides better information and manages the supply chain; and (b) mass customisation, which focuses on the use of the company’s goods and services to meet customer-specific needs. For this strategy to be effective, the company must have operational capabilities to obtain customer information, process capability and the ability to deliver the right product to the right customer. f. Customer life cycle management is a strategy to build up, sustain and expand long-term relationships with customers. The traditional one-way communication from the company to the customer has to be changed to a two-way communication that delivers important information about customers and customer segments in order to strengthen the relationship.

8.5 Understanding the Customer Marketing functions centre on the brand relationships of customers. Although companies spend about $11 billion annually on CRM software, they are not aware of the variety of relationships customers can have with a firm and how to harness these. In order to categorise customers by different relationships, companies need to understand their behaviour and expectations. Some guidelines for understanding customers are as follows (Avery et al., 2014):

8.5.1 Listen for Signals Although companies receive a vast amount of data through emails, online chats with customers and sales staff and phone calls that contain relational signals, they do not collect or analyse the information effectively to interpret the signals. These signals define the type of relationships that customers want and how they are evolving. Companies can pick up broad relational signals through web crawling, data mining and listening and capturing data to understand whether customers want to engage or disengage the relationships, whether relationships are strained or how customers respond to the company’s various activities.

8.5.2 Understand the Rules The rules cover such issues as what the customer expects from the relationship and the brand and when the customer and the firm engage. These rules are based on the customer’s expectations and enable the firm to meet their needs and create a profile that includes an ideal mix of relationships. This can be accomplished by: (a) strengthening desired relationships; (b) shifting customers towards desired relationships and (c) changing goals. Firms should also consider the following:

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New orientation: Reorganise marketing roles around relationships, creating relationshiporiented roles for employees and expanding the marketing purview. Expand marketing umbrella: Relationship orientation needs to reach beyond marketing-related functions. A data capture system should capture and analyse the highly specific and nuanced relationship data in consumers’ social media interactions and communications with the company’s IT. When customers desire a particular type of relationship, the firm needs to respond because it advances the mission, drives profitability and market share and contributes towards revenue. Companies have to change their goals in response to the changing requirements of the market.

8.6 types of Relationships Various types of relationships are based on customers’ expectations. Some of the relationships are defined below (Avery et al., 2014):

a. Basic exchange: In this relationship, the customer is looking for dependability and wants to obtain a product or service at a fair price. b. Business partners: The customer wants to develop a reliable partnership to solve problems over the long term. c. Fling: The customer desires to experiment with a new identity and expects the company to provide excitement and drive their passion in every transaction. d. Best friend: The customer desires close contact and emotional support and expects a twoway communication with the company which safeguards their security and privacy. e. Buddies: The customer wants a sustained interaction with the firm without close contact or emotional support. The firm respects their freedom to associate with others. f. Master–slave: Customer intensifies their self-worth and expects the firm to react to their needs and demands without asking any questions.

8.7 Management Action Managers must take an active role throughout the designing and implementation phase of the CRM programme. CRM requires managers to (Rigby, 2013): 1. Identify the strategic “pain points” in the customer relationship cycle. These are strategic issues that have a major impact on customer satisfaction and loyalty. 2. Evaluate the type of data needed to address these pain points and calculate the value of such information that would bring benefits to the firm and the company. 3. Select a technology to implement the CRM programme and determine the cost of implementing it with the necessary training. 4. Carry out a cost–benefit analysis. 5. Develop incentive programmes to encourage staff to get involved in the project. Creating a customer-centred organisation structure improves the success of the CRM programme. 6. Monitor the participation of key staff in the project and develop metrics to measure improvements in customer profitability. Communicate the information to encourage further participation.

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8.8 Benefits of CRM An effective CRM programme brings numerous benefits to the organisation and its customers (Rigby, 2013; Rigby et al., 2002). Some of the benefits are as follows: ◾ Generates market research on customers in real time ◾ Provides more reliable sales forecasts ◾ Coordinates information on customers and their expectations between sales staff and customer support representatives ◾ Enables sales representatives to understand the financial implications of different product packages before the prices are established ◾ Provides information on the performance of promotional programmes and the effect of marketing activities so that the financial resources can be better utilised ◾ Provides data on customer preferences so that it can be fed back to product designers ◾ Improves sales systematically through identifying and managing sales leads ◾ Improves customer retention and enables the companies to design effective customer service programmes ◾ Allows companies to gather customer information swiftly to identify most valuable customers over time ◾ Enhances customer loyalty by delivering customised products and services ◾ Reduces the cost of serving customers and makes it easier to acquire new customers.

8.9 CRM types CRM is a customer-oriented management approach where its information supports operational, analytical and collaborative processes in order to enhance profitability and relationships with customers. The three areas of CRM (Mishra & Mishra, 2009) are described below.

8.9.1 Operational CRM Operational CRM processes are designed to support front office processes such as call centres. Operational CRM integrates technologies and business processes in order to satisfy customers’ needs during all transactions with them. For example, in a call centre, the CRM processes are integrated with human resources (HR) and Enterprise Resource Planning (ERP) functions for transferring order information.

8.9.2 Analytical CRM Analytical CRM is an extension of operational CRM that captures and analyses information on customer segments, behaviour and values using statistical techniques. The data are integrated with a centralised data warehouse where data mining tools analyse the behaviour of one customer with another, leading to the determination of customer segments that support marketing campaigns.

8.9.3 Collaborative CRM Collaborative CRMs focus on customer integration using multiple channels of communication such as online shops and call centres.

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8.10 CRM Process The CRM process gathers customer information and integrates with the business processes of the organisation for creating dual value: profitability for the company and satisfying customer needs (Winer, 2001). The CRM process is illustrated in Figure 8.1.

8.10.1 Developing a Strategy The strategy of customer experience management (CEM) defines the objectives and the purpose of CRM. It helps clarify the nature of CRM programmes and activities to be undertaken by both

Develop strategy and purpose

Create a database

Analyse

Target customers Decisions for targeting customers Select tools for targeting customers Build relationships with customers Resolve privacy issues Develop metrics to measure performance of CRM

Figure 8.1 CRM process.

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the company and the customer. By defining the purpose, the expectations and capabilities of both partners are identified so that mutual goals can be satisfied.

8.10.2 Creating a Database A database should contain at least the following information: ◾ Transaction history (purchase history, price paid, delivery date, etc.) ◾ Customer contacts: Information from multiple channels, which includes sales calls, service requests and customer or company-initiated contacts ◾ Descriptive information: Useful for segmentation and data analysis purposes ◾ Response to marketing efforts: How the customer responds to a direct marketing initiative, a sales contact or any other direct contact.

8.10.3 Analyse the Data A variety of tools and CLV are employed to analyse the data to identify customers with similar behaviour patterns and descriptive data, which are then used to develop different product offerings or direct marketing campaigns.

8.10.4 Select the Customer The purpose of this step is to identify which customers to target with the firm’s marketing programmes. Various types of analysis such as segmentation analysis or customer profitability analysis are used to obtain the necessary information.

8.10.5 Target Customers Traditional marketing approaches such as TV, radio or printed advertising are of limited use for CRM activities because of the impersonal nature of such programmes. Conventional approaches for targeting selected customers include telemarketing and direct mail. Internet marketing allows one-to-one contact with customers, thus facilitating relationship building. Although direct email has become a popular and effective method for targeting customers, some consider this to be junk mail.

8.11 Relationship Programmes Overall, the purpose of relationship programmes is to deliver better customer satisfaction for the organisation than its competitors. Owing to intense competition, marketing communications and ever-changing customer needs, a higher level of customer satisfaction is demanded by customers. Research has shown a positive relationship between profits and customer satisfaction. Some of the relationship programmes (Winer, 2001) are customer service (reactive or proactive service), frequency/loyalty programmes (e.g. frequent flyer, loyalty cards), customisation (built to order computers) and reward programmes and community building (network for exchanging productrelated information).

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8.12 Privacy issues Customers are generally cautious about the amount of personal information contained in databases. The privacy issue extends from the initial step of collecting the information to the final delivery of services. Privacy concerns include simple irritation (e.g. a response to junk mail), violation of privacy, fear of harm and nightmarish visions. Although customers have the opportunity to forbid the use of personal information by others, once the information is collected the customer loses control. Government initiatives to introduce laws preventing the sharing of the information with third parties have provided some relief to customers (Winer, 2001).

8.13 Metrics Traditional metrics used by managers to measure the success of products and services in the marketplace are not suitable for evaluating the effectiveness of CRM. Although financial and market-based information is important, firms should focus on customer-centric measures that give managers a better idea of the performance of the CRM project (Winer, 2001). Some of the webbased and non-web measures for evaluating the success of CRM are as follows: ◾ ◾ ◾ ◾ ◾ ◾

Customer acquisition costs Conversion rates from browsers to buyers Customer retention rates Sales rates Loyalty measures Customer share of purchases related to a brand.

8.14 types of CRM Processes The successful implementation of a CRM programme requires the integration of business processes with the programme. Four such business processes are: (a) service; (b) support; (c) analysis and (d) management (Salomann et al., 2001). Table 8.1 shows the activities of each of these processes.

8.15 Factors Affecting People-Driven CRM CRM can be in defined in terms of data, processes and people. Data-driven CRM integrates with customer information, interfaces and automation tools. Process-driven CRM focuses on existing practices and rules and uses the data sources to improve the processes. People-driven CRM focuses on executives and operational staff who use one-to-one communication for process relationship management (Shan & Chen, 2007). Factors affecting the dependency on human processes in CRM are: (a) customer focus; (b) information processed; (c) employee capabilities and (d) organisational environment. a. Customer focus The purchase decisions of customers are driven by their functional and emotional needs. The functional needs are well defined, explicit and tangible and communicated through lean

160  ◾  Integrating Business Management Processes T Processes

Sub-processes

Service: Designed for a complete coverage of customer service

Campaign management

Planning, realisation and controlling marketing activities that target existing customers, who are individualised or directed at specific market segments

Sales management

Identifying the needs of potential or existing customers and advising the customer on possible alternatives to their needs, providing the customer with an offer and close a contract

Service management

Planning, realisation and controlling of services offered in the after-sales phase of the transaction and addressing the buying and disposal phases of the customer process

Complaints management

Receiving, processing and communicating customer dissatisfaction throughout the transaction. It is primarily concerned with the using phase of the customer process

Loyalty management

Directed at customer retention and is defined as planning, realisation and controlling measures employed to enhance the duration and intensity of customer relationship

Market research

Designing, collecting, analysing and reporting data and results of a specific market situation

Customer scoring

Generating a short list of existing customers in order to promote cross-selling, reduce contact costs and increase customer satisfaction

Lead management

Consolidation, qualification and prioritisation of contacts to potential customers

Customer profiling

Analysing available knowledge about customers in order to categorise customers

Customer segmentation

Classifying customers according to similar needs and requirements

Feedback and knowledge

Collecting and analysing knowledge about customers to improve products and services of the company

Multichannel management

Integrating and coordinating design, development and control of product and knowledge flows from and to customers

Performance management

Controlling all CRM processes

Support: Designed to perform support activities

Analysis: Analyse knowledge collected in other CRM processes

Management: Business processes for design, control and development of CRM service, support and analysis processes

Activities

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channels such as transaction records, click stream data and surveys. Latent, intangible, difficult-to-communicate and subconscious needs are emotional needs which are communicated via rich channels such as semi-structured interviews, picture drawings, archetype research and storytelling. The quality of a delivered service is reflected in customers’ emotions which can be captured using various types of IT. b. Information processed A CRM programme utilises IT to collect data, analyse data on customer patterns, interpret customer behaviour and deliver products and services. Two types of knowledge are created through IT: explicit and tacit. Explicit knowledge refers to records of transactions with customers during sales and service, e.g. external data, survey information, history of transactions, personal information and profitability data. Tacit knowledge is undocumented and inaccessible. Customer needs, human data or emotional knowledge and the experience and expertise of employees are some examples of tacit knowledge. This type of knowledge is transmitted during conversations, informal meetings and interactions with managers. c. Employee capabilities Customers’ interactions with the organisation take place through employees. Employees therefore need to understand the principles of CRM and be trained to enhance skills and knowledge to collect rich information during all transactions with customers. d. Organisational environment Executives must create a customer-centric business environment to deliver the CRM programme through marketing, sales and service processes. The traditional product-oriented culture has to be transformed to a customer-oriented culture, which has customercentric values and beliefs that all employees of the organisation share. Such a culture can be created through the resolution of interdepartmental conflicts, promoting communication of information across all departments, decentralising governance structures and rewarding staff on market-based factors.

8.16 CRM implementation The CRM programme includes complex multiple operations, and its implementation involves significant organisational change. An effective CRM implementation requires a frontline system that captures relevant data, shares the information across all interface units and provides an output strategy and tactics to gain customer business and loyalty. General considerations for successful CRM implementation are as follows (Ranjan & Bhatnagar, 2008): 1. Customer-focused approach The customer is the core element of the CRM system. Data mining, which has been widely used in the business sector, is the process of extracting information from numerous data sources using algorithms and techniques. The approach for implementing CRM using data mining has to be customer-centric. 2. Top management commitment Successful implementation of any management system requires top management commitment. The management should be aware of the requirements of the CRM system, share the information and encourage the staff to participate in the programme.

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3. Skills Implementation of CRM requires skilled staff to use technology to capture the necessary information and utilise it for developing and enhancing customer relationships. 4. Planning The roles and responsibilities of participants should be clearly defined, and a project plan and an action plan have to be developed in advance so that the progress of the project can be monitored. 5. Monitoring and feedback The CRM system is an evolving entity, and in order to improve the programme, effective metrics have to be established to monitor progress. The feedback system enables continuous improvement of the programme. 6. Communication Communication requirements have to be considered in advance, and facilities should be made to share the information through all departments. Some information may need to be communicated manually. 7. Privacy and security issues Customer data includes some personal information, and therefore, the company has to establish protocols to secure this type of information. When looking at privacy and security issues, also consider the type of information that can be shared in the organisation. 8. Integrating information systems with existing systems Hardware and software requirements have to be determined in advance, and provision should be made to linking the existing systems with the new system. 9. Timeframe The benefits of the CRM programme are not realised immediately, and improved relationships with customers occur over time. 10. Implementation cost The organisation should analyse and calculate the cost involved in the implementation and the expected benefit from CRM implementation.

8.17 O optimising CRM The core element of CRM is the customer, and customer satisfaction depends on the quality of products or service offered to customers. It is the difference between what is expected by the customer and what has been delivered by the firm. Loyalty is created through customer satisfaction, a positive brand image and a personalised relationship with customers. Therefore, gaining customers and retaining them are important considerations in CRM (Frangeul, 2012).

8.17.1 Gaining Customers 1. Maintain and analyse a database: The database should enable the classification of customers according to potential, their needs and demographics. Design marketing strategies are needed to meet these criteria and deliver the products and/or services at the right time, to the right person using the right means. 2. Create an effective message: The message should describe your idea, service, product or company in 1 minute. 3. Plan the work ahead: Plan the work using planning tools such as a Gantt chart.

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4. Follow-up on customers and monitor the project: Pay attention to inactive customers. 5. Expand your network: Promote your organisation using various means such as Google Adwords, white papers and free trials. Encourage the employees to spread the word about the company. 6. Use employees’ expertise: Create a knowledge base to collect and share both tacit and explicit knowledge of employees.

8.17.2 Retaining Customers 1. Develop customer loyalty: Personalise your messages, listen to customers’ needs and expectations and respond to their concerns quickly to forge sincere and lasting relationships with them so that they become brand advocates. 2. Establish a three-step loyalty chain: Forge lasting relationships based on trust and follow-up potential customers and inactive ones. Create a programme that encourages loyalty, develop programme membership and collect and analyse customers’ purchasing behaviour. 3. Create interesting and relevant content and get customers involved. 4. Monitor the progress of your efforts.

8.18 Why Do CRM Programmes Fail? Companies approach CRM in different ways. According to published data, CRM programmes have produced mixed results. CRM programmes which have been implemented successfully have produced excellent results. For example, within 18 months of implementation, Lowe’s Home Improvement Warehouse achieved a dramatic 265% return on investment (ROI) on its $11 million CRM investment. Similarly, Virgin Wines realised a 12% customer conversion rate after the implementation of a CRM programme compared with 4% prior to this (Stringfellow et al., 2004). Other studies have shown that despite $11 million spent annually on CRM software, many companies have failed to achieve expected results (Avery et al., 2014). According to the Gartner Group, 55% of CRM projects are bound to fail. A survey of 1,500 companies in Marketing Week has indicated that a CRM programme has been used by 30% of the respondents for tracking transactions. But only 4% have utilised the CRM database for maintaining and developing customer loyalty (Stringfellow et al., 2004). Many factors therefore contribute to the failure of CRM projects (Rigby et al., 2002): 1. Implementing a CRM before developing a CRM strategy: Every customer has different needs and expectations and different potential and current value to the company. A CRM strategy should focus on the acquisition and retention of customers by: (a) segmenting them as the most to least profitable customers; (b) deciding whether to invest in profitable relationships, thereby reducing costs to improve margins, or divest unprofitable customers and (c) the availability of resources. 2. Introducing technology before creating a customer-centric organisation: Review the business processes that relate to customers as 87% of failures are due to change management. Design business processes such as job descriptions, performance measurements, reward systems and training requirements to better meet customer needs. 3. Assuming that CRM technology is better: Customer relationships can be managed in many ways and assuming that CRM has to be technology-intensive is a fallacy. The objectives of

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the CRM programme can be achieved without huge investments in technology by motivating employees to understand the customers and be more aware of their needs. In fact, a wide spectrum of technology (low, mid and high) has been used successfully to implement CRM programmes. 4. Annoying and not encouraging the right customers: Companies attempt to build relationships with wrong customers or with right customers the wrong way. Organisations have to identify customers who want to build relationships with the company. Failure to build relationships with right customers is a sure way to lose them to competitors. According to a survey conducted by Forsyth (2001) in 700 companies, the following were identified as causes of CRM failure: ◾ ◾ ◾ ◾ ◾ ◾

Organisational change (29%) Company policies/inertia (22%) Lack of understanding of CRM (20%) Poor CRM skills (6%) Inadequate planning (12%) Financial problems (4%).

8.19 Misconception of CRM Companies focus their marketing efforts on CRM to create dual value for the company as well as for their customers. However, companies have not realised the full potential of CRM. The success rate of CRM has been reported to be between 30% and 70% and managers are often dissatisfied with CRM performance, mostly because of misconceptions about the use of CRM software. Verhoef and Langerak (2002) have presented 11 such misconceptions: 1. CRM technology alone will improve business performance Business performance is driven by creating value for customers and software alone cannot deliver customer value. Top management must develop a customer-centric culture with different departments and employees jointly focusing on creating superior value for customers. 2. Lack of focus on customer relationship development It is more expensive to acquire new customers than to retain existing ones. Therefore, firms often tend to focus on satisfying current customers. Although firms take great effort to retain customer loyalty, there will always be some who prefer to drop out. In order to compensate for the loss of customers, organisations should focus on acquiring new customers. 3. Customer acquisition and CRM are independent activities The customer acquisition strategy has a major impact on customer relationship development and must be managed simultaneously. Although the acquisition of selective customers enhances the lifetime value of individual customers, being too selective will hinder the acquisition of new customers and profitability. When customer acquisition and CRM are considered as two interrelated activities, the trade-off becomes easier. 4. Customers want to have relationships with companies The relationship between a customer and a company involves a series of repeated transactions defined as a social interaction. Social interaction enhances the commitment of the customer to the relationship, and marketing efforts are directed towards the social dimension.

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5.

6.



7.

8.



9.

10.

However, the social interactions do not add value to low involvement products and services delivered to customers. For high involvement products and services such as jeeps and Harley-Davidson motorcycles, social interaction is important. Therefore, companies should identify customers’ purchasing behaviour in order to direct marketing resources to the right customers and prevent customers from perceiving suppliers as aggressive. Long-lasting relationships with customers are more profitable Companies assume that customers with long-lasting relationships are less price sensitive, the cost of servicing these customers is lower, and it generates higher revenue and referrals. However, such customers have more experience with the company and are aware of the value that it provides and therefore they are more price sensitive. There is no evidence to support the assumption that servicing costs for customers with long-lasting relationships are lower. Managers should therefore direct their efforts on relationship development rather than on relationship continuance. Satisfied customers are always more loyal Companies have invested in many programmes to drive customer satisfaction, but customer satisfaction and loyalty are not always interrelated. Measuring customer satisfaction by itself is too simplistic. Firms should focus their efforts on creating superior value for customers instead of customer satisfaction. While some satisfied customers are loyal, others are driven by costs of switching, habitual buying habits and variety. Therefore, companies should try to improve customer satisfaction in market segments where loyalty is affected by customer satisfaction. Marketing efforts should be focused on the most profitable customers Marketing efforts are often directed towards loyal customers, which leave fewer resources to capture potential profitable customers. The majority of loyal customers will always remain loyal. Therefore, companies should not only focus exclusively on the most profitable customers but also focus their resources towards customers with high potential value. Traditional customer pyramid is good for segmentation A customer pyramid classifies customers according to their profitability. It is often difficult to calculate customer profitability using the customer pyramid. The limitations of a customer pyramid are: (a) customer-specific costs are not included; (b) it does not consider non-purchase-related behaviours; (c) the contribution margins considered in the pyramid can be sensitive to the number of products and service sold; (d) considers only customers’ monetary value and (e) encourages marketers to drop less profitable customers. Loyalty programmes always enhance loyalty Loyalty programmes have always been associated with CRM, and their objective is to improve retention rates and enhance cross-selling. Implementing and maintaining loyalty programmes are costly. Data on the benefits of loyalty programmes are scarce. In many competitive markets, purchasing patterns are well established, and therefore, it is difficult to enhance loyalty. Companies should conduct a thorough cost–benefit analysis before implementing a loyalty programme. The benefits should also include non-monetary gains from customer loyalty. CLV is predictable CLV is affected by many factors such as customer satisfaction, competitive actions and legislation which are not stored in the database. These factors are also not predictable, but it is a useful concept for two reasons: (a) it forces managers to adopt a long-tern view in their marketing decisions; and (b) effective models are available to predict CLV at the aggregate

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or group level. The forecast can be used to allocate resources for customer acquisition and customer development strategies for specific market segments. 11. The internet is the most useful tool to measure customer loyalty The internet enables customers to compare prices easily and switch suppliers often in the absence of barriers such as distance to a store. Over time, the loyalty may decrease. Companies relying on the internet should lock-in their customers using customised services such as home delivery of products. It is a useful tool to improve customer loyalty when customers switch to new suppliers and they can be locked-in with customised services.

8.20 the Future of CRM The relationship with customers is an important consideration in improving the profitability of the company. With the shift of marketing focus from products and services of the organisation to its customers, the CRM philosophy is increasingly being embraced across the business sector. Companies are investing more resources into CRM programmes, and there will be improvements in the way they develop long-term relationships with customers. Databases traditionally used for capturing sales transactions will be used extensively for collecting and analysing customer behaviour for better customer selection and acquisition. Companies will then be able to anticipate the purchasing behaviour of customers. Brand images tend to change, offering customers more incentives to identify themselves with these brands and demonstrate loyalty. An increasing focus on CRM will drive firms to rethink the role of marketing management. Companies are likely to consider splitting the Marketing Manager’s role into two parts – acquisition and retention – and the two roles require different skills. The acquisition role requires experience in tactical aspects of marketing such as advertising and sales. The retention role requires a better understanding of customer loyalty and satisfaction for the particular product category. The concept of CRM is expected to extend to CEM. Customer contact points are increasing all the time as a result of technological progress. It is critical to identify and measure customers’ experiences of these contacts. Companies need to respond quickly to the negative experiences and address the concerns through apologies and appropriate rewards without delay (Winer, 2001).

References Avery, J., Fournier, S. and Wittenbraker, J. (2014). Unlock the mysteries of your customer relationships. Harvard Business Review, 92 (7/8), 72–81. Bolton, R. N. and Tarasi, C. O. (2007). Managing customer relationships. In N. K. Malhotra (Ed.), Review of Marketing Research, Vol 3, pp. 3–38. New York: Emerald Group Publishing. Economist. (2009). Customer relationship management. Retrieved February 11, 2018 from http://www. economist.com/node/14298886. Forsyth, R. (2001). Six impediments to change and how to overcome them in CRM. Retrieved February15, 2018 from http://www.mycustomer.com/topic/technology/six-major-impediments-change-andhow-overcome-them-crm-and-politics. Frangeul, S. (2012). Growing importance of customer relationship management. Retrieved February 28, 2018 from http://www.espressocommunication.com/en/communication-en/6476/the-growing-importanceof-customer-relationship-management.

Customer Relations Management  ◾  167 Gordon, I. (2001). Customer relationship management is a strategy and not a tactic. Ivey Business Journal. Retrieved February 20, 2018 from http://iveybusinessjournal.com/publication/crm-is-a-strategy-not-a-tactic/. Mack, O., Mayo, M. C. and Khare, A. (2005). A strategic approach for successful CRM: A European perspective. Problems and Perspectives in Management, 2, 98–106. Mishra, A. and Mishra, D. (2009). Customer relationship management: Implementation process perspective. Acta Polytechnica Hungaric, 6 (4), 83–99. Parvatiyar, A. and Sheth, J. N. (2001). Customer relationship management: Emerging practice, process and discipline. Journal of Economic and Social Research, 3 (2), 1–34. Ranjan, J. and Bhatnagar, V. (2008). CRM critical success factor for implementing CRM using data mining. Journal of Knowledge Management Practice, 9 (3), 1–7. Rigby, D. K. (2013). Management Tools: An Executive Guide 2013. Boston, MA: Bain & Company. Rigby, D. K., Reichheld, F. F. and Schefter, P. (2002). Avoid the four perils of CRM. Harvard Business Review, 80 (2), 101–109. Saarijärvi, H., Karjaluoto, H. and Kuusela, H. (2013). Customer relationship management: The evolving role of customer data. Marketing Intelligence and Planning, 31 (6), 584–600. Salomann, H., Dous, M., Kolbe, L. and Brenner, W. (2001). Addressing CRM initiatives with knowledge management. Journal of Information Science Technology, 3 (2), 22–43. Shan, S. S. C. and Chen, C. H. (2007). Human processes in customer relationship management. 11th Pacific-Asia Conference on Information Systems, Auckland. Retrieved February 20, 2018 from http:// www.pacis-net.org/file/2007/1259.pdf. Stringfellow, A., Nie, W. and Bowen, D. E. (2004). CRM: Profiting from understanding customer needs. Business Horizons, 47 (3), 45–52. Verhoef, P. C. and Langerak, F. (2002). Eleven misconceptions about customer relationship management. Business Strategy Review, 13 (4), 70–78. Winer, R. S. (2001). Customer relationship management: A framework, research direction and the future. California Management Review, 45 (4), 89–105.

Chapter 9

Knowledge Management 9.1 Historical Aspects Knowledge sharing has been an essential part of human experience. Before the advent of the written word, craftsman such as jewellers, shoemakers and carpenters passed their skills to the next generation, usually to their children through demonstrations and verbal communication. However, knowledge that is unused soon becomes obsolete. Tribal cultures in many African countries are gradually disappearing. The application of new technology adds a further dimension to shared knowledge. Telephone operators who directed telephone calls in large organisations have been replaced with automated systems, except in call centres where customers’ queries are handled. Shorthand used in dictating memos and letters has been superseded by voice recorders. Knowledge that is applied and used perpetuates. The teachings and sermons of great religious teachers such as Lord Buddha and Jesus Christ, which have been passed on from generation to generation verbally, have not changed for centuries because of the frequent application of these principles by their followers. Knowledge management (KM) as a distinct field emerged in the 1990s. It is based on the premise that organisations are generally not able to fully utilise the knowledge that employees possess in order to improve their performance. Through KM, organisations aim to acquire or create potentially useful knowledge and share it among those who need it to make a positive contribution to the company’s performance.

9.2 Definitions Data: According to the New International Webster’s Comprehensive Dictionary of the English Language (NWDDC, 1993), data is defined as “facts or figures from which conclusions may be drawn”. Data is also defined as raw unrelated facts (Wilson & Asay, 1999) and may be recorded in figures or words. Information: Information refers to facts that have been given meaning and relationship (Wilson & Asay, 1999). Data is processed in a useful and meaningful manner. Knowledge: Knowledge is a “body of facts, principles, etc, accumulated by mankind” (NWDDC, 1993). Information that supports and leads to action is called knowledge. Action is the means and the culmination of knowledge (Wilson & Asay, 1999). 169

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Knowledge management: KM is the process of planning, organising, motivating and controlling people, processes and systems in the organisation to ensure the improvement and effective employment of its knowledge-related assets (King, 2009). Its purpose is to identify, optimise and extend the ability to take effective action (Wilson & Asay, 1999). Organisational learning: Organisations learn by “encoding inferences from history into routines that guide behaviour” (Levitt & March, 1988). There are many views of knowledge as discussed in information technology (IT), strategic management and organisation theory literature. Some authors define knowledge in relation to data and information while others use different concepts (Alavi & Leidner, 2001). Knowledge has been defined as: (a) a state of mind; (b) an object (c) a process; (d) an availability of information and (e) a capability. These definitions and their implications in KM and knowledge management systems (KMS) are shown in Table 9.1. T Reference

Concept

Meaning

Effect on KM

Effect on KMS

Fahey and Prusak (1998)

A direct consequence of experience, reflection and dialogue

An organisational phenomenon distinct from data and information

Creates a shared context to generate, transmit and use knowledge in an activity

Role of KMS is to develop a shared understanding of what knowledge is about. It supports monitoring and correction of errors in the stock of knowledge, in generating, moving and leveraging knowledge throughout the organisation

Schubert et al. (1998)

A condition of understanding

Knowledge is gained through experience or study. It is a sum or range what has been perceived, discovered and learnt

Provides a knowledge medium for creation, integration, reviewing and distribution of domain specific knowledge

Role of IT is to support the building of virtual scientific communities through the internet medium

Zack (1998), Carlsson (2001), McQueen (1998)

Object

Knowledge is an object which is transient and can be stored and manipulated

Building and managing knowledge stocks are KM issues

Role of IT is to collect, codify and store knowledge to be used by others

(Continued )

Knowledge Management  ◾  171 Table 9.1 (Continued)  Definitions of Knowledge and Their Implications Reference

Concept

Meaning

Effect on KM

Effect on KMS

Zack (1998), Carlsson (2001), McQueen (1998)

Process of applying expertise

Knowledge is viewed as a simultaneous process of knowing and action

KM focus is on knowledge flows and the process of creating, sharing and distributing knowledge

Role of IT is to integrate sources of knowledge to expand and enhance knowledge flows

McQueen (1998)

Condition of access of information

Knowledge facilitates access and retrieval of content through databases and repositories

KM facilitates access and retrieval of knowledge content

Role of IT is to provide search and retrieval facilities to access information

Carlsson (2001)

Capability

Identify, develop, refine, distribute, implement and protect knowledge and knowledge processes to enhance value and prevent imitation

KM identifies and leverages individual and collective knowledge to support organisation’s competitive advantage

IT role is to support and enhance organisational processes of knowledge creation, storage/ retrieval and transfer

9.3 Knowledge types Knowledge has the following characteristics (Bornemann et al., 2003 (a) it is generated dynamically through changes to cognitive structures; (b) it is essentially linked to people and (c) it is a requirement before any action is taken. There are various classifications of knowledge types. A useful classification is given by Bornemann et al. (2003). According to this structural classification, knowledge is categorised as: (a) knowledge psychology; (b) ability to articulate knowledge and (c) knowledge owner. The two aspects of knowledge psychology are declarative knowledge and procedural knowledge. The former deals with facts, concepts and generalisations (“know what”). Know what specifies what action is to be taken when presented with a situation. For example, a courier person who delivers parcels knows the best and quickest route to take during rush hours. Procedural knowledge (“know how”) deals with skills, procedures and processes. Procedural knowledge includes the way cognitive processes and actions are performed. The essence of know how knowledge is the relationship between stimuli and the response to the stimuli. When the relationship is unclear and uncertain, a professional knows the exact action to be taken. For instance, when the reason (stimulus) for a breakdown (response) of a vehicle is not clear, a trained car mechanic knows how to find the root cause and resolve the issue (King, 2009).

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Classification of knowledge according to the ability to articulate depends on whether or not the owner of knowledge is consciously aware of it and can communicate it. Therefore, a distinction is made between explicit knowledge (knowledge that the holder is consciously aware of and can be articulated) and tacit knowledge (knowledge that the holder is not consciously aware of), which can only by articulated with special techniques such as observation and interview. This is the widely used classification of knowledge (Nonaka, 2007). Structural classification, according to the knowledge owner, makes a distinction between individual knowledge and collective knowledge. Individual knowledge is specific to the individual and controlled by them, and collective knowledge is held by a group, such as an organisation or a community. It can include individual knowledge, which reaches its full value when combined with the knowledge of others and knowledge that is commonly shared by others, such as the assistance provided by the IT department or human resources (HR) department (Bornemann et al., 2003; Lenz, 2001).

9.3.1 Tacit Knowledge Tacit knowledge originates in and is held by individuals. Since such knowledge is carried in the heads of individuals, it is difficult to assess. Often the owners of tacit knowledge are not aware of the knowledge they possess and how it can be useful to others, and as such, tacit knowledge is considered to be a valuable and a hidden asset. It provides context for people, places, ideas and experience. It can only be shared by personal contact and with trust (Armstrong, 2010). Tacit knowledge has been developed over a long period of time through trial and error and experience and is usually underutilised because the organisation is not aware of its existence. In a business situation, tacit knowledge is entrenched in processes, activities and relationships created over a long period of time through continuous improvement activities (King, 2009). According to Nonaka (2007), tacit knowledge is composed of two elements: cognitive and technical. The cognitive element refers to a person’s mental modes, which include mental maps, beliefs, paradigms and viewpoints, whereas the technical element is composed of concrete know how, crafts and skills. A large winery in West Auckland was producing about 125,000 cases of wine daily and installed a state-of-the-art packaging machine in the late 1980s. The machine imported from Germany erected and sealed the case around 6 or 12 bottles with interlacing dividers in between. The machine was known as a “wrap around” machine. The printed cardboard arrived as flat sheets which were fed into the machine. These cases were manufactured in New Zealand. The tolerances allowed for the board were so narrow that the machine would jam even if the board was 2 or 3 mm outside the recommended specifications. This resulted in unnecessary downtime, and the engineers had to spend a considerable amount of time at the machine to resolve the issue. The Chief Engineer investigated the problem, and after consulting the manual and the machine supplier, he communicated the finding to the team who then exploited the knowledge and created a log book. After the changes were made, the machine could handle wider tolerances with no difficulty at all. The problem and how it was solved were discussed at the monthly management review meeting, and it was decided to maintain the log book to record such instances as lessons learned. It was the first effort made to capture tacit knowledge. Soon the log book was filled with incidents, problems and the resolutions, and it was the first point of reference when a problem was encountered.

9.3.2 Explicit Knowledge Explicit knowledge in the organisation is documented and structured and exists in the form of procedures, steps and checklists. Such knowledge is stored in filing cabinets, hard drives in

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computers and databases. The “owner” is consciously aware of explicit knowledge, and it can be expressed, codified and communicated in symbolic form and/or in natural language with accuracy (Armstrong, 2010; Bornemann et al., 2003; Alavi & Leidner, 2001).

9.4 Knowledge Conversion The knowledge conversion process involves preserving, embedding and enhancing knowledge of the processes, products and services of an organisation. It creates, transfers and shares knowledge while improving the access as well. Organisations have to create a knowledge environment that promotes knowledge development, its use and its transfer in the knowledge creation process (Smith, 2001). According to Nonaka (2007), Smith (2001), and Tongchuay and Praneetpolgrang (2008), there are four modes of knowledge conversion: (a) tacit-to-tacit; (b) tacit-to-explicit; (c) explicitto-explicit and (d) explicit-to-tacit. This completes the spiral of knowledge as shown in Figure 9.1.

9.4.1 Conversion of Tacit-to-Tacit Knowledge This is the mode of knowledge conversion through interaction between people, known as “socialisation”. Tacit knowledge is learned by observation, imitating and practising or by socialising into a way of doing things like learning from mentors or peers. Those who undergo apprenticeship programmes or follow an internship programme, such as doctors and pharmacists in their first year in a practice setting, gain knowledge through this mode of knowledge conversion. At this stage, knowledge is still tacit and not explicit. This tacit knowledge is still not available to the organisation as a whole.

9.4.2 Conversion of Tacit-to-Explicit Knowledge This is the articulation of tacit knowledge through discussions, descriptions and innovations to the team in the organisation.

9.4.3 Conversion of Explicit-to-Explicit Knowledge Individuals can combine discreet pieces of explicit knowledge from different sources through exchange mechanisms. The knowledge is standardised and collated in a manual or log book which Socialisation Tacit

Tacit

Articulation

Internalisation

Explicit

Combination

Figure 9.1 Modes of knowledge conversion.

Explicit

174  ◾  Integrating Business Management Processes

is then embedded in a product. The conversion process, which is called combination, does not expand the organisation’s knowledge base.

9.4.4 Conversion of Explicit-to-Tacit Knowledge This mode of knowledge conversion is similar to the traditional concept of learning and is referred to as internalisation. New explicit knowledge is shared throughout the organisation, and soon employees begin to internalise it by broadening and enhancing their own tacit knowledge. In an organisation, all four modes of knowledge conversion exist, and knowledge creation is substantially enhanced by the interaction of tacit knowledge with explicit knowledge. In the situation discussed earlier, the Chief Engineer gathered tacit information by socialising with the manufacturers of the machine (socialisation). Next the Chief Engineer translated his findings and proposal into explicit knowledge that he could communicate to the team members and others (articulation). The team then synthesised the information and created a manual or log book for future use (combination). Finally, through the resolution of the packaging problem, the team members enhanced their own tacit knowledge base (internalisation) (Figure 9.2). Nonaka and Konno (1998) introduced the concept of “ba” (Japanese word for place) to signify the physical space, virtual place or mental space where the individual realises themself as belonging to the environment on which their life depends. Ba exists at many levels and is of fundamental importance for knowledge creation. It consolidates applied knowledge and integrates it, building a foundation of knowledge. There are four types of ba: (a) originating ba – individuals share knowledge through face-to-face interaction from which the organisation’s knowledge creation process commences; (b) interaction ba – it is the externalisation mode of knowledge creation through peer-to-peer interaction; (c) cyber ba – denotes a virtual space of interaction corresponding to the combination mode of knowledge creation through group-to-group dialogue or conversation

Socialising

Chief Engineer (CE) consults supplier and manuals (Tacit)

Articulation

CE discusses with his team (Tacit to Explicit) Team combines the knowledge and documents it (Explicit to Explicit)

Combination

Team expands their knowledge base (Explicit to Tacit)

Internalisation

Department Management System

Figure 9.2 Knowledge creation and transfer.

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and (d) exercising ba – signifies the conversion of explicit-to-tacit knowledge through the internalisation process of focused training with senior mentors and colleagues in real-life or simulated situations.

9.5 the Role of KM in Management Systems Management systems are designed to ensure the effective operation of activities and bring profit to the organisation. Organisations develop and implement quality management systems (QMSs) to offer quality products and services to their customers. Food safety programmes ensure the provision of safe food for the consumer. Occupational safety and hygiene systems aim at the safety and health of the employees and the workplace. Environmental management systems (EMSs) mitigate or eliminate harmful impacts of the organisation’s operations on the environment. A common theme among all management systems is the effective management of knowledge. The role of knowledge in management systems is briefly summarised in Table 9.2. In today’s competitive and uncertain economic environment, management of knowledge is important for the survival of the organisation. Knowledge can also be viewed as a potential source of competitive advantage. table 9.2 Role of Knowledge in Management Systems Management System

Purpose

Examples of Knowledge Involved

Quality

Provides quality products and services

Customer needs and expectations Raw materials and resources Products and services to be delivered Improving, preserving and enhancing knowledge of processes, products and services IC

Food safety

Provides safe food

Human health Hazard Analysis and Critical Control Point (HACCP) GMP Microbiology Risk analysis and hazard identification Raw materials/ingredients Preservation of raw materials/ ingredients Suppliers and previous history of suppliers Processes Equipment and operations Troubleshooting Handling and storing finished product Preservation of finished products Customer base Marketing Managing quality Delivery Microbiology of food Trade and industry

(Continued )

176  ◾  Integrating Business Management Processes Table 9.2 (Continued)  Role of Knowledge in Management Systems Management System

Purpose

Examples of Knowledge Involved

Environmental

Protects the environment from harmful activities of organisations

Environmental issues Risk analysis and hazard identification Environmental aspects Environmental impact Mitigation and/or elimination of risk Pollution control, waste management and contaminations CO2 and other emissions

Occupational safety and health

Welfare of staff and the workplace

Risk analysis Health and safety issues Human resources Industry specific knowledge Human health

In the early 1980s, a large winery in West Auckland in New Zealand was plagued with excessive production costs due to high unplanned downtime and maintenance costs. The General Manager appointed a Production Accountant to monitor and control the financial aspects of all production operations. The new Production Accountant worked very closely with the company’s Financial Controller. He had early discussions with the Financial Controller to determine the financial data and information already available in the organisation that could be utilised to monitor the financial aspects of production (socialisation). With his background in accounting and experience, he was able to establish several financial indicators. He presented the information to the production team (articulating) who pooled their knowledge and produced a working document to determine the financial costs of production operations (combining). When the plan was implemented, employees had access to the data and information, thereby enhancing their knowledge and learning to keep a close watch on production operation costs (internalising).

9.6 integrating KM and Management Systems In the modern competitive market environment, organisations must possess knowledge that enables them to improve their performance. KM processes and practices have been found to improve performance and promote creativity. The drivers of organisational effectiveness are knowledge infrastructure capability and knowledge process capability. A positive relationship has also been established among KM infrastructure, KM processes and organisational performance (Zaied et al., 2012). Effective management systems are necessary to improve the performance of organisations. Management systems and business operations are aimed at satisfying customers’ needs while protecting the health and safety of workers and the environment. Several papers have been published on integrating total quality management (TQM) and KM (Subrahmanyam, 2008; Zhao & Bryar, 2001; Loke et al., 2011; Ribiere & Khorramshahgol, 2004). However, KM is a common thread among all management systems, and therefore, a wider view of integration is necessary.

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Management systems can be viewed as processes of transforming a set of inputs such as plant equipment, raw materials, procedures and methods, information and knowledge people and skills into a set of outputs such as products, services, documents and any results including environmental protection that meet customers’ needs and expectations. Similarly, from the KM perspective of business processes, inputs are a combination of knowledge of the customer base, raw materials and resources to be utilised, products and services to be delivered and data, information and knowledge (Figure 9.3). The knowledge conversion process is a changing one and/or the improvement process consists of storing, embedding, enhancing knowledge of processes, products and services, and it facilitates access to information. During the knowledge conversion process, knowledge is created, transferred and shared among the team. Thus, KM takes data, information, knowledge and people skills as its basic inputs, which are then converted to knowledge and intellectual capital (IC) as outputs. Knowledge creation, transfer and embedding can be modified to serve different organisational purposes such as enrichment of customers’ knowledge or developing greater access to knowledge (Zhao & Bryar, 2001). Suppliers Inputs Materials, procedures, methods, people, skills, knowledge, plant and equipment. Environment

Inputs Knowledge relating to materials, resources and customers. Data, information. Environmental aspects

Knowledge conversion process

Management system processes

Outputs Meet customers’ and consumers’ expectations. Products, services, information, documents, results. Reduction of environmental impact.

Management Systems

Figure 9.3

Management systems and KM.

Outputs Intellectual capital. Enhanced knowledge conversion. Knowledge embedded in customers, products and services. Risk analysis.

Knowledge Management

178  ◾  Integrating Business Management Processes T Management Systems

Knowledge Management

Consistency of action and reduce variation by measuring performance against established management system objectives

Achieve knowledge enhancement and competitive advantage Become a learning organisation Promote innovation and collaboration

Meet customer needs and expectations and satisfaction

Manage relationship with customers, consumers and regulatory authorities

Delivery of products and services that customers need Protect environment against harmful activities

Focus on processes needed to collect, store, retrieve, share and leverage knowledge assets

Focus on resolving defects of products and services and identifying environmental aspects of processes

Focus on lessons learnt and assessment of risk

Creating a safe and healthy workplace where employees enjoy their work

Focus on promoting safe and healthy work practices

Competence, awareness and training

“Know-how” knowledge Empowerment, skill development and lessons learnt

Require managerial responsibility and commitment for managing and sustaining management systems

Knowledge officer Knowledge champion Informal groups

KM and management systems are complementary to each other. Effective management systems require efficient KM processes. Table 9.3 compares the objectives and focus of management systems with those of KM. Both management systems and KM aim to enhance customer satisfaction. In addition, KM objectives include customer relations management (CRM) (Ribiere & Khorramshahgol, 2004).

9.7 KM Process The goal of a KMS is to enhance organisational capabilities using individual and collective knowledge resources, which include the skills, capabilities, experience, routines, norms and technologies already existing in the organisation. In today’s uncertain economic conditions, organisations have to compete in a global knowledge-intensive environment. Their very survival depends on the ability to view knowledge as a potential source of competitive advantage (Probst, 1998). The essential requirements of a KMS are listed below (Frank, 2001):

a. Emphasis on concepts and reason: A KMS should provide definitions of concepts such as strategy, business process, task, etc., that are needed for the description and analysis of the organisation. It should also

Knowledge Management  ◾  179

b.



c.

d.



e.

incorporate tools to answer questions such as “What is a business process?” or “What is brand positioning?” posed by users of the KMS. Ability to reuse existing knowledge in the organisation: An effective KMS should have an adequate body of knowledge. Reusing existing knowledge contributes towards the economics of quality of the KMS while improving the overall quality of its contents. It promotes communication by referring to a body of knowledge that many people of the organisation are familiar with. Ability to support multiple perspectives: A KMS is used by people at all levels in the organisation, and in order to support different users and different activities, it should offer many perspectives on its platform. Different levels of detail are required to manage complex issues. For example, the production department needs only a brief knowledge of how various brands are marketed, while the sales team requires a comprehensive description of all tasks and resources associated with brand management. In order to support professional communities in the organisation, such as engineers and microbiologists, a KMS should provide concepts that relate to their specialities. Ability to integrate knowledge with information: The focus of a KMS is on storing knowledge rather than information. But the necessity to store information cannot be completely ignored because: (a) the distinction between the two is based on subjective judgement; and (b) information also adds value to knowledge. Therefore, a KMS should support the integration of knowledge with information. KMS should support awareness: In order to promote organisational learning, a KMS should support the distribution of knowledge. A KMS should be updated regularly so that its contents are kept up to date. Whenever the contents get updated, a KMS should have tools for communicating the changes to the users. Facilities should be made available for people to access certain types of knowledge or more general contents.

9.7.1 KM Models Many models have been proposed for KM, but only two models which incorporate the basic concepts of KM are considered in this chapter. According to the model proposed by Alavi and Leidner (2001), there are four stages in the KM process. The model proposed by Frank (2001) includes seven stages, and these are shown in Table 9.4. Alavi and Leidner’s model does not include setting knowledge goals or measurement. A combined model is shown in Figure 9.4. There are seven steps in this model, and a feedback loop provides for a review of knowledge goals.

9.7.2 KM Goals KM goals initiate KM activities. The three types of KM goals are: (a) normative knowledge goals (NKGs); (b) strategic knowledge goals (SKGs) and (c) operational knowledge goals (OKGs) (Probst, 1998).

9.7.2.1 Normative Knowledge Goals NKGs are aimed at creating a knowledge-aware, knowledge-friendly company culture and devising appropriate policies. These goals lead to conditions for formulating SKGs and OKGs. Examples of NKGs are to promote internal communications and involve important customers.

180  ◾  Integrating Business Management Processes T Reference

Alavi and Leidner (2001)

Probst (1998)

Stages

Create

Set goals

Store/retrieve

Acquire

Transfer

Develop

Apply

Distribute Use Preserve Measure

Set Goals 1

Measure Effectiveness 7

Preserve Knowledge 6

Identify Acquire Convert Create Knowledge 2

Knowledge Management Process

Apply Knowledge 5 Knowledge transfer Knowledge use

Develop Knowledge 3

Store, Retrieve Distribute Knowledge 4

Figure 9.4 Knowledge management model.

9.7.2.2 Strategic Knowledge Goals SKGs describe the capabilities of the organisation and its future needs. They are based on existing strategies and enable the evaluation of strategies, both existing and new, from the point of view of knowledge requirements. SKGs permit strategic alignment of organisational structure with management systems. Examples of SKGs are to create a new market for a product and to add or extend the product range.

Knowledge Management  ◾  181

9.7.2.3 Operational Knowledge Goals OKGs define the operational aspects of NKGs and SKGs and ensure that KMS is implemented at the operational level. OKG help optimise the infrastructure of KM. An example of an OKG is the formulation of the knowledge requirements to enhance the brand image of a product in the market. Relevant knowledge aspects would be data and information on market share, presentation of the product, required shelf space in the market, competitors’ products, price structure, etc.

9.7.3 Knowledge Creation Knowledge creation always begins with an individual. Sir Alexander Fleming’s discovery of penicillin in 1928 from the fungus Penicillium notatum opened up a whole new era of treating infections with antibiotics. A Brand Manager’s intuitive sense of market trends initiates a concept for a new product to fill the gap in the market. A process worker in a factory utilises his years of experience on the floor to come out with a more efficient process. In all these instances, an individual’s knowledge has been converted to organisational knowledge which benefits the company. Knowledge-creating companies are able to harness individual knowledge and share it among others. Knowledge creation is a continuous process, and it occurs at all levels in the organisation (Nonaka, 2007). Organisational knowledge creation is a process of developing new or updating existing contents within the organisation’s tacit and explicit knowledge. Knowledge is created, shared, expanded and justified through social and collaborative processes and an individual’s cognitive process such as reflection. Four modes of knowledge creation through conversion (socialisation, articulation, externalisation and internalisation) have already been discussed (Section 9.4) (Alavi & Leidner, 2001).

9.7.4 Knowledge Identification Most organisations are not aware of the existence of internal and external data and information that reside in the organisation and its capabilities. Lack of awareness leads to inefficiency, uninformed decisions and redundant tasks. Information networks get disrupted through restructuring, downsizing and re-engineering activities. Identification of internal knowledge and transparency can be achieved through knowledge maps, internal electronic databases and the internet. However, people on their own do not externalise their knowledge in computer systems, and therefore, tools have to be provided in the KMS that support personal contact (Probst, 1998). From the early 1980s, Accenture employees shared knowledge through employee conferences, phone calls, faxes and regular post. As the company grew, these methods of managing knowledge were found to be ineffective. In 1991, the company decided to pursue a global standard and inclusive KM policy through its “Horizon 2000” taskforce. The strategy aimed to integrate the skills, knowledge and experience of the individual with the collective knowledge and the reusable experience of its global community. Individuals were connected electronically and culturally, and thereby the taskforce created a KM organisation. The first version of the company’s “Knowledge Xchange” was designed to create and share knowledge internally and with external communities creating a network of electronic communities of practice (Terjesen, 2003).

182  ◾  Integrating Business Management Processes

9.7.5 Acquisition of Knowledge Often organisations have to acquire knowledge through acquisition strategies. Four such strategies are as follows (Probst, 1998):

1. Knowledge possessed by other organisations A rapid way to develop an organisation’s competence is by acquiring other companies’ knowledge through joint ventures, or the takeover of highly innovative companies in the desired knowledge field, or recruiting people from such companies. 2. Stakeholders’ knowledge This is an economic way to acquire knowledge. Customers’ knowledge early in the product development phase can provide valuable information about their requirements. 3. Recruiting experts Hiring experts or specialists in the desired field is increasingly becoming a suitable option to acquire knowledge. 4. Knowledge products Potential of knowledge products, such as software, patents and CD-ROMs, can only be realised through human intervention. The knowledge product has to be compatible with existing knowledge capabilities and has to be treated as an investment in the future (potential knowledge) or in the present (directly applicable knowledge).

9.7.6 Knowledge Development Knowledge development refers to all managerial activities that can produce new internal or external knowledge at the individual and collective level. Individual knowledge development is based on creativity and problem-solving capabilities and a proper KMS has to support both components. Collective knowledge development involves the development of teams. Team members must have complementary skills, and each team must have clearly defined realistic goals. Management must create an environment where openness and trust are valued to promote communication among the team members. Internal think tanks, learning forums, internal centres of conference and product clinics are some tools that support knowledge development (Probst, 1998). Hewlett Packard (HP) has developed a sophisticated approach to manage its knowledge. HP’s KM initiatives have made a success of its KM programme. The following are among the tools and techniques (Birkinshaw, 2001): ◾ IT application and organisational tools for coordinating activities: HP has established a market research database containing research reports accessible to all and for managing research projects and its patent folios. HP’s laboratories are organised into centres that focus on specific technologies, and strong links exist between centres and development groups. ◾ IT application and organisational tools for problem-solving: HP has an elaborate competence database, which allows searching for employees with specific skills. Intranet forums and video conferencing are also available for speedy communication. The best practice transfer process encourages employees to seek out information from other laboratories and from outside sources and share information with others. In order to prevent hoarding of information, HP has an informal network of individuals with similar expertise.

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9.7.7 Knowledge Storage and Retrieval Knowledge residing in the organisation is often referred to as organisational memory. It consists of storage, organisation and the retrieval of knowledge content. Knowledge in the organisational memory exists in several forms such as written documents, structured information in electronic databases, codified human knowledge in expert systems, documented procedures and processes and tacit knowledge acquired by individuals and networks of individuals (Alavi & Leidner, 2001). Individual knowledge memory is based on personal observations, experiences and actions. Collective organisational memory is the way in which knowledge from past experience and events influences current organisational activities. Organisational memory also includes components such as organisational culture, production processes and standard operating procedures, the structure of the organisation, the environment and internal and external information archives. The advantages of organisational memory are: (a) facilitates the implementation of change by relating to organisational change in the past and (b) supports the storage and application of standards and procedures for immediate use avoiding repetition. Organisational memory also has disadvantages: (a) creates a bias in the decision-making process and (b) maintains the status quo leading to a stable organisation culture resistant to change. A classic case where a prediction was based on previous events was the earthquake which rocked L’Aquila in Italy on April 9, 2009. The 6.3 magnitude quake devastated the city and killed 309 people. Six Italian scientists and an ex-government official were sentenced to a 6-year jail term. The prosecution argued that the scientists provided inadequate characterisation of the risks and misleading reassurances about the dangers that faced the city based on previous experience and events (Johnston, 2012). However, in 2005, the Supreme Court cleared all earthquake scientists except for the public official whose prison sentence was reduced to 2 years (Cartlidge, 2005).

9.7.8 Knowledge Distribution An effective KMS delivers appropriate knowledge to people who use and benefit from such knowledge. Groupware, interactive management information systems and computer-based cooperative work support the efficient exchange of knowledge in the organisation. An efficient distribution system can promote rapid customer support by making knowledge available at various locations in the organisation. Holderbank, the Swiss-based world market leader in the cement and concrete industry, has practised KM for over half a century. Initially, the small group knowledge in the company was too small. Exchange of information was conducted through personal contact, networks, meetings, seminars and forums, courses and annual reports. As the company expanded, it established a formal organised and coordinated approach which was well advanced and was moving towards codification. Its strategy included the development and adoption of better tools, methods and systems. In 1993, Harry Brantz, a research and marketing expert, created a personal network of R&D specialists, fostered trust among them and collected information from all the sites, codified the projects and facilitated access. By 1995, he was able to collect all the information from all the projects at various sites (Brantz, 2000; Heideloff, 1997).

9.7.9 Knowledge Application and Use Knowledge application and use refer to the productive deployment of organisational knowledge. The application of knowledge that resides in the organisation can be used by the

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company for its competitive advantage. Knowledge application enhances organisational capability through three mechanisms (Alavi & Leidner, 2001): directives, routines and selfcontained task teams. Directives define rules, standards, procedures and work instructions established by knowledge-converting specialists, i.e. tacit knowledge to explicit knowledge, and integrates them with the KMS for efficient communication. For example, a directive for the conservation of energy in the organisation or a directive for waste disposal. Routines define the way tasks have to be performed by individuals by applying and integrating their knowledge without having to articulate or communicate with others, e.g. assembly operations of a vehicle. Self-contained teams are formed when directives or routines cannot be established. Organisations may nominate a special team of experts to solve a problem. For example, the CEO of a food processing company may form a team of specialists to investigate and resolve the frequent microbiological contamination of its processed food products. IT can enhance knowledge integration and application by facilitating the acquisition, sharing, updating and accessibility of organisational directives allowing faster changes to be applied when necessary. It can also increase the speed of knowledge integration and application by coding and organisational routines. Without constant use, the knowledge residing in the organisation will decay in quality. In order to promote adaptability, the user has to see the genuine benefits of the KMS. Organisations can improve knowledge use through knowledge forums, advisory boards, champion communities, internal communication channels, groupware and the internet (Probst, 1998). At Novartis, an infrastructure was designed by Arthur Anderson in1998, which was known as the “The Knowledge Marketplace”. It was defined as a means for people to contribute, participate and influence and shape their future. It was accessible though the company’s intranet or via Lotus Notes. The knowledge marketplace included profiles of internal experts (The Yellow Pages), profiles of external experts (The Blue Pages) and discussion groups (The Virtual Forum), where discussions on specific themes are held (Leibold et al., 2005; Abramson, 1999).

9.7.10 Knowledge Transfer The transfer of knowledge takes place at various levels: ◾ ◾ ◾ ◾ ◾ ◾

Between individuals From individuals to explicit sources From individuals to groups Between groups Across groups From groups to the organisation.

The effectiveness of the KMS depends upon the availability of knowledge at locations where it is needed and used. For example, knowledge about monthly sales figures should be accessible to all sales personnel to promote their sales. Generally, organisations are not aware of the knowledge they possess and have inefficient means of locating and retrieving knowledge that exist in organisations. Knowledge transfer can be viewed in terms of five elements: (a) perceived value of knowledge; (b) willingness to share knowledge; (c) effectiveness of the mode of transmission;

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(d) willingness to acquire knowledge and (e) the ability to acquire, assimilate and use knowledge (Alavi & Leidner, 2001). Informal channels of transfer are unscheduled meetings, informal seminars and communication between individuals or groups during breaks. They are more effective in small organisations. Small companies may also experience problems of transfer of knowledge because of the absence of coding. Learning problems can occur when individuals filter the knowledge based on their experience and skills. Formal transfer methods are training seminars, plant tours, etc. Personal channels such as apprenticeship programmes and individual transfers are also effective means of transferring knowledge. IT such as intelligent software, video technology, computer networks and electronic bulletin boards can also enhance knowledge transfer.

9.7.11 Knowledge Preservation Knowledge that has been acquired and developed has to be preserved in the organisation’s corporate memory. Often when companies undergo restructuring or reorganisation, they lose a good proportion of their corporate memory. Organisations must select the essential knowledge to be preserved in their corporate memory and ensure that the knowledge base is regularly updated. Individual, collective or electronic storage processes can be used to preserve an organisation’s knowledge. Individuals such as engineers and quality assurance professionals should be encouraged to preserve their knowledge in the knowledge base. On the collective level, the company can promote the storage of capabilities and experiences in the organisation’s corporate memory. Electronic storage processes use expert systems to store organisational experience and ensure effective accessibility. It is important to remember to update storage systems regularly (Probst, 1998).

9.7.12 Measurement of Effectiveness Unlike financial performance, the effectiveness of a KMS cannot be easily measured. There are no proven tools such as quality tools or financial indicators to measure and evaluate a KMS. Instead, a number of key indicators have to be used that reflect the organisation’s normative, strategic and operational goals. A number of indicators have been used by various authors to measure the performance of a KMS (Zaied et al., 2012). Some of these measures are given below: ◾ Perceived benefits ◾ Market share, sales growth and competitiveness ◾ Financial performance such as profitability, growth rate, return on investment (ROI) and cost performance ◾ Innovativeness ◾ Efficiency and effectiveness ◾ Productivity. Organisations realise that IC is an asset, and several models have been proposed to measure the IC residing in an organisation. Among the methods are IC Index, Balanced Scorecard, Intangible Asset Monitor and Skandia Navigator (Jurczak, 2008).

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9.8 Why Do KM Programmes Fail? The success of a KMS is assessed through its acceptance and usage by the employees of the organisation. As with other management systems, after the initial enthusiasm, the acceptance and usage diminishes for various reasons. Wild and Laumer (2011) have conducted a longitudinal case study of a German financial services provider with about 900 employees and assets of €3.2 billion. Since 1999, the bank has provided knowledge and information to its employees through a static intranet system. Since then, the KMS has not changed, although a number of radical changes have taken place: For example, the Basel II guidelines, legal requirements, radical intra-organisational changes through a merger with another financial services provider in 2000, and the introduction of a new core banking system in 2008. The study found the inhibitors to be:

1. Process failure: Missing the organisational embeddedness of the KMS after several organisational changes. 2. Information failure: Preparation of information based on outdated standards defined in 1998. 3. Organisation failure: Failure to integrate the implementation of the new core banking system and missing information in support of the KMS. 4. System failure: Not updating technology since 1999 and a failure to integrate the technological innovations of the KMS. A KMS which is outdated is as good as a “dead” system. If we fail to identify and correct errors in “what we know” and “how we learn”, the KMS soon becomes obsolete leading to poor decisions. Fahey and Prusak (1998) have identified 11 such errors associated with the concept of knowledge itself:

1. 2. 3. 4.

5. 6. 7. 8. 9. 10. 11.

Inability to distinguish between data and information. Focusing on knowledge stock, impeding knowledge flow. Considering knowledge as existing outside the heads of individuals. Inability to understand the concept that the fundamental intermediate purpose of managing knowledge is to create a shared context. Ignoring the role and importance of tacit knowledge. Disconnecting knowledge from its uses. Paying less attention to thinking and reasoning. Too much emphasis on the past and the present and not on the future associated with future projections. Failure to recognise the significance of experimentation. Technological contacts take precedence over human contact. Attempting to develop a direct measure of knowledge.

In order to avoid these errors and move the organisation towards a more knowledge-driven enterprise, organisations need to take the following actions: ◾ Knowledge should be considered as an organisational phenomenon. Since knowledge is distinct from data and information, discussions and reflections should take place to arrive at a consensus about knowledge itself. ◾ Organisations should strive to note and correct errors in their stock of knowledge. ◾ Managers must be vigilant about detecting and correcting errors in their processes of knowing, i.e. creating, sharing and leveraging knowledge throughout the organisation.

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9.9 Application of KM in Management Systems A fictional case study to illustrate the use of KM in developing the EMS, emergency preparedness and response. ABC Food Products Limited is a small, well-established company located in a suburban industrial estate, employing about 50 staff. Its core business is the manufacture of a limited range of ingredients for the food industry. Since 2000, it has operated from a medium-sized, partly modified site on an industrial estate established in the early 1990s. The site, a former chemical processing firm, has not been designed for ABC food production work, but the local community and the local government encouraged the company to establish the food plant here. The Managing Director is a business entrepreneur with more than 15 years of experience in senior executive roles. He is actively involved in local community activities, and most of the people in the community work for this company. Nick Wright, Environmental Manager (EM), has been with the company for about 3 years. He has a wealth of information on environmental management gained while working for the Environment Protection Agency (EPA) for about 10 years. During the last 7 years, the company has grown significantly. It has an efficient food safety management system certified to ISO 22000 standard and has a fully compliant Good Manufacturing Practice (GMP) programme. The EMS is not comprehensive, but it complies with all regulatory requirements. So far the company has not been penalised for violating any environment protection laws. At a time when the company was thinking of expanding and relocation, the CEO, Alan Brown of Global Food Products Company (GFPC), a multinational company with plants in ten countries, acquires ABC’s chemicals plant. The CEO has visited the plant since the takeover and assured job security and expressed his intention to expand and modernise the plant in the current location. The CEO, Alan Brown, summoned Nick and instructed him to develop and implement a fully functional EMS as the current system was inadequate to cope with the expected growth of the company. It was good news for ABC food production staff. Nick started to work on it immediately, and within a few days, he was able to present a plan to develop and implement the EMS programme. As ABC Food Products Limited has covered the groundwork, Nick had only to identify and prioritise areas for further enhancement. Alan was pleased with the plan and instructed him to contact the specialists listed in the Global Food Products global network, if necessary. Previously, in 2005, the site was flooded as a result of a severe storm, but no spills or emissions occurred. There were no other disasters, natural or otherwise. Nick set his first priority as the development and implementation of an Emergency Preparedness and Response Programme (EPRP). He developed the following strategy:

1. An Environment Management Team (EMT) was formed consisting of the Quality Assurance Manager, Food Safety Manager, Site Engineer, two workers from the floor, a supervisor and one of the HR personnel. 2. An operational goal was established. 3. In order to tap tacit knowledge held by the staff, the IT department created a port for individuals and groups with disaster management experience to share their experiences. He talked to specialists in the GFPC network to develop his ideas further (socialisation). 4. Nick collated all the information and translated the tacit knowledge into explicit knowledge that he can communicate to the team members and others through various means: discussion forums, newsletters, bulletin board, etc. (articulation).

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5. The EMT standardised this knowledge, putting it together into a manual and embodying it in company procedures. The first part of the document explained the potential emergencies, the risks involved and how they are assessed. The second part included the following: – Policy statement – Purpose and scope – Associated documents including applicable regulations – Responsibilities of the staff – Resources required – Procedures in case of earthquakes, chemical spills, emissions, fire, terrorist activities, criminal activities, gas leaks, power outage and floods – Training programme – Reviews – Practice drills – Incident reviews. All employees were allowed access to the documents, and comments from the staff were appreciated. A worker from the floor suggested the inclusion of lessons learned following a disaster, so this too was included under “Procedures”. The drafts were reviewed following the brief period allowed for comments. The final document was presented in three parts: Part One – Description and analysis of disasters, Part Two – Procedures and Part Three – Incident reviews and lessons learned. The documents were made available as hard copies and via the intranet ports accessible to all (Combination). 6. Finally, through the creation of a new procedure, Nick and his team members enriched their own tacit knowledge base (internalisation). The greatest advantage was that the team came to understand in an extremely innovative way that practical solutions can be generated through team work. KM is not a luxury but a necessity for any organisation. It creates a system that enables organisations to tap into knowledge and experience while motivating creativity among staff to improve performance.

References Abramson, G. (1999). Knowledge management. CIO Web Business, 12 (20), Section 2, 31–34. Alavi, M. and Leidner, D. (2001). Knowledge management and knowledge management systems: Conceptual foundations and research issues. MIS Quarterly, 25 (1), 107–136. Armstrong, P. F. (2010, March 5). A knowledge management process for quality leaders. Paper Presented at the 22nd Annual Quality Management Conference on Improvement through People, Processes and Performance, New Orleans, LA. Birkinshaw, J. (2001). Why is knowledge management so difficult? Business Strategy Review, 12 (1), 11–18. Bornemann, M., Graggober, M., Hartlieb, E., Humpl, b., Koronakis, P.,…Wols, K. (2003). An illustrated guide to knowledge management. Graz: Wissensmanagement Forum. Brantz, H. (2000, September, 21–22). Summary of “Holderbank” experience on knowledge management in area of product development. Paper Presented at the Conference on Knowledge Management: Challenge for Firms and Organisations, Ottawa, Canada. Carlsson, S. A. (2001). Knowledge management in network contexts. 9th European Conference on Information Systems, Slovenia. Cartlidge, E. (2005). Italy’s Supreme Court clears L’Aquila earthquake scientists for good. Science Magazine. Retrieved January 26, 2018 from http://www.sciencemag.org/news/2015/11/italy-s-supreme-courtclears-l-aquila-earthquake-scientists-good.

Knowledge Management  ◾  189 Fahey, L. and Prusak, L. (1998). The eleven deadliest sins of knowledge management. California Management Review, 40 (3), 265–276. Frank, U. (2001). Knowledge management systems: Essential requirements and generic design patterns. In W. W. Smari, N. Melab and K. Yetongnon (Eds.), Proceedings of the International Symposium on Engineering Systems and Engineering, pp. 114–121. Las Vegas, NV: CSREA Press. Heideloff, F. (1997). Differences in socio-cognitive filters: Illustrating an understanding of the information overload problem in the course of transformation processes. Journal of the East European Management Studies, 2 (4), 436–441. Johnston, A. (2012, October, 22). L’Aquila quake: Italy scientists guilty of manslaughter. BBC News Europe. Retrieved March 18, 2018 from http://www.bbc.co.uk/news/world-europe-20025626. Jurczak, J. (2008). Intellectual capital measurement methods. Orgmasz, 1 (1), 37–45. King, W. R. (2009). Knowledge management and organisational learning. In: W. R. King (Ed.), Knowledge Management and Organizational Learning, pp. 3–15. New York: Springer. Leibold, M., Probst, G. and Gibbert, M. (2005). Strategic Management in the Knowledge Economy: New Approaches and Business Applications, pp. 288–291. Erlangen: Publicis. Lenz, K. (2001). Managing Knowledge: How to Implement a Knowledge Management Concept. Hamburg: Diplomica Verlag GmbH. Levitt, B., and J. G. March. (1988). Organizational learning. Annual Review of Sociology, 14, 319–340. Loke, S. P., Downe, A. G., Sambasivan, M., Kalid, K. and Ooi, K. B. (2011). Integrating total quality management and knowledge management to supply chain learning: A structural approach. A Paper Presented at the 2011 International Conference on Financial management and Economics, Singapore: IACSIT Press. McQueen, R. (1998). Four views of knowledge and knowledge management. Proceedings of the Americas Conference of AIS, August 1998, pp. 609–611. Nonaka, I. (2007). The knowledge-creating company. Harvard Business Review, 85 (7, 8), 162–171. Nonaka, I. and Konno, N. (1998). The concept of “ba”: Building a foundation for knowledge creation. California Management Review, 40 (3), 40–54. NWDDC. (1993). The New International Webster’s Comprehensive Dictionary of the English Language (Deluxe Encyclopaedia Edition). Naples, FL: Trident Press International. Probst, G. J. B. (1998). Practical knowledge management. Prism, Second Quarter, 17–29. Ribiere, V. M. and Khorramshahgol, R. (2004). Integrating total quality management and knowledge management. Journal of Management Systems, 16 (1), 39–54. Schubert, P., Lincke, D. and Schmid, B. (1998). A global knowledge medium as a virtual community: The NetAcademy concept, Proceedings of the Americas Conference of AIS, August 1998, pp. 618–620. Smith, E. A. (2001). The role of tacit and explicit knowledge in the workplace. Journal of Knowledge Management, 5 (4), 311–321. Subrahmanyam, Y. V. (2008). Systems approach for integrating knowledge management to total quality management in learning organizations. A Paper Presented at the XXXII National Systems Conference on Energy Systems Optimisation and Conservation, December 17–19, 2008, Roorkee: The Indian Institute of Technology. Terjesen, S. A. (2003). Knowledge management in Accenture: 1992–January 2001. In P. Gooderham and O. Nordhaug (Eds.), International management: Cross-Boundary Challenges, pp. 234–257. Malden, MA: Blackwell Publishing. Tongchuay, C. and Praneetpolgrang, P. (2008). Knowledge quality and quality metrics in knowledge management systems. International Journal of Computer, Internet and Management, 16 (Sp 3), 21.1–21.6. Wild, U. and Laumer, S. (2011). Failure and success of knowledge management systems in the financial services industry. Proceedings of the Quality Information in Organisations and Society of Pre-ICIS sigIQ Workshop, December 3, 2011, pp. 1–8. Wilson, L. T. and Asay, D. (1999). Putting quality in knowledge management: The quality professional’s role in corporate memory management. Quality Progress, 32 (1), 25–31. Zack, M. (1998). What knowledge problems can information technology help to solve. Proceedings of the Americas Conference of AIS, August 1998, pp. 644–646.

190  ◾  Integrating Business Management Processes Zaied, A. N., Hussein, G. S. and Hassan, M. M. (2012). The role of knowledge management in enhancing organizational performance. International Journal of Information Engineering and Electronic Business, 5, 27–35. Zhao, F. and Bryar, P. (2001). Integrating knowledge management and total quality: A complementary process. Paper Presented at the 6th International Conference on ISO 9000 & TQM, April 17–19, 2001, Paisley: University of Paisley.

Chapter 10

Financial Management 10.1 I introduction The finance department is the nerve centre of any business organisation. Any dysfunction of the finance department will paralyse the operational activities of the company. The company will experience liquidity/cash flow difficulties and will not be able to procure its supplies. Suppliers will refuse to deliver goods because of unpaid bills. Bankers will attempt to recover its debts. Cost reductions in manufacturing will result in the production of shoddy goods. The firm’s competitors will thrive. These are some of the fall outs from finance department dysfunction. Corporate malfeasance during the last one-and-a-half decades has led to the collapse of major profitable companies (Ritholtz, 2013). Enron, a Houston-based commodities, energy and service corporation established in 1985, was named “America’s most innovative company” for 6 years in succession before its collapse in 2001. Owing to accounting malpractices shareholders lost $74 billion, thousands of employees and investors lost their retirement funds and many employees lost their jobs. In 2002, Tyco, a safe blue chip company manufacturing electronic, health care and safety equipment faced a similar fate. The Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) stole $150 million, and inflated the company’s income by $500 million through unapproved loans and fraudulent stock sales. In both instances, a regulatory body imposed severe penalties including prison sentences on the responsible parties. Financial management is an essential part of organisational management and should not be treated as a separate entity. It involves planning, organising, controlling and monitoring financial activities in order to achieve company objectives. These are realised through proper acquisition, effective utilisation and management of financial resources to satisfy customer needs while making a profit for the organisation.

10.2 evolution of Financial Management Financial management developed as a distinct field of study during the early part of this century, and the driving forces behind it were consolidation and the formation of large enterprises (Chandra, 2008). Its evolution can be considered in three phases: traditional phase, transitional phase and modern phase.

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10.2.1 Traditional Phase Four features dominated the traditional phase for about four decades: ◾ Financial management was considered from the point of view of outsiders such as investment bankers, lenders and others rather than the Financial Controller of the firm. ◾ It focused on corporate finance, and not much emphasis was placed on non-corporate institutions. ◾ The focus of financial management during the life cycle of an organisation was on formation, issuance of capital, major expansion, merger, reorganisation and liquidation. ◾ Long-term financing, institutions, instruments, procedures employed in capital markets and legal aspects were considered important in financial management. Problems of working capital management were not addressed.

10.2.2 Transitional Phase The transitional phase lasted from the early 1940s to the early 1950s. The nature of financial management was similar to that of the traditional phase. However, emphasis was placed on the day-to-day problems of working capital faced by Financial Managers. An important contribution during this phase was the development of capital budgeting techniques.

10.2.3 Modern Phase The modern phase evolved during the mid-1950s, and with the combination of economic theory ideas and statistics, financial management was considered to be more analytical and quantitative. This phase witnessed the rational matching of funds to their users which maximised shareholders’ wealth. Major contributions in this phase were: ◾ ◾ ◾ ◾ ◾ ◾ ◾

Capital budgeting Asset pricing theory, capital structure, efficient market, option pricing and agency theories Valuation models Dividend policy Working capital management Financial modelling Behavioural finance.

Many more developments are taking place in financial management, making it an exciting and challenging field of study.

10.3 objectives of Financial Management Financial management is concerned with the procurement, allocation, utilisation and control of financial resources of an enterprise. The objectives of financial management can be considered in terms of: (a) basic objectives and (b) other objectives (Bhat, 2008; Management Study Guide, n.d.).

10.3.1 Basic Objectives Traditionally, the maintenance of liquid assets and maximisation of profits have been considered to cover the basic objectives of financial management. However, emphasis on the maximisation

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of profits has been much criticised and greater emphasis is now placed on the maximisation of shareholders’ wealth. a. Maintenance of liquid assets Organisations should maintain sufficient liquid assets to meet its obligations at all times. Investments in liquid assets have to be carefully planned so that they are neither too low nor excessive. The Financial Managers should aim to strike a balance between liquidity and profitability. b. Maximisation of profit In terms of the owner-oriented concept, net profit refers to the amount that forms the dividends to shareholders. From an operational point of view, profit represents the economic performance of the organisation. The organisation’s drive to achieve maximum profits based on its investment, finance and dividend policy is termed “profit maximisation”. Organisations select assets, projects and decisions that are profitable and reject non-profitable ones. Advantages of Profit Maximisation – Best criterion to evaluate economic performance of the enterprise – Financial resources are allocated to profitable projects – Permits optimum utilisation of resources – Ensures maximum dividends to shareholders, timely payments to creditors, higher wages to employees, better quality driving lower prices, more employment, opportunities and maximisation of capital. Limitations of Profit Maximisation – Does not distinguish between short-term profit and long-term profit – The terms “profit” and “maximum” cannot be defined clearly – Ignores the time value and risk factor. c. Wealth maximisation: Wealth maximisation is defined in terms of net present value (NPV), which is the difference between gross present worth and the amount of capital required to achieve the benefits. All financial actions should achieve positive NPV, create and add wealth to the organisation and reduce actions that create negative NPV. Wealth maximisation brings benefits to lenders or creditors, employees, community and the employer.

10.3.2 Other Objectives Other objectives are the provision of regular and adequate financial resources, planning a sound capital and ensuring adequate returns to shareholders, the efficient utilisation of funds and security of investments.

10.4 Scope of Financial Management Traditionally, financial management was considered to be the simple procurement of funds to meet the financial needs of the organisation. The modern approach of financial management provides a conceptual and an analytical framework that supports financial decision-making (Khan & Jain, 2005). In essence, the modern approach to financial management includes not only the acquisition of financial resources but also their efficient utilisation.

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The scope includes such issues as the total volume of funds to be committed, types of assets to be acquired and the mechanism for financing the funds. These issues are related to the size and the intended growth of the enterprise, the types of assets needed and the composition of the liabilities. Thus, the scope can be broken down into: (a) investment decisions; (b) finance decisions and (c) dividend policy decisions.

10.4.1 Investment Decisions Investment decisions refer to the selections of assets for investment using the funds of the enterprise. Long-term assets deliver returns over a period of time. On the other hand, short-term assets are those that are convertible to cash without diminution in value over a short period of about 1 year. The process of acquiring long-term assets is known as “capital budgeting”, in contrast to “working capital budgeting”, a process for investing in the short term. Capital budgeting: The benefits of capital budgeting extend over the lifetime of the project or asset. It involves: (a) selection of new assets out of several alternatives of reallocation of funds when an existing asset has not performed as expected; (b) assessment of risk and uncertainty and (c) evaluation of benefits against a certain norm or standard. Working capital budgeting: It is mainly concerned with the management of current assets. In working capital budgeting, a trade-off is required between profitability and liquidity. If the firm lacks adequate working capital, it will not invest sufficient funds in current assets and it may not be able to meet its current financial obligations. On the other hand, investing large amounts in working capital can adversely affect profitability.

10.4.2 Financial Decisions An example of a financial decision is concerned with the financing mix or the capital structure or leverage and refers to the mix of debt and equity capital. An optimum capital structure is one where there is a reasonable proportion of debt and equity capital. Therefore, the financial decision is based on: (a) optimum capital structure and (b) the proportion of funds to be raised to maximise shareholders’ return.

10.4.3 Dividend Policy Decisions The dividend policy is associated with the profits of the firm and the financial decision is based on whether it can be shared with the shareholders or retained in the business. The dividend payout ratio determines the proportion of profits that is allocated for shareholders. The preference of shareholders and investment opportunities available within the firm are also considered in designing the dividend policy.

10.5 Functions of Financial Management The financial functions of a firm can be broadly classified into two categories: routine financial functions and special financial functions (Management Study Guide, n.d.).

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10.5.1 Routine Financial Functions The main routine financial function is the management of cash. Firms require cash for the payment of wages and salaries, payment of bills, payments to creditors, payment and collection of loans, meeting current liabilities, maintenance of adequate stock, payments for raw materials, etc.

10.5.2 Special Financial Functions 1. Estimation of capital requirements: This is based on expected costs and benefits, future programmes and the policies of the firm. Methods used for estimation must ensure the improvement of the earning capacity of the firm. 2. Determination of capital mix: Following the estimation of capital requirements, a firm has to decide on the optimum capital structure, which involves short-term and long-tern equity analyses. The decision is based on the current proportion of equity capital and additional funds required from external sources. 3. Selection of funding sources: Funds may be sourced from: (a) issue of shares and debentures; (b) loans from banks and other financial institutions and (c) issue of bonds. The choice depends on the merits and demerits of each source. 4. Investment of funds: Funds are allocated according to the financial policy of the firm and must ensure safety and adequate returns on the investment. 5. Distribution of profits: The firm may decide to share the profits among the shareholders as a dividend declaration or retain them in the company for projects like expansions. 6. Cash management: This function involves the management of cash required for the payment of salaries and wages, payment of power and water bills, payments to creditors, meeting current liabilities, maintaining the inventory and procurement of raw materials. 7. Financial control: The most important function of financial management is the financial controls, which not only includes planning, procurement and the efficient utilisation of financial resources but also controls using techniques such as ratio analysis, financial forecasting (e.g. profit forecasting, cash flow costing), and cost and profit control.

10.6 Benefits of Good Financial Management Four components make up good financial management (National Council for Voluntary Organisation (NCVO), n.d.): a clear financial strategy, a plan for enhancing revenue, a sound financial management system and a suitable internal control environment. The benefits of a good financial management system are as follows: Provides a clear financial strategy and a plan for enhancing income It has a suitable internal control environment Effective and efficient utilisation of financial resources Able to achieve firm’s financial objectives and fulfil its commitment to all stakeholders Establishes accountabilities to donors and other stakeholders Gains the respect and confidence of funding agencies, partners, beneficiaries and the community ◾ Gains a competitive advantage for scarce resources ◾ Plans for long-term stability and growth.

◾ ◾ ◾ ◾ ◾ ◾

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10.7 Financial System The financial system consists of a set of components and mechanisms such as monetary policies, insurance companies and banks that permit economic transactions to occur. Funds flow from lenders who have an excess of funds to borrowers such as individuals, the government and businesses either directly or indirectly. The main components of a financial system are: (a) financial markets; (b) financial institutions; (c) lenders and (d) borrowers. It is the principal means of transforming savings into investments. There are several types of financial systems in the business sector, from those used for transactions within an organisation to systems that allow international financial transactions (Chandra, 2008). Figure 10.1 is a simple model of a financial system, which shows the interrelations among the various components of the system. Business enterprises need financial resources for growth and competitive advantage. A welldesigned financial system helps in the formation of capital and meets the short-term and long-term capital needs of individuals, businesses and the government. It allows the pooling of money from individuals, businesses and the government and invests in productive sources (Gupta, 2015). Table 10.1 shows the various players in the financial system. The financial system is the link between those who have surplus funds (lenders) and those who need financial assistance (borrowers). It permits investors to monitor the performance of their Securities Financial Market Funds

Funds

Funds Funds

Financial Establishments

Lenders

Borrowers Deposits Shares

Figure 10.1

Funds

Loans

Model of a finance system.

T Finance Market

Financial Institutions

Money market Capital securities market

Commercial banks Non-banking financial institutions Mutual funds Insurance companies

Lenders Households Businesses Government Foreign enterprises

Borrowers Households Businesses Government Foreign enterprises

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investment and achieve the optimum allocation of risk. The system enables the sharing of financial information and broadens the understanding of the financial market.

10.7.1 Financial Institutions Key financial institutions are commercial banks, mutual funds, insurance market and financial market (Chandra, 2008). Commercial banks and non-banking financial institutions: Lenders provide funds to borrowers indirectly through financial institutions. Financial institutions provide services such as merchant banking, leasing and credit rating. The main advantages of financial banking are convenience, maturity and diversification, lower risk, economic scale and expertise. Nonbanking financing companies deal with loans, advances, the acquisition of shares, bonds, stocks debentures and securities issues by the government, local authorities or other marketable securities. They provide a variety of advisory services to clients. Commercial banks too deal with loans and advances. Mutual funds: Mutual funds pool money from investors and invest in productive diversified portfolios. They issue securities to investors, and profits are shared by the investors based on their investment. Mutual funds are set up as trusts and usually have a sponsor, trustee, an asset management company and a custodian. The advantages of mutual funds are convenience, lower risk, expertise and lower transaction costs. Insurance companies: Policy holders’ funds are invested in ventures in exchange for delivering a specified sum at a later stage or on occurrence of an event such as death or disability. It offers protection as well as a saving opportunity. The contractual payment of a premium encourages people to invest in insurance companies.

10.7.2 Financial Market The financial market is a place where funds from surplus units are transferred to deficit units through the creation and exchange of financial assets. It is not a source of finance but merely a link between lenders and borrowers. Businesses, financial institutions, government and individuals trade in their financial products in this market directly or indirectly. The financial market includes the money market and the capital market. The money market deals with short-term (usually less than 1 year) financial assets and provides access to users of short-term funds at reasonable prices. On the other hand, the capital market deals with long-term funds. The main users of the capital market are mutual funds insurance organisations, foreign investors, individuals and businesses. Two segments of the capital market are the primary new issue market and the secondary stock market. The former offers a channel for the sale of new securities not previously available. The stock market deals with old existing securities and transactions of shares, stocks, debentures, etc.

10.8 Financial Management System Financial management consists of procedures and systems that are required to execute the functions of financial management. The Financial Manager is involved in managerial functions while the executives who report to them carry out routine operations. The Financial Manager holds

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a key position in the company and shapes the future of the enterprise. They must have a sound understanding of financial principles as well as the financial goals of the organisation (Pandey, 2005). The major functions of a Financial Manager are (McKinney, 2004) presented below: 1. Financial planning: (a) Long-term and short-term planning and evaluating various courses of action; (b) implementation of regulatory requirements and (c) defining financial programmes and activities. 2. Financial control and budget preparation: (a) Forecast expenditure and revenue; (b) assistance with submissions for budget preparation; (c) establishment of expenditure classification control and (d) manage cash flow requirements. 3. Developing accounting systems and procedures: (a) Developing internal controls and appropriate accounting systems; (b) advising department heads how best to use the accounting system and (c) reviewing budgeting process, financial reporting systems and making improvements. 4. Reporting financial performance: Reporting financial information, particularly the variance between the budget and actual performance, to Department Managers. 5. Providing investment opportunities: Selecting important investment opportunities that enhance the growth of the company based on return and risk. 6. Communicating with external agencies: Developing and maintaining an effective liaison with external parties such as auditors, regulators and fiscal authorities (e.g. Inland Revenue Department). 7. Training staff: Organising appropriate training for staff to enhance financial understanding and maintain a skilled workforce. 8. Analysing fiscal conditions. Apart from major financial activities such as investment decisions, internal controls and budget preparation, the financial department carries out numerous routine activities (Pandey, 2005). Some of the routine activities are receiving cash, payments and safeguarding cash balances, safeguarding securities, insurance policies and other important financial documents, monitoring financing from external agencies and record-keeping and reporting.

10.9 Structure of the Financial Department There is no set structure for organising a financial department. The Financial Manager’s position is a top management position reporting directly to the board of directors. The exact structure depends on the size of the firm, the nature of the business, the competence of the financial team and the financial philosophy of the firm. There are three basic models of financial organisations in business. In the simplest integrated model, the financial position is a single department. In the second model, the financial function is split into two areas: budget and finance departments. In the third model, the CFO heads the department where the responsibilities are divided into various activities such as accounting, treasury, revenue collection and budgeting (McKinney, 2004). In large organisations, the CFO is assisted by two officers: the Treasurer and the Financial Controller. The Treasurer is responsible for auditing, retirement benefits, credit management and cost control. Planning and budgeting, inventory management, performance evaluation and accounting functions are the responsibilities of the Financial Controller (Pandey, 2005).

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10.10 Financial Management Process Financial management is a four-stage continuous process, which requires financial information at all the stages (Figure 10.2). The four stages are financial analysis, financial decision-making, financial planning and financial control (Bhat, 2008).

10.10.1 Financial Analysis The financial analysis stage is the preliminary review and diagnostic stage during which a full financial analysis and a review are conducted to assess the current financial performance and state of the business. Existing or anticipated financial problems, risks, constraints and limitations are identified. A financial SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis is usually carried out at this stage.

10.10.2 Financial Decision-Making The review enables organisations to make financial decisions and choices. Possible decisions involve strategic investment decisions such as expanding current facilities, acquiring new businesses and raising long-term loans.

10.10.3 Financial Planning The main objective of financial planning is to direct the right amount of financial resources to the right project at the right time and the right cost. At this stage, the financial planners consider the financial risk involved in the decision. A budget is prepared for the organisation using financial planning tools, usually aided by computerised financial modelling.

10.10.4 Financial Control At this stage, plans are communicated to all departments to ensure effective implementation. The progress is monitored and reported to the board of directors, and corrective action is taken to address any deviations from the plan.

Financial Control

Financial Planning

Financial Information

Financial Decisions

Figure 10.2

Financial management process.

Financial Analysis

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10.11 Preparation of the Budget The preparation of the budget is the most important function of the finance department. It is the blueprint to achieve the objectives and goals of the organisation and it has an impact on employees, the suppliers and other stakeholders. The budget can be used as a tool for measuring the performance of managers by comparing the business results achieved with expected results in the budget. Events such as a downturn in the economy or an unexpected rise in the price of raw materials are beyond the control of managers. Therefore, when the budget is used to evaluate the success in achieving the department’s goals, the assessor should apply the appropriate measures of the results (Harvard Business School, 2009).

10.11.1 Budgeting Activities Although the finance department is responsible for preparing the budget, the entire organisation is involved in the process. Budgeting activities include (Harvard Business School, 2009): (a) forecasting future business results in terms of sales volume, revenue, capital expenditure and expenses; (b) integrating the forecasts with the organisation’s goals and financial resources; (c) obtaining the support of the management for the proposed budget and (d) managing post-budget activities to ensure the achievement of budgeted results.

10.12 Purpose of Budgeting Organisations need budgets for several purposes (Goodwin et al., 2012) such as to: ◾ ◾ ◾ ◾ ◾

Develop realistic financial forecasts that permit the effective allocation of resources Serve as a controlling tool and ensure that spending meets budgeted requirements Enable monitoring of variances so that appropriate decisions can be taken Provide a tool to monitor the performance of cost centres Effectively support the improvement of the annual plan.

10.13 types of Budgets Companies operate different types of budgets depending on the purpose for which it is utilised. The main types of budgets (Harvard Business School, 2009; Plewa Jr. & Friedlob, 1995) are as follows.

10.13.1 Operating Budget The operating budget captures daily expenses and depreciation and typically covers a period of 1 year. Subunits of the organisation such as departments, divisions and units present their own operating budget. The operating budget includes detailed budgets for each of the following operational activities: sales, production, raw materials, labour, factory overheads, selling expenses, administrative expenses and budgeted sales and total income.

10.13.2 Capital Budget The capital budget refers to planned expenditure for plant, equipment and product development. These budgets are prepared for long periods such as 3, 5 or 10 years. Different departments, divisions and units may prepare their own capital expenditure budgets.

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10.13.3 Cash Budgets or Cash Flow Statement The cash budget reflects the expected cash balances for the period and is prepared with the information in operating and capital budgets. This budget is prepared by the finance department in order to ensure that the organisation has sufficient liquidity (cash and credit) to meet the expected expenditure.

10.13.4 Master Budget Separate operating and capital budgets may also be prepared for individual projects, geographic locations or large line items. The master budget is a summary of the financial position of the firm for the given period and is prepared by consolidating all these budgets into one major budget. It has two main components: operating budget and a financial budget. The financial component of the master budget contains the cash budget, capital budget and the budgeted balance sheet. The starting point of the master budget is an estimate of market demands in terms of sales forecast (Plewa Jr. & Friedlob, 1995). Sales forecast data, together with expected inventory levels to meet the sales demand, determine the production that must be budgeted. In the production budget estimates for materials, labour, overheads and other operating costs are included. Primary operating cash inflows are based on a company’s collection policies and experience and the sales forecast. Primary operating cash outflows are payments for materials, labour, overheads, the cost of selling and administration. The Financial Manager can determine whether there is excess cash to invest or whether the company needs to borrow funds by analysing operating cash inflows, outflows and capital expenditure needs. After establishing investing and borrowing activities, the Financial Manager can prepare the projected income and expenditure (profit and loss) statement and the balance sheet. Figure 10.3 shows the relationship between the various components of the master budget.

Sales projections, volume of sales and cost

Sales forecast

Inventory levels

Estimated production costs

Cost of materials, labour overheads and other operating costs

Cost of goods sold

Administrative costs

Capital expenditure

Figure 10.3

Budgeted income statement

Budgeted balance sheet

Selling costs

Cash budget

Relationship among various budget components.

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10.14 top-Down versus Bottom-Up Budgeting 10.14.1 Top-Down Budgeting In top-down budgeting, the Financial Manager establishes goals for items such as net income, profit margin and expenses. The Financial Manager sets a ceiling for each department, division or unit for expenses, e.g. 6% above the previous year’s expenses. When the department budget is prepared these parameters, the firm’s overall plans for sales and marketing costs, and expenses are considered. Companies operate within the framework of these objectives in order to reduce expenses as a percentage of revenue (Harvard Business School, 2014).

10.14.2 Bottom-Up Budgeting In bottom-up budgeting, departments are not given specific financial targets. Each department, division or unit prepares the budgets based on the requirements to meet the strategic objectives of the organisation and the goals of the department. The department may be requested to adjust the plan to fit into the overall company financial strategy. After several iterations, the budget is accepted and rolled into the master budget. The Financial Manager needs to work closely with each department to make the process successful (Harvard Business School, 2014).

10.14.3 Zero-Based Budgeting A zero-based budget requires managers to justify all of their budgeted expenditure rather than the traditional approach of justifying incremental changes to the budget or the actual results from the previous year. Therefore, the manager is assumed to have an expenditure baseline of zero. In reality, the manager is assumed to have a minimum budget for its basic operations. Any additional funding required has to be justified. The objective of zero budgeting is to refocus on key business objectives and terminate or reduce the expenditure for activities that no longer support company objectives. The steps in zero-based budgeting are: (a) identify business objectives; (b) establish alternative methods of achieving the objectives; (c) evaluate alternative funding levels for intended performance and (d) set priorities (Accounting Tools, 2015).

10.15 Accounting and Finance There is a close relationship between accounting and finance as well as two key differences in their viewpoints. A close relationship exists because accounting has an important input into financial decision-making. The key differences relate to the treatment of funds and in decision-making (Khan & Jain, 2005). Accounting generates important financial information/data on the operational activities of the firm. It provides financial statements such as the balance sheet, income statement, changes in the financial position or the sources and uses of funds. Financial Managers use this information to assess the past performance and the future direction of the firm in planning strategic direction and objectives. In large firms, the Treasurer reports to the CFO and their role is to raise and conserve funds employed in the business. The Financial Controller, on the other hand, is responsible for financial accounting and management accounting. Financial accounting includes

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the maintenance of accounts and the preparation of periodic management accounts and statutory accounts which form the basis for taxation. Financial planning, analysis and cost accounting come under the umbrella of management accounting. In smaller firms, the Financial Controller assumes the functions of the Treasurer.

10.15.1 Key Differences

a. Treatment of funds The measurement of income and expenditure in accounting is based on the accrual principle. According to this principle, financial events are recognised by matching revenue to expenses at the time of the transaction rather than when payment is made. It is debatable whether accrual-based accounting fully reflects the financial position of the firm. From the viewpoint of accounting, a firm may appear to be profitable, but it may not be able to meet its financial commitments because of shortage of liquidity due to uncollected funds. The viewpoint of finance regards the treatment of funds as cash flow. Cash inflow occurs when revenue is actually collected. Similarly, cash outflows occur when expenses are actually paid. Financial management is concerned with achieving the solvency of the firm by providing sufficient cash flow to meet its financial obligations. When a customer purchases a TV from a shop using a credit card, cash and accrual methods will view the transaction differently. According to the accrual method, the transaction is recognised, although the revenue will be realised much later. The cash method realises the revenue when the actual payment has been made. b. Decision-making Another difference between finance and accounting is their purposes. The purpose of accounting is the collection and presenting of financial data in the form of easily interpreted data on the past and future operations of the firm. Financial management utilises this information and data for financial decision-making for planning and controlling. Therefore, the function of finance begins where accounting ends.

10.16 Financial Statements Financial statements provide important information for several groups of people. This section explains the kind of information found in these statements. The emphasis is not on preparing financial statements, which is the job of accountants. Management use the information to evaluate performance and identify areas for future action. They are also of interest to shareholders who look at them to monitor how well their capital is being managed. Investors use them to identify opportunities. Lenders and suppliers routinely examine the statements to determine the creditworthiness of the firm that they are dealing with (Harvard Business Review (2012).

10.16.1 Objectives of Financial Statements Many people use the financial statements of companies. The following groups have a direct interest in financial statements: shareholders, debenture holders, employees, customers, suppliers of goods and services on credit and regulators. Financial analysts and advisors, stock exchange,

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academicians, lawyers, trade associations and labour unions show an indirect interest in them (Bhat, 2008). The basic objectives of financial statements are to: 1. Provide reliable and accurate information about the economic resources, obligations and commitments of a business organisation. 2. Provide financial information about the net resources (resources less obligations and commitments) of an organisation resulting from its activities. 3. Provide financial information that assists managers to estimate the revenue potential of the company. 4. Update information on changes in economic resources and obligations. 5. Disclose to the users as needed other information related to the financial statements that are relevant to them. Shareholders, creditors, regulators and others can use this information to set performances and impose restrictions on the management of the firm. 6. Provide information on how the company has performed in the past and in the current financial status. 7. Provide information for future forecasting and financial planning.

10.16.2 Limitations of Financial Statements Financial statements are based on accounting principles which are not without limitations (Bhat, 2008). The following are the limitations of financial statements:

1. Financial reports are only interim reports, and the final profit and loss can only be computed at the termination of business. 2. Financial statements do not take into account non-financial factors such as the reputation of the company, the skills of the management and the loyalty of employees. 3. It is not always possible to uncover false figures in financial statements because the financial team can resort to “window dressing” in their statements. 4. Financial statements reflect the financial position of the enterprise at intervals based on judgement, and therefore, the allocation of funds over various periods becomes difficult. 5. Asset valuation in the balance sheet does not represent the realisation or replacement costs. 6. Financial statements are prepared mainly for the benefit of shareholders and others who utilise them have to make adjustments to suit their needs. 7. Often historical facts are presented in financial statements, and therefore, they do not reflect the current creditworthiness of the firm.

10.16.3 Key Financial Statements The three key financial statements are: (a) the balance sheet; (b) the income and expenditure statement or profit and loss statement and (c) the cash flow statement (Harvard Business Review, 2012). These are briefly defined below.

10.16.3.1 Balance Sheet The balance sheet summarises the financial position of the firm at a given point of time (at the end of the month, the quarter or the end the financial year). It is a snapshot of the financial position

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at a particular date. Basically it shows: (a) the firm’s assets, (b) what it owes (liabilities) and (c) its book value or net worth, also called “owner’s equity” or “shareholder’s equity”. Assets are the physical resources utilised by the company for delivering its products and services. They include cash, stocks and bonds, raw material and finished goods inventories, land, building and equipment and the funds owed by customers (accounts receivable) for the goods and services offered by the firm. Liabilities are funds owing to suppliers (accounts payable) and creditors. Owner’s equity is total assets less total liabilities. The balance sheet is presented in such a way that the assets on one side balance the liabilities on the other side.

10.16.3.2 Income Statement or Profit and Loss Statement The income statement presents the financial performance within a defined timeframe such as a quarter or a year. It is also called the “profit and loss statement” and shows the company’s revenue and expenses within the timeframe. The statement starts with the revenue from sales and other sources. Then, the costs of goods sold, operating expenses, depreciation expenses, interest and income tax paid are deducted for the total revenue to arrive at net income.

10.16.3.3 Cash Flow Statement The cash flow statement shows how the revenue was generated and how it spent its cash during the period under consideration. These are also called cash inflows and cash outflows. There are three components in the cash flow statement: operating activities, investing activities and financing activities. Cash generated by and used in operations is net cash from operational activities. Investing activities include cash spent on capital equipment and other investments (cash outflows) and the cash realised from the sale of such investment (cash inflows). Cash outflows from investing activities include cash used to reduce debt, buy back stock and pay dividends. Cash from loans or stock sales is considered as cash inflows.

10.17 Financial Analysis Process In this section, a brief overview of the financial analysis process is presented. Readers who require an in-depth understanding of financial analysis should consult a publication on financial management. Financial analysis is based on the following steps (Wahlen et al., 2010): 1. Identify the economic characteristics of the firm’s business sector and competitive dynamics of the industry. Three factors to consider are: (a) the number of firms that sell similar products, e.g. there are a large number of companies that sell grocery products in contrast to a small number that sell pharmaceuticals; (b) the impact of technology on maintaining competitive advantage and (c) the rate of growth of sales. 2. Identify the strategies that the firm adopts to gain or sustain a competitive advantage. 3. Evaluate the quality of the firm’s financial statements and make adjustments if necessary. 4. Analyse the company’s profitability and risk using the information in the financial statement. The financial health of the enterprise can be assessed by examining three major factors: liquidity, leverage and profitability.

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5. Prepare a forecasted financial statement. 6. Assess the value of the firm. 7. SWOT analysis.

10.17.1 Analysis of Financial Statements Liquidity, leverage and profitability are all internal measures within the control of the organisation. However, the external economic environment may have an impact on these factors which are beyond the control of the management (Malonis, 1999).

10.17.1.1 Liquidity Liquidity is the company’s ability to pay its current bills and expenses. It relates to the availability of resources such as the cash and other assets needed to meet accounts payable, short-term debt and other liabilities. Start-up companies and very young companies usually do not have adequate liquidity. But small firms require a certain liquidity to ensure that they can pay their bills on time. A mature company’s low level of liquidity can be due to poor management. Seasonality, timing of sales and the state of the economy can have an impact on the liquidity of the company. Cash outflows are generally not flexible while revenue is uncertain because: (a) cash generation does not follow a set schedule; (b) sales of inventory vary and (c) collections from customers are erratic. Therefore, companies may face liquidity problems. In order to address this difference between cash generation and cash outflow, companies must endeavour to maintain a healthy ratio of current assets to current liabilities.

10.17.1.2 Leverage Leverage is the contribution of funds from investors to finance the operations of the company. A company with a high leverage has a high proportion of debt in relation to equity and is exposed to higher risk and business downturn. Associated with the risk is the potential for higher returns. It is an aspect of finance that is regularly reviewed by bankers and investors.

10.17.1.3 Profitability Profitability is a reflection of the company’s performance in using the resources of the business. Basically, it refers to the returns that the company earns on the funds that have been invested. Many factors such as changes in price, volume, expenses, purchase of assets, borrowing of money and the external environment affect company’s profitability.

10.17.2 Performing Analysis with Financial Ratios A financial ratio is calculated by dividing one financial factor by another, and it is usually expressed as a percentage. The ratio provides useful information for decision-making by examining the relationship between various financial indicators.

10.17.2.1 Liquidity Metrics Three measures of liquidity are current, quick and liquidity ratios. Current ratio = current assets ÷ current liabilities.

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Current ratio represents the company’s ability to pay its near-term obligations. A generally accepted standard is a ratio of 2:1. A lower current ratio signifies the company’s inability to pay its bills on time. A higher ratio means that the company has money in cash or safe investments that could be put to better use. Quick ratio (acid test) = quick assets (cash, marketable securities and receivables) ÷ current liabilities. The ideal quick ratio is accepted as 1:1. A lower quick ratio indicates that the company relies heavily on inventory to meet its obligation, while a higher ratio denotes that the company has too much cash or a poor investment programme. Liquidity ratio (cash ratio) = cash ÷ current liabilities. This ratio, also known as cash ratio, takes into consideration only the cash (eliminating current assets) in computing the ratio, which should ideally be 40:1.

10.17.2.2 Leverage Leverage = debt ÷ owner’s equity. This ratio represents the relative mix of the company’s investor-supplied capital, and a low debt-to-equity ratio is an indication that the company has a higher proportion of owner’s equity. A higher ratio is a caution for the company. Ideally, it should be 50%–80% of equity.

10.17.2.3 Profitability A measure of profitability is return on equity (ROE) = net income ÷ owner’s equity. It is a measure of the effectiveness of utilising its equity investments. In general, financial analysts consider ROE ratios in the 10%–14% range as representing attractive levels of investment quality. A low ROE indicates poor management performance or a highly conservative business approach. Financial analysis is an important tool for business owners to measure their progress towards reaching their financial goals and their ability to compete with larger companies within an industry. The regular use of these tools to measure financial performance helps companies recognise and adapt to changes in the external economic environment. From the point of view of bankers, investors and financial analysts, it provides a good measure of a company’s success.

10.18 I internal Control The internal control mechanism of the financial department is an essential function, and it represents the organisation’s plans, methods and procedures employed to meet its mission, goals and objectives. It is the first line of defence in safeguarding the company’s assets and preventing and detecting errors, fraud, abuse, waste and mismanagement in the organisation. It gives the stakeholders reasonable assurance that the company’s objectives are achieved through effective and efficient operations, reliable and accurate financial reporting and compliance with regulatory standards (Steinhoff, 2005). The internal control framework consists of five elements: (a) control environment; (b) risk assessment; (c) control activities; (d) information and communication and (e) monitoring (Walker, 1999).

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10.18.1 Control Environment An effective control environment sets the foundation for the other elements of internal control. The top management must demonstrate a commitment to internal control through organisational structure, culture, values and climate, management philosophy and style, standards of accountability, delegation of proper authority, level of competence and results orientation.

10.18.2 Risk Assessment Risk assessment is the process of identifying, analysing and managing potential risks that prevent the achievement of company’s objectives. The company must recognise both internal and external risks, develop procedures to measure the likelihood and impact on the company’s activities and manage those risks that can hinder the progress of the company.

10.18.3 Control Activities Control activities are policies, procedures, techniques and mechanisms that enable the budget proposal to be effectively implemented. Internal control activities occur at all levels of the organisation and include a diverse range of activities such as approvals, authorisations, verifications, reconciliations, performance reviews, security and the creation and maintenance of records that provide evidence of successful execution of these activities.

10.18.4 Information and Communication The top management must promote upward communication without fear of reprisals. Information on operational and financial data has to be communicated in a timely fashion to those who need it in a form that enables them to understand and carry out their activities. Mechanisms must be established to capture and record information from external stakeholders that may have a significant impact on the firm’s activities. All personnel should be aware of their job responsibilities.

10.18.5 Monitoring At regular intervals, the management must monitor the effectiveness of implemented internal controls to ensure that they are functioning properly. Internal audits, external audits, agency audits and reviews are usually conducted to identify the problems. The management must ensure that Department Managers carry our prompt corrective actions to address these issues and implement preventive programmes.

10.19 E ethics A business enterprise is responsible not only to its stakeholders but also to the community they serve. Its commitment to business ethics can be seen by the tendency of all its employees to adhere to laws, regulations and moral standards relating to product quality and safety, fair employment practices, fair marketing and selling techniques, avoid misusing personal and confidential information for personal gain, get involved with the community and avoid corrupt business practices (Brigham & Houston, 2013).

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Ethical dilemmas can arise when there is a conflict between business ethics and profits. Legal and ethical considerations sometimes make the choice obvious. When non-Pharmacist Managers of retail pharmacies in the UK insist pharmacists perform medicine use reviews on patients who do not require such a service, professional ethics should override business considerations. Such dilemmas are very common in the pharmacy environment. Sometimes conflicts between ethics and business practices are not very clear cut. If an industry’s emissions to the air are within legal limits and further reduction of emissions is costly, eroding company profits, the industry faces an ethical dilemma of satisfying the community around the industry by reducing pollution or maintaining the status quo to satisfy its stakeholders. Over the last few years, several companies in the USA have been taken to task for illegal, unethical fraudulent accounting practices. Arthur Andersen, a financial accounting firm who audited Enron and Worldcom accounts, was found guilty by the US Justice Department for fostering a climate in which unethical practices were permitted (Brigham & Houston, 2013). Andersen went out of business but was later found to be not guilty. It was too late for Andersen because the company was already out of business and other companies did not trust a shady company. Employees who report unethical behaviour are protected by the USA government. The Sarbanes–Oxley Act (2002) was designed to protect “whistle blowers” who report unethical business practices. Such employees cannot be penalised. Finance is one of the most important and integral parts of any business, and it plays a key role in all business activities. The CFO is ultimately responsible for the financial success of the business and has to navigate it successfully through a turbulent economic climate.

References Accounting Tools. (2015). Zero-based budgeting. Retrieved December 30, 2018 from http://www.accountingtools.com/zero-based-budgeting. Bhat, S. (2008). Financial Management: Principles and Practice. New Delhi: Excel Books. Brigham, E. F. and Houston, J. F. (2013). Fundamentals of Financial Management. Mason, OH: SouthWestern Cengage Learning. Chandra, P. (2008). Financial Management: Theory and Practice. Bangalore: Tata McGraw-Hill Publishing. Goodwin, R., Kaggwa, R and Malebo, A. (2012). Financial Policies and Procedures: Utility Management Series for Small Towns (Vol. 1). Nairobi: UN Habitat. Gupta, S. (2015). Indian financial system. Retrieved March 22, 2018 from http://www.slideshare.net/ silonygupta/fmi-ch1. Harvard Business School. (2009). Preparing a Budget: Expert Solutions to Everyday Challenges. Pocket Mentor Series. Cambridge, MA: Harvard Business Press. Harvard Business Review. (2012). HBR Guide to Finance Basics for Managers. Cambridge, MA: Harvard Business School Publishing. Harvard Business School. (2014). Finance Basics: 20 Minute Manager. Cambridge, MA: Harvard Business Press. Khan, M. Y. and Jain P. K. (2005). Basic Financial Management. New Delhi: Tata McGraw-Hill Publishing. Malonis, J. A. (1999). Financial Analysis. Encyclopedia of Business (2nd Ed). Detroit, MI: Gale. Management Study Guide. (n.d.). Financial management, meaning, objectives and functions. Retrieved March 18, 2018 from http://www.managementstudyguide.com/financial-management.htm. McKinney, J. B. (2004). Effective Financial Management in Public and Non-Profit Agencies. Westport, CT: Praeger Publishing. NCVO. (n.d.). The basics of financial management. Knowhow non-profit. Retrieved March 21, 2018 from http://knowhownonprofit.org/organisation/operations/financial-management/management. Pandey, I. M. (2005). Financial Management. Noida: Vikas Publishing House.

210  ◾  Integrating Business Management Processes Plewa Jr. F. J. and Friedlob, G. T. (1995). Understanding Cash Flow. New York: John Wiley & Sons. Ritholtz, B. (2013). 10 worst corporate accounting scandals. Retrieved March 15, 2018 from http://www. ritholtz.com/blog/2013/03/worst-corp-scandals/. Steinhoff, J. C. (2005). Financial management: Effective internal control is key to accountability. Testimony before the Subcommittee on Government Management, Finance, and Accountability, Committee on Government Reform, House of Representatives. GAO-05–321T, Washington, DC: U.S. Government Accountability Office. Wahlen, J., Baginski, S. and Bradshaw, M. (2012). Financial Reporting, Financial Statement Analysis and Valuation: A Strategic Perspective (7th Ed). Mason, OH: South-Western Cengage Learning. Walker, D. M. (1999). Standards for internal control in the federal government. General Accounting Office (GAO). GAO/AIMD-00.21.3.1. Retrieved April 6, 2015 from https://www.gao.gov/assets/80/76455. pdf.

ASSURAnCe PRoCeSSeS

ii

Chapter 11

Management Reviews 11.1 I introduction Effective performance is a critical aspect of any operation. At each level of the organisation, staff perform some fundamental activities: inspectors verify product, operators verify processes, sales staff verify customer requirements and Purchasing Managers verify supplier capability. At the managerial level, managers verify that the processes which oversee the fulfilment of all other processes are defined, implemented, controlled, monitored and maintained. Just as every organisation performs an annual review of financial aspects, forecasting, planning and budgeting, effective performance is realised through regular reviews of all management operations. Like any other process, such reviews require defining, planning, controlling, consistency, establishing inputs and outputs, periodic verifying and record-keeping. The review process is a health check of the management processes that leads to the identification and correction of current or incipient deficiencies (Robitaille, 2002). Care for the success or failure of a management system is the ultimate responsibility of the executive management. Top management involved with policy and strategy decisions should ensure that the management objectives and strategies are compatible with corporate goals. Objectives and strategies define the processes of the organisation, and each process owner should present appropriate and useful information that demonstrates to the executive team the success and effectiveness of each operation (Gagliardi, 2010).

11.2 the importance of Management Review Management review is an essential aspect of business operations. It provides an opportunity to discuss and address proactively issues relating to organisational and staff changes, new projects or standards and any other anticipated challenges. Recommendations for addressing any existing or other anticipated performance deficiencies or inefficiencies are proposed for implementation. The management review horizon extends far beyond the weekly production planning meetings, scheduled review meetings or other such meetings. These meetings deal with day-to-day operational activities and focus on the “now”. Day-to-day operational issues are resolved with an emphasis on corrective actions. Preventive measures are rarely addressed. Management reviews, on the other 213

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hand, focus on planning for improvement by identifying the root causes of problems, developing effective corrective actions and preventing recurrences (Martof, 2006). An effective management review programme enables the organisation to review the effectiveness of the system, past incidents, current circumstances (and agree on a plan for improvement), provide a forum for resolving audit problems and follow-up on any corrective and preventive actions, and demonstrate the commitment to the management system. Management reviews need to be dynamic and productive. However, a poorly planned management review programme can have undesirable effects on those who attend and those who have to implement actions agreed to at review meetings (Early, 1995).

11.3 Definitions Management review: A review of the management system at planned intervals to ensure its continuing suitability, adequacy and effectiveness. It includes a review of opportunities for improvement and the need for changes to the system, as well as policies and objectives. Non-conformance: Non-conformance is a failure to meet a specific standard, criteria or requirements. Correction: A correction is any action taken to eliminate a non-conformity. It can be a rework or a regrade and can be done in conjunction with corrective action. Corrective action: Corrective action eliminates the root cause of an identified non-conformity or deficiency. It is carried out after the occurrence of the non-conformity or deficiency and there may be more than one root cause. Preventive action: Preventive action eliminates the root cause of a potential non-conformity or deficiency. It is carried out to prevent the occurrence of a non-conformity or deficiency and there may be more than one root cause.

11.4 objectives of Management Review The primary objective of the management review is to ensure the continuing adequacy, suitability and effectiveness of a management system (Randig, 2008) for current and future operations. Adequacy is the sufficiency to satisfy or meet a need of a customer. The management should be capable of satisfying the requirements of the organisation, its customers and relevant standards or regulations. Suitability is the selection of the right elements for the specified purpose in the management system. Effectiveness is the ability of the management system to accomplish its intended purpose. To maintain a competitive advantage, goals and objectives need to change with time, and all the business processes should reflect these changes. A review can be considered as an assessment of process efficiency. Other objectives are (EBME, 2015): ◾ To identify irregularities or defects in the system and propose recommendations for continual improvement ◾ To review the effectiveness of previous corrective actions including those related to subcontractor and supplier performance ◾ To review any complaints received, identify the root cause and recommend corrective action ◾ To review the findings of internal and external audits and identify recurring problems

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◾ To review non-conformance reports and identify any trends ◾ To review training requirements.

11.5 Review input and output In terms of the process approach, management review is defined by the input, output and the review process (Biswas, n.d.a; Martof, 2006).

11.5.1 Review Input ◾ Results of internal and external audits: These are the findings of internal and external audits, customer visits and supplier audits. Management review is an ideal opportunity to review supplier performance in order to determine their ability to meet the organisation’s needs. ◾ Customer complaints and customer feedback: These include any form of customer communication. Customer survey data, field complaints or issues, gain in new customers and loss of established customers, records of recognition and employee retention information are reviewed at this meeting ◾ Process performance, product conformity and current status of corrective and preventive actions: Process performance and product conformity are directly related to customer requirements. Process performance records include an analysis of meeting delivery requirements, realising cost/profit targets and meeting project schedules. Product conformity refers to an analysis of product defects, error trends, first pass quality and field issues. It also includes assembling inspection reports, corrective measures and resolutions. The effectiveness of corrective actions is also reviewed at this meeting ◾ Follow-up from previous management review meetings: The implementation and actions generated from a previous management review meeting are reviewed in order for the management to use the process successfully to gain process performance. ◾ Changes that could affect quality, the environment and food safety management systems (FSMSs): Changes such as new versions of standards and/or government regulations or upcoming regulations that could affect management systems. In addition, the necessary changes triggered by audits are presented to the review team. ◾ Recommendations for continual improvement: Some recommendations for improvements such as those arising from internal audits can be addressed as part of the review process. Employee suggestions which have been recorded in a log book are also reviewed. Complex suggestions require the approval of expenditure. ◾ Objectives and targets: The quality, environment and food safety policies and objectives are additional management review inputs. The policies should be made available to the management review team members and reviewed to ensure their suitability, adequacy and effectiveness. Internal and external changes in the economic environment may prompt a change in policies and objectives. Goals are reviewed to ensure that they are achievable and measurable.

11.5.2 Review Output The output from management review meetings should be considered as an input into the organisation’s continual improvement programme. Specific outputs refer to decisions and actions relating

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to the improvement of the effectiveness of management systems and its processes, the improvement of products related to customer requirements and resource requirements. The outputs from management review meetings result in continual process improvement. Improvements may be to the management systems, processes, products, personnel, work environment or infrastructure. Decisions and actions relating to resource requirements include training, professional development, new equipment and information technology (IT).

11.6 Frequency of Management Reviews The depth as well as the frequency of management reviews is dictated by a number of factors: maturity of the organisation, maturity or the degree of implementation of the management system, the level of management performing the review, past experience such as incident history, previous reviews and audit results and the management’s view of the risks posed by the activities to be reviewed. Generally, most of the management review effort will be focused on the operational activities of the organisation. While these can be scheduled on an “as needed” basis, particular aspects of the management system are typically reviewed at predicted intervals such as monthly, quarterly or annually. They may be scheduled in conjunction with other regularly scheduled meetings such as a safety committee meeting and production efficiency meeting. Initially, soon after the implementation of the Quality Management System (QMS), management reviews can be conducted monthly. As the system matures, meetings can be held at longer intervals. The meeting schedule should be circulated to relevant staff well in advance so that the necessary information can be gathered (Robitaille, 2002; Centre for Chemical Process Safety (CCPS), n.d.).

11.7 Gathering evidence It is the responsibility of the management representative to ensure that management reviews are organised effectively so that the outcome is productive. Gathering and presenting the information for these reviews is the responsibility of each process owner. These owners should present prescribed and useful metrics that demonstrate to the management review team the effectiveness of the processes. For example, the Purchasing Manager may have to report on the percentage of deliveries on time, the Sales Manager may be required to report on the sales achieved as per sales targets and the Warehouse Manager may submit figures on the on-time deliveries achieved. There is no requirement to organise the information in any particular format. However, the management team must decide on what is to be measured and monitored and select a method that is relevant to the organisation. Master spreadsheets and/or databases for variable data may not be necessary. What is important is the information that is relevant and can be extracted from these sources. Based on the production figures for the previous 3 months, the Production Manager may report that x number of units had to be reworked out of a total of xx units of production. Graphs, charts or complex calculations are not warranted. The level of complexity of the review process is governed by the importance of the activity, the complexity of the organisation and its internal culture. If the company comprises only three or four members, they may decide to sit down and review the records and files together while recording deficiencies. The organisation must bear in mind that information requirements can change with changing circumstances (Robitaille, 2002).

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11.8 Participants at Management Review Meetings There is no hard and fast rule about the number and the management level of the participants. Too many participants can hinder the progress of the management review meeting because of the difficulty of making collective decisions. On the other hand, if there are not enough team members, the opportunity for deliberation and discussion will be lost. In either case, the organisation will not be able to develop action plans and allocate the necessary resources to improve the system (Robitaille, 2002).

11.8.1 Top Management Top managers have multiple roles to play. They allocate resources to fulfil customer needs, maintain the viability of the management system, sustain the financial capability of the organisation, set policies and objectives, facilitate communication and ensure the soundness of the infrastructure in which business is conducted. Therefore, their presence at the meetings is very important. In small organisations, the owner may perform several roles such as purchasing, order processing and recruitment. In such organisations, the management review is conducted by one or two people. In larger organisations with multiple hierarchical levels, the management representative organises the management review meetings. They will decide who should attend (invariably includes top management), when it should occur, the items for the agenda, data to be presented and how it will be formatted. In addition, the management representative will communicate with supervisors, gather relevant data, construct charts and/or graphs if necessary, book the meeting room, respond to questions about data, record the minutes, identify items to be actioned, monitor progress between meetings and ensure the process complies with stated requirements in the management. As Corporate Quality Assurance Manager of the largest winery in New Zealand, the author was responsible for organising the management review meeting. Initially, just after the management system was certified to the ISO 9001 standard, management review meetings were held monthly and all supervisors and managers attended. Representatives from the sales and marketing teams were also invited to attend. As the management system reached maturity, the meetings were held less frequently, i.e. quarterly.

11.9 Content of Management Review Meetings Management reviews are performed with the same object as an audit in order to evaluate the effectiveness of the entire management system or part of it. Reviews are broadly focused and conducted in a less formal manner and more frequently than audits. The management review team meets with individuals responsible for managing and implementing the management system to: (a) present evidence of implementation and observations of conditions and activities; and (b) respond to questions about programme activities (Centre for Chemical Process Safety (CCPS), n.d.). The suggested content of management review meetings is described in Section 11.5.1 under input.

11.10 Model Agenda for Management Review Meetings 1. Apologies for absence. 2. Minutes of previous meeting.

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3. Review of corrective and preventive actions from previous meeting. 4. Review of general actions from previous meeting. 5. Changes to the management standards (quality, environment and food safety), assessment schedules or certification requirements, regulatory changes and procedures. 6. Review input [specify the owner]: Results of audits, customer feedback, service and/or product performance and supplier performance. 7. Recommendations for continual improvement. 8. Objectives and targets. 9. Resource requirements. 10. Review of infrastructure and work environment. 11. Date and time of next meeting. The process owners will produce documents including analysis, reviews and proposals for circulation among the team members. The minutes of the meeting will be formally documented and recorded by the chairperson, usually the management representative. These records will be made available to external auditors.

11.11 Measuring the effectiveness of Management Review Meetings The effectiveness of management review meetings is measured by assessing the effectiveness of key decisions relating to the items discussed at the meetings. Management review outputs are intended to improve the performance of the business and auditors will look for evidence that this is being achieved by the organisation. An effective management review meeting is an essential tool for product, process and service improvement and customer satisfaction. Organisations that have implemented an effective management review process gain competitive advantage, growth and long-term success because the organisation has focused on meeting the needs of their customers and continual improvement.

11.12 N non-conformance Non-conformance is applicable to both products and services. A product or service may not meet the requirements of a standard or criteria such as product or service quality, product safety, material quality, environmental monitoring and measurement requirements, operational and/or process control, document and record control, and record retention criteria. Requirements can be a need, expectations or obligations stated or implied by an organisation or its customers and other interested parties. Non-conformances may arise from such sources as: ◾ ◾ ◾ ◾ ◾ ◾

Internal or external inspections and audits Customer queries and questionnaires Management reviews Customer complaints Internal complains Training issues

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◾ Emergency response improvements ◾ Regulatory non-compliance. Any non-conformance has to consider the impact on the environmental management system (EMS), QMS and the FSMS using risk assessment methodology. Non-conformances are classified as critical, major or minor. A critical non-conformance includes, but is not limited to: (a) failure of controls at Critical Control Points (CCPs), pre-requisite programmes or other process steps in a food safety programme or environmental management programme that have the potential to harm the consumer and are likely to result in a recall or harm to the public due to a catastrophic environmental disaster; and (b) falsification of food safety records relating to food safety controls. A major non-conformance is less serious than a critical non-conformance and produces unsatisfactory conditions that carry a food safety, quality or environmental risk likely to result in system failure. A minor non-compliance is a deficiency that will not affect the system or certification requirements and if not addressed may lead to a risk to food safety, quality or the environment (King, 2013; American Feed Industry Association (AFIA), 2015).

11.12.1 Disposition of Non-conforming Product All non-conforming products are segregated and action is taken to dispose of them. Disposition may involve rework, a downgrade or scrapping such products. The organisation may also decide to accept the product under a waiver. Such products should be sent to the customer only with their agreement to accept. Unsafe food products are prevented from entering the food chain unless the organisation takes steps to minimise the food safety hazard to defined acceptable levels.

11.13 Corrective and Preventive Actions Corrective and preventive actions are key elements of any management system that lead to continual improvement. Problems in operational activities are identified through audits, reviews, measurements or by simple observations. The business needs to adapt and grow with the changing economic environment. To address the deficiencies, the organisation has to ensure that problems and non-compliances are identified and investigated, root causes of the problems and non-compliances are identified, corrective and preventive actions are initiated and implemented and these actions are monitored and their effectiveness verified. It is important that the organisation analyses the non-compliances and problems in order to identify any trends. The organisation can then anticipate and prevent future occurrence. Preventing problems is far cheaper than fixing them after they occur or recur and problems are really opportunities for improvement of the management system.

11.13.1 Misconceptions About Corrective and Preventive Actions There are three common misconceptions about corrective and preventive actions (Westcott, 2005): 1. Organisations assume that every occurrence of a non-compliance has to be documented. 2. Preventive action is another form of corrective action. 3. Development projects and re-engineering projects aimed at improvement need not be documented as preventive action.

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In order to address these misconceptions, the definitions of corrective and preventive actions have to be extended as follows:





a. Patch: A single occurrence of a problem or error should be treated as an isolated incident and requires a quick fix or patch without any further action to enable continuity of the process. An unclean glass bottle in a filling line can be fixed by cleaning the bottle and returning it to the process and does not require documentation. b. Corrective action: A more frequent occurrence of a problem or error is a serious issue that affects the quality of the output as well as cost and labour for reworking. A decision involves reworking, scrapping or downgrading the item. It is therefore necessary to identify the root cause of the problem, devise corrective action to rectify the problem and document the corrective action. c. Preventive action: Preventive action is warranted when: i. A process is suspected of operating less effectively and might adversely affect the output, or ii. A process to which corrective action was applied has been ineffective and could trigger the need to look at another process or similar process, or iii. A process has not been examined for a long time. Preventive action has to be documented and monitored for some time to ensure that it has been effective. d. Development action: This term is applied to new processes that replace or eliminate existing processes (re-engineering or breakthrough projects) developed in response to marketplace changes to gain a competitive advantage and/or technological advances. Such projects require much research and development in order to prevent the occurrence of potential problems. Developments actions are documented as preventive actions.

11.13.2 Corrective and Preventive Action Process The process for corrective action includes seven steps (Hammer, 2013):

1. Define the problem: State the problem in simple terms, e.g. button holes in garments are too small. 2. Define the scope: Determine whether it has been a recurring problem and the extent of the problem. It may be necessary to perform a risk analysis. 3. Damage control: Take immediate steps to contain the problem. A current stock of garments may need to be examined for the same problem. Send replacement to the customer. 4. Find the root cause or causes: Use quality tools to identify the problem. 5. Plan corrective action: Identify the steps needed to resolve the problem. Depending on the problem, approval for funding may be necessary. 6. Implement corrective action: Draw up an action plan to implement the solution(s). 7. Monitor the effectiveness of corrective action.

The process for preventive action (Westcott, 2005): ◾ Take proactive steps to ensure non-conformances do not occur. ◾ Employ tools such as process and system analysis to investigate and prevent the occurrence of non-conformances.

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◾ Use failure mode and effects analysis to identify risk and potential problems and establish priorities for improvement.

11.13.2.1 Define the Problem In a production line where defective items are produced, the real problem is defective items produced by machine X. Machine failure or operator error is not the problem; they might be the causes of the problem. Failure to state the problem clearly can lead to ineffective solutions.

11.13.2.2 Define the Scope The scope of the problem defines the extent of the problem. Relevant questions are: ◾ ◾ ◾ ◾

Has it occurred before? How widespread the problem is? Does it occur on a particular day, say Fridays? Is the problem confined to one product or a range of products, etc.?

11.13.2.3 Damage Control Take immediate action to contain the problems while investigations are going on. In the case of a food safety issue, product recall is an effective approach to contain the problem. It is also important to implement stop gap measures or check so the same occurrence or similar can be identified early.

11.13.2.4 Identification of the Causes(s) of the Problem During the analysis phase, all causes leading to the problem are identified. Usually, there is the tendency to jump into solutions without identifying the root cause. At all costs this should be avoided because it can lead to the treatment of the symptoms rather than the problem. Many tools are available to determine the root cause of a problem (Tague, 2005). A multiple cause diagram, which is a modification of the Ishikawa diagram, is an ideal tool to identify the root cause(s) of a problem (Cameron, 2008). A thorough analysis of internal and external data (Table 11.1) is required to capture the root cause (Tartal, 2014). Figure 11.1 shows the application of a multiple cause diagram to identify the root cause(s) of the presence of glass fragments in a drink bottle, one of the worst problems that beverage table 11.1 Data Sources Internal Process control data, performance data, test results, device history records, internal audits, management reviews, nonconformance reports, rework or scrap data, training records

External Supplier controls, communication from customers, complaints, external agency reports, external audits, servicing data, similar devices from competitors

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No training programme Ineffective bottle breakage procedure

Track not cleared of broken glass Depalletiser not maintained

Faulty track

Unskilled operator Machines not cleared of broken glass

Fallen pallet on depalletiser

Faulty rinsing Breakage at filler or capper

Machines not set up correctly

Faulty depalletiser Glass pieces in a drink bottle

Damage while packing, palletising or transport

Figure 11.1

Depalletiser not cleared of broken glass

Faulty track setting

Damaged bottles

Damage while picking

Recycled bottles

Faulty manufacture

Transport damage

Multiple cause diagram.

manufacturers have to face. The problem is so important that food safety regulations require a validated procedure for cleaning the filler or the capper following a glass breakage. Six possibilities are identified in the diagram and the possible causes are presented.

1. 2. 3. 4. 5. 6.

Damaged bottles on receipt. Problem in the depalletiser while loading onto the platform. Faulty rinsing process. Bottle breakage in the filler or capper. Damage while packing, palletising or transporting to the warehouse. Damage while picking stock at the warehouse.

In operations which include glass particle detection instrumentation, the possibility of malfunction should also be considered. The six possibilities are further explored to identify the root cause. Each of these possibilities requires the investigation of records and documents associated with the filling process.

11.13.2.5 Plan Corrective Action When the root cause is identified, a brainstorming session can generate actions necessary to correct the problem. Depending on the problem, it may be necessary to determine the cost, return on investment and the financial approval process for corrective action.

11.13.2.6 Implement Corrective Action The action plan generated in Step 5 needs to be implemented within the agreed timeframe.

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11.13.2.7 Follow-Up A proper follow-up is necessary to determine the effectiveness of the corrective action. Most organisations tend to overlook this important step. If the problem occurs again, it is necessary to go back and identify the root cause(s). Either the exact root cause was not identified correctly or an important root cause was not recognised.

11.14 Continual improvement The terms “continual improvement” and “continuous improvement” have often been used synonymously in organisations. ISO standards specifically refer to continual improvement. Continuous improvement refers to a single, uninterrupted non-stop event, whereas continual improvement refers to a series of infinite changes that bring about improvement. It is a recurring activity to increase the ability to fulfil requirements. It is applied to both conforming and non-conforming products/processes. Conforming and non-conforming processes can be further improved by taking corrective action to prevent a recurrence of problems. Improvement activities are very similar to problem-solving exercises. However, an important difference is that improvement activities are planned, proactive, organised and are a part of a larger programme, whereas problem-solving activities are usually reactive and unplanned (Skledar, 2004). Improvement efforts are effective if they are integrated into the vision, mission and value statements of the organisation, and employees at every level are made to understand the value of continual improvement. When new programmes are developed and implemented within the organisation, improvement techniques should be instinctively applied and explained to the staff. This process enables the work teams, supervisors and top management to apply continual improvement efforts to daily practice. Table 11.2 defines ways of promoting continual improvement for improving organisational performance.

11.14.1 Essential Components of Continual Improvement Essential components of a continual improvement programme are improvement work teams, a structured method to analyse problems and data analysis techniques to evaluate the outcomes (Skledar, 2004). T • Define continual improvement for the organisation. • Develop a strong customer focus. • Encourage employees to solve problems using problem-solving techniques and identify solutions. • Use employee work teams to improve quality, food safety and environmental system. • Develop continual improvement programmes and train all levels of staff. • Create an environment where employees are encouraged to take risks and support their ideas. • Understand that the person who is closest to the activity is the most knowledgeable person. • Recognise the achievements of employees.

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a. Improvement work teams: Effective improvement teams are multidisciplinary, and they are given clear direction on the scope of the problem and aspects that need improvement. Each improvement team should consist of those who can guide the project (guidance team) and those who can provide the expertise (project team). The guidance team provides direction and solicits administrative support for resources and programme changes. The project team provides frontline work. Together they should feel comfortable in identifying improvement opportunities, analysing problems, brainstorming improvement strategies and instructing team members, customers and colleagues and help monitor outcomes. b. Improvement methodology: A structured approach is required to bring about consistent improvements. A widely used method is the Plan–Do–Check–Act (PDCA) cycle designed by Walter Shewhart in 1920. The planning phase involves evaluating baseline practices compared with results from internal, published or benchmark standards, and during the doing phase, improvement actions are designed and establish criteria for measurement of outcome. Through monitoring the outcome, the improvements are refined and expanded. c. Data-driven development: Identifying opportunities for improvement and reporting progress and outcome are based on factual data. Baseline data can be analysed using benchmark standards and quality tools such as flowcharts, cause and effect diagrams, and statistical process control techniques.

11.14.2 Tools for Continual Improvement There are two fundamental ways to achieve continual improvements: breakthrough projects and incremental improvement. Breakthrough projects are either revisions or improvements of existing processes or the implementation of new processes. They are carried out by cross-functional teams outside routine operations. Small-step ongoing improvement activities are performed within existing processes by people (Kaizen approach) (Plura, 2000). The following are some of the processes that can lead to continual improvement (Biswas, n.d.b): a. Audit results: Results of product, process, QMS, EMS and FSMSs. Some of the improvement opportunities may relate to communications, IT (e.g. cloud computing), processes, controls, resource usage and/or wastage, etc. b. Other audits: These include financial, health and safety, food safety, environmental, financial performance and social responsibility. c. Process situations: These are situations that can lead to continual improvement and include machine set-up, unplanned downtime, die changes, machine set-up times, cycle time, scrapping, reworks, floor space requirements, process variations, testing requirements not justified, labour and resource wastage, manufacturing difficulties, assembly and installation problems, excessive handling and storage, environmental impacts and food safety issues. Tools that can be used for continual improvement include seven quality tools (Tague, 2005): (a) cause and effect diagram; (b) check sheet; (c) control chart; (d) histogram; (e) Pareto chart; (f) scatter diagram and (g) stratification diagram. These tools can be used to analyse risk, process control, test and measurement technology, equipment effectiveness, technology, benchmarking and error proofing.

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11.14.3 How to Succeed in Continual Improvement Continual improvement activities are conducted by work teams. However, a steering group of managers should direct the teams towards the goal and create an environment for success. The following are three guidelines for success (Bassett, 2011): 1. Change the culture: Quality improvement programmes involve a radical change of attitudes. Top management must create a culture where individuals are encouraged to innovate and identify opportunities for improvement. Resistance to accept change can be overcome by top management explaining the benefits of improvement activities. 2. Demonstrate commitment: Continual improvement involves the entire organisation and is not confined to a few project teams. Top management must demonstrate commitment to the cause and to the policies of the organisation, and then the teams will rally round the management offering total support for the programme. 3. Reward achievements: Even small changes in improvement should be acknowledged and rewarded. Rewards may have a financial component but not necessarily. There are no magic rules for providing rewards. The process should be transparent, compatible with the culture of the organisation and offer some benefit to the individual.

11.14.4 Continual Improvement Process Breakthrough projects should be carried out in an effective and efficient way by the project management team using a project management methodology. On completion of the project, the next project plan is the foundation for continual improvement. The best source of ideas for small ongoing improvements comes from individuals themselves because they are closer to activity than the management. However, they must be controlled to understand the effect. The role of the management is to provide the authority, technical assistance and necessary resources to achieve goals. Continual improvement by either method involves seven steps (Plura, 2000):

1. 2. 3. 4. 5.

Identify the reason for improvement. Assess the current situation. Analyse and determine the root causes(s) of the problem. Generate possible solutions and select the best option that will eliminate the root cause. Evaluate the effects: This step involves the confirmation that the problem has been resolved, the root cause has been eliminated or mitigated, the solution has worked and the objective for improvement has been achieved. 6. Change the process: The old process is replaced by the new process preventing the recurrence of the problem. 7. Evaluate the effectiveness and efficiency of the process. The survival of an organisation depends on its ability to meet the challenges imposed by external and internal economic environments. Unless the organisation keeps monitoring its performance, its days are numbered. The management review, the ability to effectively deal with nonconformances and take appropriate corrective and preventive actions and continual improvement are essential management tools that cannot be ignored by any organisation.

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References AFIA. (2015, January 19). Safe feed/food update (Vol. 4). Retrieved April 25, 2018 from http://safefeedsafefood.org/images/pdf/SFSF%20Newsletter%20vol4.pdf. Bassett, R. (2011). How to create and sustain successful continuous improvement teams. Retrieved January 6, 2018 from https://www.automationworld.com/article/topics/lean-manufacturing/ how-create-and-sustain-successful-continuous-improvement-teams. Biswas, P. (n.d.a). ISO 9001 – Clause 5.6: Management review. Retrieved April 3, 2016 from http:// isoconsultantpune.com/iso-90012008-quality-management-system/iso-9001-requirements/ iso-9001-clause-5-6/. Biswas, P. (n.d.b). ISO 9001 – Clause 10: Improvement. Retrieved April 26, 2016 from http://isoconsultantpune.com/iso-90012015-clause-10/. Cameron, S. (2008). The MBA Handbook (6th Ed). London: Pearson Education. CCPS. (n.d.). Introduction to management review and continuous improvement. Retrieved April 5, 2018 from http://www.aiche.org/ccps/topics/elements-process-safety/learn-experience/management-review-andcontinuous-improvement/introduction. Early, R. (1995). Guide to Quality Management Systems for the Food Industry. New York: Springer Science + Business Media. EBME. (2015). Procedure for management review meetings. Retrieved April 3, 2018 from http://www.ebme. co.uk/articles/ebme-quality-management/355-procedure-for-management-review-meetings. Gagliardi, J. (2010). Management review – Measuring the “heartbeat” of your quality management system. 9001 Academy. Retrieved April 1, 2018 from https://www.mastercontrol.com/gxp-lifeline/managementreview-quality-management-system. Hammer, M. (2013). Seven steps for corrective and preventive actions to support continuous improvement. Retrieved April 15, 2018 from https://advisera.com/9001academy/blog/2013/10/27/seven-stepscorrective-preventive-actions-support-continual-improvement/. King, H. (2013). Food Safety Management: Implementing a Food Safety Program in a Food Retail Business. New York: Springer. Martof, L. (2006, October). Management review: A process, not an event. Modern Steel Construction, 10, 41–42. Plura, J. (2000). Continual improvement within the quality management system. Kvalita Inovicia Prosperita, IV (1), 13–22. Randig, M. (2007). ISO 9001 – Your management review. Retrieved April 3, 2018 from http://ezinearticles. com/?ISO-9001---Your-Management-Review&id=1239977. Robitaille, D. (2002). The Management Review Handbook. Chico, CA: Paton Press. Skledar, S. (2004). Continuous quality improvement. In A. M. Peterson (Ed.), Managing Pharmacy Practice, pp. 205–232. Boca Raton, FL: CRC Press. Tague, N. (2005). Quality Toolbox (2nd Ed). Milwaukee, WI: Quality Press. Tartal, J. (2014). Corrective and preventive action basics. US Food and Drug Administration. Retrieved April 13, 2018 from http://www.fda.gov/downloads/Training/CDRHLearn/UCM421767.pdf. Westcott, R. (2005). Corrective and preventive action. Quality Progress, 38 (3), 104.

Chapter 12

Measurement and Analysis 12.1 I introduction Measurement is an integral part of process control. Operators need precise and accurate information to analyse and resolve problems. According to James Harrington (Goodreads, 2016), a quality guru, “Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it”. Successful measurement is the first step towards process improvement. It is an effective tool to determine current performance, establish goals for future performance and monitor the effects of implemented changes.

12.2 Categories of Measurement Organisations collect data for different purposes. Data may be collected for improvement, research or evaluation. Improvement category of data focuses on the outcomes and processes of a system. Organisations which depend on grants and funds from external sources collect data for accountability and evaluation purposes in order to provide results to external agencies. The research category of data seeks new knowledge, and the differences are depicted in Table 12.1 (Ward & Norton, 2016; Health Quality Ontario, 2013).

12.3 Definition and Benefits of Measurement 12.3.1 Definition Measurement is the assignment of numbers to aspects of objects or events according to a rule or convention. It applies to the aspects of an object and not to the object itself. For example, it is possible to measure the area of a circle but not the circle itself. The circle has other aspects such as the circumference and the radius which are ignored. The measurement of an aspect of several objects enables the numbers assigned to the aspect of these objects to be compared with one another.

227

228  ◾  Integrating Business Management Processes T Measurement

Improvement

Accountability/ Evaluation

Research

Data Category 1. Purpose

Process improvement

Assurance

New knowledge

2. Methods: Test observable

Sequential observable tests

Performance assessment

One “blind” test

3. Bias

Accept stable bias

Adjust data to reduce bias

Design to eliminate

4. Data “quantity”

Small sequential just enough data

Report all

Collect as much data as possible

5. Flexibility of hypothesis

Flexible hypothesis subject to revision and test

No hypothesis

Fixed hypothesis

6. Technique

Run or Shewhart charts

No focus on change

Statistical tests

7. Testing strategy

Small sequential tests

No tests

One large test

8. Confidentiality

Data restricted to those involved in improvement projects

Meant for public, no confidentiality necessary

Confidentiality necessary

Therefore, if one measures the capacities of vats that hold liquids in litres, a comparison can be made to determine the largest and the smallest vat.

12.3.2 Benefits of Measurement There are several benefits of measurement (Pedhazur & Schmelkin, 1991; Health Quality Ontario, 2013). 1. When comparing the aspects of objects, numerical values are more useful than abstract notions. For example, terms such as light, heavy, very heavy and too light can be assigned numbers to make decisions. 2. Measurement is a powerful tool to study phenomena. General observations and verbal descriptions lead to ambiguous statements. For example, the statement that people with high blood alcohol levels are dangerous drivers is a potentially ambiguous statement. However, by defining this unsafe blood alcohol level and driving ability tests, a correlation can be determined between the two parameters in a population. 3. Measurements can be used to measure performance trends and discover actual and potential problems. By establishing the criteria for performance, the process capability of operations can be measured for the identification of problems and process improvement. Process improvement thus becomes evidence-based.

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4. All organisations are faced with various types of business risks. These can be identified and measured so that the company can adopt a risk treatment strategy.

12.4 effective Measurement of Quality improvement Process improvement involves the ongoing monitoring of performance throughout the organisation. Effective and meaningful measures should be established for all business activities, and this requires a comprehensive understanding of the system and how the various processes work together to achieve the intended outcome. Therefore, the concept of a family of measures provides a view of the system from the outcome to processes and expectations (Health Quality Ontario, 2013). Some of the items to consider are: ◾ ◾ ◾ ◾ ◾ ◾ ◾

Current outcome Outcomes desired in the future Processes and activities that have an impact on the outcome Current performance of these processes and activities Reliability and stability of the processes Impact of one process change on the outcome Impact on other elements of the system if one process is changed.

12.5 Characteristics of Measurement There are three main characteristics of measurement (Sebastian-Coleman, 2013): 1. Measurement must be comprehensible and interpretable: Users must be able to understand and interpret the information and data collected from measurements. Understanding and interpretation are interrelated – interpretation requires a deep understanding of the aspects measured. 2. Measurements must be reproducible: In order to maintain the reproducibility of measurement, factors that influence the measurement must be known and considered. The type of measurement tool to be used and the conditions under which it should be used must be specified. 3. Measurement must be purposeful: Measurements should not be used merely for the sake of measurement and there must be a valid reason for it. Companies use financial and performance measures to make decisions about future investments and opportunities and the acquisition of skills.

12.6 Measurement Scales 12.6.1 Properties of Measurement Scales Measurement scales have one or more of the following properties (Stat Trek, 2016): 1. Identity: Each value has a unique meaning. 2. Magnitude: Values have an ordered relationship to one another, with some values being larger and others smaller.

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3. Equal interval: The differences between the units are equal. 4. Minimum value zero: The scale has a true zero point below which no values exist.

12.6.2 Types of Measurement Scales There are four types of measurement scales or levels: nominal, ordinal, interval and ratio (Pedhazur & Schmelkin, 1991). a. Nominal scale The nominal scale is the most basic form of measurement. Nominal values represent labels given to identify objects. Examples of nominal scales are: Hair colour: 1 Black 2 Brown 3 Blonde 4 Grey Gender: M Male F Female Nominal scales are mutually exclusive and have no numerical significance. b. Ordinal scale An ordinal scale represents values in some order, but the difference between them is not known. They are typically measures of non-numeric concepts such as satisfaction, happiness and discomfort. Satisfaction: 1 Very unsatisfied 2 Unsatisfied 3 Neutral 4 Satisfied 5 Very satisfied The difference between being satisfied and very satisfied is not known and cannot assign any numerical values to the difference (e.g. by how much). c. Interval scale Interval scales are numeric scales where the order and the difference between the values are known. Increments are known, consistent and measurable. However, interval scales do not have “true zero” points, and therefore, it is not possible to compute ratios. The values can be added and subtracted but cannot be multiplied or divided. Temperature, behavioural science questionnaires and IQ tests are examples of interval scales. The Celsius scale of temperature is a good example of an interval scale. The difference between 40°C and 50°C is the same as the difference between 60°C and 70°C. However, one cannot say that temperature of 60°C is twice “hotter” than a temperature of 30°C. The values can be added and subtracted but cannot be divided or multiplied because there is no true zero point. Temperatures below 0°C are real. d. Ratio scale: The ratio scale is the highest scale of measurement. Ratio scale values have an order, and the values between units are known and have an absolute zero. They can be added, subtracted, multiplied and divided. Height and weight are examples of ratio scales. The difference between the weights of 30 and 50 kg of two objects is the same as the difference between two objects of weight 70 and 80 kg. A person weighing 80 kg is twice as heavy as a person weighing 40 kg. There is no value below 0 kg.

Table 12.2 shows the properties of the four scales of measurement (Jackson, 2014).

12.7 Assurance of Measurements Organisations make both simple and complex measurements in daily operations. However, operators often do not obtain valid results because of unrealistic assumptions about the data quality.

Measurement and Analysis  ◾  231 T Nominal

Ordinal

Interval

Ratio

Property

Gender Colour Ethnicity

Class rank Satisfaction level

Temperature Psychological tests

Height Weight Time

Identity

√

√

√

√

√

√

√

Examples

Magnitude

√

Absolute zero = unit size = or ≠

√

> or
4

Yes

Yes

Calibration yes/no

Goodness of Measurements

Test Accuracy Ratio =

± Tolerance being checked ± Accuracy of instrument used

Requirements for measurement: 1: Performance; 2: Environmental requirement; 3: Food safety requirement; 4: Legal requirement; 5: Customer requirement; 6: Company image and reputation.

1

pH

Tolerance required

Quantity to be measured

Measurement

Requirements for measurement

Required Good Characteristics of Measurement

Importance of Measurement

T

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Measurement and Analysis  ◾  233

measurement. Equipment should meet minimum requirements for correct performance. Consider statutory requirements as well as customer satisfaction issues and the consequences, if measurements are later proved to be inaccurate. The rationale for the selection should be documented for future reference.

12.7.2 Good Characteristics of Measurement Practical issues such as the cost of equipment, time availability, the staff, safety, accuracy and precision are important considerations, when determining the usefulness of measurements. To determine how good the measurements need to be with respect to accuracy and precisions, consider the specifications, drawings and/or customer requirements.

12.7.3 Determining Whether the Measurements Are Good Enough Critical thinking is required to determine whether the measurements are good enough. Calibration of equipment does not go far enough, and in fact, it can give a false sense of security. The significance of calibration depends on the criticality of the measurement to its impact on the project.

12.7.4 Documentation Documentation is the reference point to determine what has been measured and how it was measured. The documentation process has to be followed consistently in order to facilitate future reference and repletion.

12.8 Strategies for Planning for Measurement Choosing useful quality measures is a crucial step towards success, irrespective of the applications to which measurements are used. Quality measurements are useful for: (a) programme measurement – for monitoring key functions to ensure that programme goals are achieved and the resources are used effectively; (b) accountability – for demonstrating the achievement of goals; (c) quality improvement – monitoring the impact of improvement efforts and (d) reporting – for communicating the results to stakeholders. Although external and internal environments may have different impacts on organisations, some strategies for planning for measurement are as follows (Agency for Healthcare Research and Quality, 2012):

a. Think long term: Discuss quality measures as a multi-year project so that realistic expectations and research requirements can be defined. Initially, data collection problems may be encountered, and therefore, it is prudent to consider the initial collection as preliminary data. b. Consider all available measuring tools: Select an entire measurement set or a number of measurement sets. More complete and varied assessment can be made by selecting measurements from different sets. c. Select fewer measures: Choose fewer measures during the first year. Subsequently, this can be extended to a number of other measures by demonstrating the feasibility and usefulness of measures used in the first year.

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d. Develop a plan: When planning for measurement, a clear focus is necessary for intended uses and information needs so that only the essential data is collected. The development of a plan involves the following stages (Health Quality Ontario, 2013): 1. Identify the measure. 2. Select the type of measure: – Outcome measures: They are directed towards customer requirements (consider the end results of improvement efforts). – Process measures: They capture the management system changes that contribute towards system outcomes. – Balancing measures: They determine whether the changes made on a part of the system cause problems in other areas, e.g. new quality improvement changes intended to enhance staff satisfaction may have an adverse influence on customer satisfaction. – Plan–Do–Study–Act (PDSA) measures: These determine the impact of each change carried out and provide information about the efforts of each change attempt. 3. Define the reason for the measurement. 4. Define the operational definition of the measurement. 5. Select the data collection and sampling method. 6. Decide on the method of displaying the results. 7. Select baseline data, if available. 8. State the goals or targets. 9. Select the source. Therefore, the measurement, frequency of the measurement, the person responsible for collecting the data, the individuals who need the data and the leadership and organisation are important factors to consider in planning for measurements. The plan should be revised regularly so that the team is clear about the goals of the measurements. Staff need reliable and timely information to conduct their operations.

12.9 Uncertainty of Measurement 12.9.1 Uncertainty and Error Uncertainty represents the quality of measurement. It is the doubt about the result of a measurement. In a measurement, there is always a margin of doubt. For example, the distance between two cities may be expressed as 100 km, although the actual distance may range from 100.1 to 100.9 km leading to the next city, which is 101 km away. In contrast to uncertainty, an error is the deviation of the measured value from its “true” value.

12.9.2 Precision and Accuracy Measurements are precise when the measured values are clustered together with little scatter. All precise measurements may not be accurate. The smaller the scatter, the greater is the precision. On the other hand, measurements are accurate when the measured values are close to the target value (Hughes & Hase, 2010). A pictorial representation of precision and accuracy is shown in Figure 12.1.

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Not accurate Not precise

Accurate Not precise

Not accurate Precise

Accurate Precise

Figure 12.1 Precision and accuracy.

12.9.3 Taxonomy of Errors There are three classes of errors: random errors, systematic errors and mistakes.

12.9.3.1 Random Errors These are two-sided errors that affect the precision of a measurement. In the absence of other types of errors, measured values fluctuate above or below the true or accepted value in a random fashion. They are unpredictable variations in the measurement process. The precision of such errors can be increased by taking repeated measurements or refining the measurement method or technique, which lends easily to statistical analysis. Random errors can be easily detected and usually occur when trying to estimate the value between two graduation lines or when the reading fluctuates due to the instability of the instrument.

12.9.3.2 Systematic Errors These affect the accuracy of a measurement. They are one-sided errors, and in the absence of other errors, repeated measurements yield a constant shift from the true value. Repeated measurements do not improve the accuracy of the measurement and cannot be analysed by statistical analysis. These errors are not easy to detect but once detected can only be reduced by refining the measurement method or technique. They are caused by incorrectly calibrated instruments, poorly

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maintained instruments and operator error. A parallax error is a form of systematic error caused by the user reading the graduations at an angle leading to a consistently high or low reading.

12.9.3.3 Mistakes The Mars Climate Orbiter, a 338 kg robotic space probe, was launched by NASA on December 11, 1998, to study the Martian climate, the Martian atmosphere and surface changes and to act as a communication satellite. On September 23, 1999, the $125 million Orbiter came within 37 miles of the Martian surface and burned up in the atmosphere. The disaster was caused by a simple maths error! The Lockheed Martin Engineering Team used English units in measurement, while NASA’s team used the metric system for spacecraft operations. This unit mismatch prevented navigation information from transferring between the team at Lockheed Martin in Denver and the flight team at NASA’s jet propulsion lab in Pasadena (Lloyd, 1999; Phillips, 2014a). Mistakes like this are similar in nature to systematic errors, as they are difficult to detect and cannot be analysed statistically. Entering the pH as 7.6 instead of 6.7 in a laboratory record book is a mistake that may be easily overlooked. Other types of mistakes are:

a. Misreading mistakes: Analogue devices may show the calibrations in two different types of units one below the other. It is common to display the weight in pounds and kilograms on weighing scales. b. Multiplier mistakes: The scale may show a multiplier such as X10 or X100, and the user needs to multiply the reading by the multiplier to get the actual reading. c. Malfunction mistake: The data may be displayed incorrectly due to a malfunction of the instrument. Such mistakes are difficult to detect.

12.10 Measurement Systems Analysis The output of a process measurement has two kinds of variation: (a) part-to-part variation and (b) measurement variation. Measurement System Analysis (MSA) is the combined study of part-topart variation and measurement variation and is a structured procedure for assessing the ability of a measurement system to provide good quality data. A measurement system, a combination of equipment, people, material, methods and environment (Figure 12.2), is employed to collect the data (Rolls-Royce, 2013). The methodology is applicable to measurement systems that allow repeated measurements of the same sample, the results of which are reported as a continuous value for the measurement output (Haynes, 2013). It is not applicable to destructive sampling or attribute or classification gauges. Table 12.4 shows some examples of MSA. The purpose of MSA is to qualify a measurement for use by quantifying its accuracy, precision and stability (MacGill, 2012). The relationship between precision and accuracy, and measurement system error, is shown in Figure 12.3.

12.10.1 Classification of MSA Any measurement is characterised by some variation. Total measurement system variation has to be classified into components or causes of variation. They have to be isolated and quantified in order to reduce their contribution to each one of these components. MSA classifies variation into five categories:

Measurement and Analysis  ◾  237

Instruments Procedures

Appraiser

Item

Location & Clamping Environment

Software

Figure 12.2 Measurement components.

Observed Variation

Part-to-part variation

Measurement Variation

Accuracy Stability

Precision Repeatability

Bias Reproducibility Linearity

Figure 12.3

Relationship between precision, accuracy and measurement variation.

1. Bias: Also known as accuracy is a measure of the distance between the observed value of the sample and the true or actual value of the sample or part. Bias can be negative when the observed value is less than the true value and positive when the observed value is greater than the true value. 2. Linearity: This evaluates whether the bias is consistent across the operation range of the measurement system. 3. Stability: This evaluates the measurement system over a period of time. It is the capacity of the measurement system to yield the same value over time when measuring the same part or sample using the same device. 4. Reproducibility: This is the error introduced by the appraiser. It assesses whether different appraisers can measure the same part or sample with the same measurement device and obtain the same value. Variations due to environmental conditions are also classified under

Time taken from receipt of a travel claim until payment

Dimensions of a machine part

Number of items out of specifications

1

2

3

Data

Counting defective items, assessment standards, procedures and environmental conditions

Vernier calipers, coordinate measurement machine (CMM), GO/NO-GO gauge, operator, procedure, environment in which measurement is made, vibration

Computer software which measures the time from start to finish or measuring manually using a stop watch

Measurement System

As per procedure

As per procedure

X number of claim forms per month

Frequency

T

Production Manager

Engineering Manager

Accounts Payable

Owner

Quality Control Manager

Quality Control Manager

Financial Manager

User

SOP X1

Standard Operating Procedure X (SOP X)

Procedure

Comments

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Measurement and Analysis  ◾  239

reproducibility. It is important to make the measurement system withstand all the environmental variation that can occur during measurement. 5. Repeatability: This is the inherent random variation in the instrument. It assesses whether the same appraiser can measure the same part or sample multiple times with the same measurement device and obtain the same value.

12.10.2 Implementing MSA When measurement and analysis system is implemented, the organisation first establishes objectives. Measurement results are then analysed to determine the progress towards the objectives. Specific practices (SP) for implementation are as follows (Potter & Sakry, 2007): SP 1: Establish and maintain measurement objectives derived from information needs and objectives. The organisation’s objectives cover a wide range of business activities such as budget, deadlines, quality issues and product and/or service performance. Only those considered important for the business should be selected. Ideally, objectives should have numeric targets. If qualitative targets are chosen, they should be refined as numeric targets such as: – Reduce delivery time by 10% over the next 6 months – Reduce reworks by 50% over the next 2 months – 100% compliance with environmental regulations. SP 2: Select measures to achieve the objectives. This step involves specifying the method of measurement and the location of data. The frequency of collection of data collection and its storage may not be the same for all measures. SP 3: Specify the method of analysing and reporting the measurements. This step is essential to clarify what to look for in the data. For example, should the data measurements lie within a range? Should there be an upward or downward trend? Has the measurement exceeded a threshold that warrants further investigation?

12.11 Different types of MSA There are two main types of MSA, and the selection of the type of measurement depends on the type of data being collected (Rolls-Royce, 2013). The data that is measured on a continuous scale, such as time, weight, dimension and pressure, involves numerical data called continuous data. The MSA method applicable to continuous data is designated Gauge R&R (Gauge Repeatability and Reproducibility). The data that is classified into categories such as pass/fail, counting defects such as the number of foreign labels in a label bundle or errors on a specification sheet, are called attribute data, and the MSA method applicable to such data is called Attribute Agreement Analysis (AAA).

12.11.1 Gauge R&R Method The Gauge R&R (GRR) method measures variables of repeatability and reproducibility in production measuring processes. Data enables appropriate corrective action to be taken if the variations are excessive (Phillips, 2014b). There are six steps in the process of GRR study: 1. Select the people (appraisers), who are familiar with the processes (usually three appraisers). 2. Make sure there is a documented procedure for measurement.

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3. 4. 5. 6.

Select the sample (minimum ten samples). If applicable, mark the exact measurement location. Ensure that the measuring instrument has adequate resolution. Number and make random measurements. Measure each sample three times by three appraisers.

12.11.2 Attribute Agreement Analysis AAA measures the level of agreement among several appraisers making a judgement or assessment of the same item. The method: (a) helps characterise the quality of the data; (b) determines the areas of disagreement; (c) helps in assessing appraisers, judges or assessors to achieve a high level of agreement and (d) lends itself to easy analysis using software or spreadsheets (ASQ, n.d.). The steps involved in AAA are: 1. Set up the study: Select the number of items to be assessed by one or more assessors. Select appraisers who are familiar with the product or process. 2. Conduct the assessment with appraisers using blind judgement. 3. Enter the data in the software package. 4. Analyse the results. Assess the agreement among appraisers, between each appraiser and the standard and among all appraisers and the standard. 5. Draw conclusions and the course of action. Usually an agreement level greater than 80% is considered satisfactory.

12.12 Assessment of Variations Variations should be carefully examined to identify and resolve any errors (Six Sigma, 2016; Chrysler Group, Ford Motor Company & General Motors Corporation, 2010).

12.12.1 Assessment of Stability ◾ Create a master sample by selecting from the middle of the process and determining its reference value relative to the standard. ◾ Over at least 20 periods (days/weeks) measure the master sample three to five times in order to reflect the environmental conditions. ◾ Plot the data on an X&R chart and calculate the control limits. ◾ Evaluate the control chart for statistical control. Possible corrective action: Review standard operating procedures, recalibrating the device and remove build-up of dirt, dust or contamination. If the device has undergone wear and tear and cannot be repaired, it should be replaced.

12.12.2 Assessment of Bias Select a sample and establish its reference value relative to a traceable standard. If a traceable standard is not available obtain a production part that falls in the midrange of production

Measurement and Analysis  ◾  241

measurements and designate it as the traceable standard for this estimation. Measure the part at least ten times, calculate the average and consider this value as the reference value. ◾ ◾ ◾ ◾

Consult the X&R chart and determine the bias Bias = X – reference value Process variation = six × standard variation Bias % = bias/process variation.

Possible corrective action: For high values, check the accuracy of the device and whether the appraisers are following the exact measurement process and if there is an error in measuring the reference value and instability in the measurement. Scales can be checked using a known calibrated weight. Callipers and micrometres can be checked against gauge blocks, while hardness testers can be tested against hardness blocks.

12.12.3 Assessment of Repeatability and Reproducibility ◾ ◾ ◾ ◾ ◾

Determine the number of appraisers, trials and samples. Select representative samples to represent the range of process variation. Start with the first sample and measure each of the samples in random order. Repeat the process with other appraisers. Repeat the process for multiple trials.

Possible corrective action: Identify the source of error. If the error is due to repeatability, the measuring device has to be improved. On the other hand, if the error is assigned to reproducibility, then appraiser training and adherence to standard operating procedures can yield improvements.

12.12.4 Assessment of Linearity ◾ ◾ ◾ ◾

Select at least five samples whose measurement values cover the range of process variation. Determine the reference value for each sample. Have one appraiser measure each sample at least ten times using the measurement system. Only collect data with the acceptable limits where there is proven linearity. This test ensures the performance of the measurement system throughout the range of measurement.

Possible corrective action: Recalibrate the device and recheck the linearity and bias. Replace the device with one that is proven to be linear. Use the device only over the linear section of the device.

12.12.5 Assessment of Resolution ◾ Choose a sample standard, and if a suitable standard is not available, select a production unit whose measurement falls into the middle of the expected measurement range. ◾ Measure the sample standard three to five times in as short period of time as possible to obtain one group of data. ◾ Repeat the process to obtain a minimum of 10–25 groups of data (each of the measurement sets should be performed regularly, e.g. hourly, daily, weekly). ◾ Plot the data on an R chart with appropriate control limits.

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Possible corrective action: If there are less than three values for the range, or there are only four possible values for the range when the subgroup size is equal to or greater than three, the resolution is inadequate. Repeat with a larger sample size so that some of them may generate new observations or measurements. Measure to as much resolution as possible and practicable.

12.13 Causes of Variation If the observed variations are excessive, the organisation should investigate the root cause of variation and apply appropriate corrective actions. Numerous factors contribute to variation in measurements and some of them are summarised below (Chrysler Group, Ford Motor Company & General Motors Corporation, 2010): 1. Variation due to instrument – Need for calibration – Worn instrument, equipment, fixtures – Poor design quality device – Poor maintenance – Wrong set-up – Wrong gauge for the application. 2. Variation due to master – Improper calibration or use of master – Distortion. 3. Measurement – Measuring wrong characteristic – Linearity – Different measurement method – Wrong assumption, error in an applied constant. 4. Appraiser – Readability or parallax issue – Unskilled – Fatigue.

12.14 General Requirements for effective Measurement Systems The following are some of the general requirements for an effective measurement system (McGill, 2012): 1. The measurement system must demonstrate statistical stability over time. 2. The variability of the measurement system must be small when compared to process variability. 3. The variability of the measurement system must be small when compared to specification limits. 4. The resolution or discrimination of the measurement device must be small compared to the smaller of either specification tolerance or process spread.

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243

12.15 Guidelines for Measurement System Acceptability Guidelines for measurement system acceptability are presented in Table 12.5 (Chrysler Group, Ford Motor Company & General Motors Corporation, 2010). GRR is an estimate of the combined variation of repeatability and reproducibility. A method for its estimation is given in Rolls-Royce (2013). According to the Automotive Industry Action Group (AIAG), three levels of variation are defined.

12.16 Pitfalls in Measurements Successful organisations thrive on data-driven decision-making. Cold hard data is the basis for decision-making. For example, in the quest for improving customer satisfaction, the organisation needs to know how many customers are served online, in person or by phone, the average time to resolve an issue in each of these channels and the types of customer requests that take the longest and shortest to resolve. Numbers are only useful if they can contribute to decision-making (Berman, 2016). Mistakes are due to wrong assumptions and five mistakes to avoid are: Assumption 1: Just having numbers is enough Data is only meaningful, if it allows the organisation to manage performance. Decide on measurements that really “count”. Select measures that reflect company objectives. Assumption 2: More metrics are better than a few metrics This assumption is based on the belief that if something can be counted, it should be counted. Collecting useless data is a waste of company resources. When planning measurement, a good start is to identify everything that could be measured. Prioritise the most important ten useful measurements that will yield the most crucial information. Begin with a manageable list and gradually add others as required for decision-making. T GRR

Decision

Comments

Less than 10%

Accept measurement

Useful for sorting or classifying parts or when tightened process control is needed

10%–30%

Acceptability depends on the application

Decision is based upon the significance of application measurement, cost of measuring equipment and cost of rework or repair. Require customer’s agreement

> 30%

Discard

Improve the measurement system. Variation may be reduced by taking the average result of several measurement of the same part characteristic

GRR, gauge repeatability and reproducibility.

244  ◾  Integrating Business Management Processes

Assumption 3: Value judgements should be assigned to volumes Numerical values generally relate to some useful information. However, over-enthusiasm may prompt the individuals to collect a large number of measures without focusing on the complete information associated with each individual measurement. For example, improving the on-time delivery five times per month is laudable. But if the target is to improve it by 20 times per month, it is important to recognise that only 25% of the target has been realised. Assumption 4: The numbers tell the whole story Numbers reflect the results of an operation but are not the root cause. Further investigation only will reveal the root cause. This involves interviewing people who are associated with the activity and observing and making sense of qualitative data. Therefore, numbers should direct the organisation to focus on areas of questioning rather than accepting them as answers. Assumption 5: Metrics are always valid The company’s objectives and problems change in response to changes in the internal and external environment. A metric which is valid now may not be useful in the future. Therefore, it is unwise to stick to the same old measurement systems. Organisations should review measurement requirements every 3–6 months so that obsolete measurement systems can be identified.

12.17 Statistical Analysis Companies collect a large amount of data, and statistical procedures are required not only to support planning but also for analysis and interpretation of data. Such data may include chemical, physical, biological, microbiological and/or sensory measurements. Appropriate statistical techniques have to be applied to arrive at inferences. A detailed description of statistical methods is beyond the scope of this book. Table 12.6 summarises commonly used statistical methods (Granato et al., 2014).

12.18 Data Quality After a decade of development costing nearly $7 billion, the Ariane 5 unmanned rocket was launched by the European Space Agency on June 4, 1996, from a launch site at Kourou in French Guiana. Just 40 seconds after the lift-off, it exploded in the atmosphere. The destroyed rocket and its cargo were valued at $500 million. The cause of the malfunction was a software error in the inertial reference system. It was a conversion error caused by the conversion of a 64-bit floating point number relating to the horizontal velocity of the rocket to a 16-bit signed integer. The number in question was larger than 32,627, the largest number that could be stored in a 16-bit signed integer. Therefore, the conversion failed causing the disaster (Arnold, 2000). This major disaster is a classic example of a failure to design the data correctly. Quality of data is essential for the management to make important decisions. When the data is unreliable, managers are reluctant to apply the data that may prove to be important for the progress of the organisation. Poor data quality affects the firm in many ways (Redman, 1998):

Measurement and Analysis  ◾  245 T Statistical Method

Description

1

Student’s t test

Compare mean values for a specific data characteristic in two data sets

2

Chi square test

Test the independence of two categorical variables

3

ANOVA

Determine statistically significant differences between the mean of three or more group.

4

Linear regression

Determine the extent to which there is a linear relationship between a dependent variable and one or more independent variables

5

Mann-Whitney test

Compare two populations means that come from the same population and to determine whether the means are equal or not

6

Wilcoxon signed-rank test

Compare two related samples, matched samples or repeated measurement on a single sample to determine whether their population mean ranks differ

7

Fisher Exact test

Determine whether there are non-random associations between two categorical variables

8

Tukey’s multiple comparison test

Determine which means among a set of means differ from the test

9

Duncan’s test

Determine significant differences between group means in an ANOVA setting

10

Kruskal–Wallis test

Evaluate whether the population means on a dependent variable are the same across all levels of a factor

1. Mistrust: Poor data quality creates distrust internally with the functional department and externally affecting customers and suppliers. An incorrect power bill will cause frustration among users, particularly when the matter is not resolved soon enough. 2. Poor or delayed decisions: Managers may delay making important decisions when they feel that data is unreliable. This is particularly so, if there is a history of poor data quality that has led to wrong decisions. Poor data quality makes the implementation of data warehouses and re-engineering difficult. 3. Wasted resources: There is a financial loss associated with poor data quality. According to a survey conducted by Gartner, poor data quality is costing companies $14.2 million annually (Friedman & Judah, 2013). Operational costs increase due to poor data quality. 4. Customer dissatisfaction: Incorrect invoices, wrong name and address, delivery of wrong product or service are some of the problems related to poor data quality and are reasons for customer dissatisfaction. 5. Lowers morale and job satisfaction: Time and resources spent on resolving data errors affect employee morale and job satisfaction.

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12.18.1 Reasons for Data Inaccuracy In 2014, Experian Data Quality commissioned Dynamic Markets to conduct a study of current approaches to data quality. Over 1,200 respondents from the US, UK, France, Germany, Spain and Australia took part in the survey. Industry sectors selected for the study included finance, public sector, manufacturing, retail, utilities and education. Vice presidents, directors, managers and administrative staff who managed data sources across a wide variety of functions participated in the study. According to the survey, globally the average amount of inaccurate data has increased to 26% from 22% during the previous year. The US organisations believe that they have the highest rate of inaccurate data at 32%. The most common data errors were missing data, outdated information and inaccurate data (Experian Data Quality, 2015) (Table 12.7).

12.19 Getting it Right Organisations often fail to recognise the root cause of poor or incorrect data. The information technology (IT) department might have to correct wrong entries in the customer database, the human resources (HR) department must work with training providers to resolve incorrect training records and physicians cannot treat patients without complete clinical data. These are just a few problems that impact on the daily operations of an organisation. In fact, data quality problems plague every functional unit in every industry, at every level and for all types of information. The consequences of such errors can be fatal. An incorrect clinical report in a hospital can kill a patient. Prescription errors can have serious consequences. An ambiguous product specification can add millions of dollars in rework in a manufacturing establishment. An inaccurate financial report can affect the financial market (Redman, 2013). The Apple Maps app launched in 2012 as a competitor to the Google app was a total failure and ruined its reputation (Rushton, 2012). When data is created, the user is often ignored. Simply correcting incorrect data does not resolve the issue. Data creation is at the heart of the matter. Here are three recommendations (Redman, 2013) to get it right: 1. Connect data creator with data user: The life cycle of data is a short one – its creation and its use. The quality of data is fixed at the time of creation, and it can only be assessed at the time of use. If the data is incorrect (or of poor quality), a typical scenario is to work around T Data Error

Percent

Incomplete or missing data

51

Obsolete information

48

Wrong data

44

Duplicate data

32

Data entry error

27

Typographic errors

22

Spelling mistakes

19

Measurement and Analysis  ◾  247

incorrect data or for the user to correct the data. Closer communication between the data creator and the user enables the root cause(s) to be identified at the source and resolve any issues. 2. Focus on getting new data right: Forward-looking organisations focus on improving the way new data is collected by identifying and eliminating the root causes of errors. Once a proper data measurement plan is implemented minimum interference may be required, but an ongoing clean-up will not be required. 3. Make Line Managers responsible for data: Traditionally, organisations rely on the IT department to fix data error problems. IT cannot judge the quality of data; it can only find and correct errors, which is only a short-term solution. Business units and managers have direct links to customers, and they must “face the music”, deliver on promises and explain poor performance to shareholders. Therefore, data quality does not reside with IT but with the creator and the user. Successful measurement is crucial for successful improvement. Good measurements do not have to be difficult or time-consuming. The right measurements can demonstrate improvements in performance quickly so that the improvement team can adapt interventions accordingly using the organisation’s resources effectively.

References Agency for Healthcare Research and Quality. (2012). Choosing quality measures. Retrieved August 24, 2018 from http://www.ahrq.gov/professionals/quality-patient-safety/quality-resources/tools/chtoolbx/ choosing/index.html. Arnold, D. N. (2000). The explosion of the Ariana 5. Retrieved September 8, 2016 from https://www.ima. umn.edu/~arnold/disasters/ariane.html. ASQ. (n.d.). Attribute agreement analysis: ASQ resources. Retrieved August 27, 2018 from http://asqservicequality.org/glossary/attribute-agreement-analysis-2/. Berman, E. (2016). The right (and wrong) way to measure results. Daily Muse Inc. Retrieved August 30, 2018from https://www.themuse.com/advice/the-right-and-wrong-way-to-measure-results. Chrysler Group, Ford Motor Company & General Motors Corporation. (2010). Measurement Systems Analysis MSA (4th Ed). Southfield, MI: Automotive Industry Action Group. Experian Data Quality. (2015). Data Quality Benchmark Report. Experian Data Quality: White Paper. Boston, MA: Experian Data Quality. Friedman, T. and Judah, S. (2013). The state of data quality: Current practices and evolving trends. Retrieved September 2, 2018 from https://www.gartner.com/doc/2636315/state-data-quality-current-practices. Goodreads. (2016). H. James Harrington quotes. Retrieved August 16, 2018 from http://www.goodreads. com/quotes/632992-measurement-is-the-first-step-that-leads-to-control-and. Graham, R. M. (2006). Four steps to ensure measurement data quality. Quality Progress, 39 (9), 82–85. Granato, D., Calso, V. M. de A. and Jarvis, B. (2014). Observation on the use of statistical methods in food science and technology. Food Research International, 55, 137–149. Haynes, R. (2013). How to understand a measurement system analysis. Retrieved August 25, 2018 from http:// www.qualitydigest.com/inside/quality-insider-article/how-understand-measurement-system-analysis.html. Health Quality Ontario. (2013). Measurement for quality improvement. Quality Improvement Primers. Edmonton: Queen’s Printer. Hughes, I. and Hase, T. (2010). Measurement and their Uncertainties: A Practical Guide to Modern Error Analysis. New York: Oxford University Press. Jackson, S. L. (2014). Statistics Plain and Simple (4th Ed). Boston, MA: Cengage Learning.

248  ◾  Integrating Business Management Processes Lloyd, R. (1999). Metric mishap caused loss of Mars orbiter. CNN.com. Retrieved September 2, 2018 from http://edition.cnn.com/TECH/space/9909/30/mars.metric.02/. MacGill, D. (2012). What is measurement system analysis? Retrieved August 27, 2018 from https://prezi. com/-sxorzwzdzp8/what-is-measurement-system-analysis/. Pedhazur, E. J. and Schmelkin, L. P. (1991). Measurement Design and Analysis: An Integrated Approach. New York: Psychology Press. Phillips, M. (2014a). Reinventing Communication: How to Design, Lead and Manage High Performing Projects. New York: Routledge. Phillips, G. (2014b). The basics of gauge R&R. Quality Digest. Retrieved August 27, 2018 from http://www. qualitydigest.com/inside/metrology-article/basics-gauge-rr.html. Potter, N. and Sakry, M. (2007). Implementing measurement and analysis: Post. The Process Group, 14 (1), 1–2. Redman, T. (1998). The impact of poor data quality on the typical enterprise. Communications of the AMC. 41 (2), 79–82. Redman, T. (2013). Data’s credibility problem. Harvard Business Review, 91 (12), 84–88. Rushton, K. (2012). Apple apologises for maps fiasco. The Telegraph, UK, September, 28 2012. Rolls-Royce. (2013). Measurement system analysis: How-to guide. Retrieved August 25, 2018 from https:// suppliers.rolls-royce.com/GSPWeb/ShowProperty?nodePath=/BEA%20Repository/Global%20 Supplier%20Portal/Section%20DocLink%20Lists/SABRe_2/Main/Column%201/Briefs%20 and%20Guidance/B3.7:%20Measurement%20Systems%20Analysis/Documents/MSA%20 handbook//file. Sebastian-Coleman, L. (2013). Measuring Data Quality for Ongoing Improvement: A Data Quality Assessment Framework. Cambridge, MA: Elsevier. Six Sigma. (2016). Measurement system analysis (MSA). Six Sigma Material. Retrieved August 28, 2018 from http://www.six-sigma-material.com/MSA.html. Stat Trek. (2016). Scales of measurement in statistics. Retrieved August 20, 2018 from http://stattrek.com/ statistics/measurement-scales.aspx?Tutorial=AP. UNIDO. (2006). Role of measurement and calibration in the manufacture of products for the global market: A guide for small and medium-sized enterprises. Working Paper. Vienna: United Nations Industrial Development Organization. Ward, A. and Norton A. (2016.). Chapter 26: Quality improvement: Small changes that can make a big difference. In L. R. Schmeltz (Ed.), A Resource Guide for Early Hearing, Detection and Intervention, pp. 26-1–26-10. Logan, UT: National Centre for Hearing Assessment and Management.

Chapter 13

Audits 13.1 I introduction With advances in technology, the global business environment is continuously changing. Successful companies are able to align their management systems to adapt to the changing business environment. Key components of good management systems are its assurance processes: audits, reviews, corrective and preventive actions. The effectiveness of management systems can only be realised through regular audits, reviews, and corrective and preventive actions. An effective audit considers auditors and auditees as equal partners in a process to maintain standards and improve performance. Jointly they combine their differences but follow complementary approaches to review the organisation’s operations. Working as a team, the auditors and auditees plan a process that meets each of their needs, discover what is going on in the organisation and provide feedback to facilitate improvements. Quality is derived from doing things right and from solving problems, not simply identifying them. An audit is a process that takes place between people, and therefore, it has to be seen in the context of human relationships. Successful audits facilitate change and achieve excellence. The auditor needs to be aware of the psychological aspects of the audit process. People have both biological and psychological needs that consciously or unconsciously they will strive to satisfy. Two of the needs are the need for approval from others and the need for self-esteem. The audit process affects these needs because in the working environment approval from self and others is related to job performance.

13.2 Definitions Audit: “An audit is a systematic, independent and documented process for obtaining audit evidence and evaluating it objectively to determine the extent to which audit criteria are fulfilled” (Cianfrani & West, 2013). The assessment includes the policies and procedures of an organisation associated with the administration, use of resources, planning and improving employee and organisation performance.

249

250  ◾  Integrating Business Management Processes

Management review: This is an analysis of business activities against specified processes to identify areas and opportunities for improvement. It is “an activity undertaken to determine the suitability, adequacy and effectiveness of the subject matter to achieve established objectives”.* It is conducted to ensure that appropriate business processes are in place to meet the goals and objectives of the firm. To remain competitive, goals and objectives need to change with changing circumstances, and all business processes should reflect these changes. A review can also be considered as an assessment of process efficiency. The essential difference between an audit and a review is that the former is conducted against existing processes, whereas a review is carried out to determine the processes needed for improvement (De Silva, 2013). Auditor: The person or the organisation conducting the audit. Auditee: The client being audited.

13.3 O objectives The objectives of audits are to (Askey & Dale, 1994): ◾ ◾ ◾ ◾ ◾ ◾ ◾

Assist the company to achieve its objectives efficiently Minimise the risk through failure, inadequacy or poor implementation Create awareness among the staff Identify areas for improvement Meet the requirements of the relevant standard Achieve the intended results or the controls required Meet legal requirements.

The objectives of management reviews are presented in Chapter 11.

13.4 Benefits of Audits A value-added audit offers numerous benefits to the organisation, auditee department, Management Representative and top management. The management can utilise audit findings to make informed decisions about the achievement of company objectives (Russell, 2013). Benefits of audits include: ◾ Verification of system effectiveness and conformance to standards, regulatory requirements, company policies and procedures ◾ Identification of risks and monitoring implemented risk measures ◾ Identification of opportunities for improvement ◾ Identification of inefficiencies and ineffective controls ◾ Verification of project implementation and readiness of new products and processes ◾ Verification of the effectiveness of corrective actions ◾ Identification and reporting of best practices ◾ Confirming the achievement of the firm’s objectives. *

ISO 9000: 2005 Clause 3.8.7.

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13.5 Misconceptions about Audits Audits usually require additional resources for planning the audit up through to submitting the final report. If adequate resources, particularly human resources, are not allocated then the preparation and performance can become superficial. Therefore, an effective audit structures the audit from scheduling through to controlling corrective actions, making the best use of available resources. Another criticism levelled against audits is that they are often conducted by independent personnel not familiar with the areas being audited, restricting their effectiveness. The potential disadvantage can be minimised by careful auditor selection and audit preparation. A skilled independent auditor will provide new insights and examine the operation from a user’s point of view. Another perception is that an auditor, being an outsider to the department or the organisation, is assumed to dictate to the management how the department should be run. If the auditor and the auditee both understand that an auditor’s role is to facilitate change for improvement, and not to tell the organisation how to run its business audit, it will be perceived as a constructive process rather than a disruptive one (Pinero, n.d.).

13.6 Audit Principles Professional standards and guidelines are essential for the credibility, quality and professionalism of auditing. The International Organisation for Standardisation (ISO) has established guidelines for auditing management systems including the principles of auditing, managing an audit programme and conducting management system audits (ISO, 2011). It also includes guidance on the evaluation of competence of the audit team. These six principles are the basis for conducting the audit in an effective and reliable manner. The first four principles are applicable to auditors and the last two are related to the audit. 1. Integrity The principle of integrity refers to honesty, diligence and responsibility in conducting the audit. The auditor should adhere to statutory and regulatory requirements and demonstrate competence while performing the audit. They should perform the audit in an unbiased manner and remain fair and unbiased in all their dealings with the client. The auditor should also be sensitive to any influences that may be exerted on their judgement while carrying out an audit. 2. Fair presentation Fair presentation is the obligation of the auditor to present the findings, audit conclusions and audit reports truthfully and accurately. The auditor has the responsibility to report significant obstacles encountered in performing it and unresolved issues because of divergent views. 3. Due professional care Due professional care refers to the application of diligence and judgement in audits. The client and other interested parties place a great deal of trust and confidence in the auditor, and therefore, the auditor should exercise due professional care in performing the audit. They should demonstrate competence to perform the task and the ability to make reasonable judgements in all audit situations. The auditor should always be aware that the audit is performed against planned arrangements and the requirements of the organisation.

252  ◾  Integrating Business Management Processes

4. Confidentiality The client reveals confidential information to the auditor during the audit, and the auditor is responsible for maintaining the security of information, both during and after the audit. The auditor should exercise discretion in the use and protection of information acquired during the audit. The information should never be used for personal gain or in a manner detrimental to the legitimate interests of the client, which would violate confidentiality. The auditor should have systems in place to keep sensitive information in a secure manner. 5. Independence The fifth principle takes into consideration the impartiality of the audit and the objectivity of audit conclusions. An auditor should not audit their own work. They should be independent of the activity being audited, unbiased with no conflict of interest, focused and objective, free from prejudice or partiality that could influence the objectivity of the audit and ensure that the audit findings and conclusions are based solely on the evidence gathered. 6. Evidence-based approach An evidence-based approach is the process of arriving at reliable and reproducible audit conclusions based on the verifiable evidence alone, and it is called the factual approach to decision-making. When sampling is required, appropriate sampling techniques should be used to gather evidence.

13.7 essential Features of Audits A properly conducted audit incorporates the following features: Audits are pre-planned and methodical in nature. They are free from prejudice or bias. They encompass some form of enquiry and the careful evaluation of evidence. They are concerned with the activities of the organisation. They are conducted in an effective and consistent manner in accordance with planned arrangements. ◾ Weaknesses are highlighted to facilitate improvements.

◾ ◾ ◾ ◾ ◾

13.8 types of Audits Several audit methods are available to fulfil the audit purpose. The three discrete types of audits are: (a) product audit which includes services; (b) process audit and (c) system audit. Desk audits or document audits are supplementary audits that support the three main types of audits. Audits are also classified as internal or external according to the party that conducts it (Russell, 2013).

13.8.1 Product Audit A product audit examines a particular product such as hardware, processed material or software, or a service such as packaging, storage and distribution, to evaluate whether it conforms to agreed specifications, performance standards and customer requirements. A product audit is generally

Audits  ◾  253

conducted on the finished product that has passed final inspection. It evaluates the entire product and its features. A product quality audit examines or tests a product which has been accepted or rejected. It performs operational tests to the same requirements in its manufacture using the same production test procedures, methods and equipment. Often a product audit measures the quality of the product aimed at the customer and evaluates the quality of packaging, its presentation, accompanying documentation, the use of approved suppliers, shipment preparation, security, recommended use by the consumer and after sales support. A product may also evaluate the environmental impact of the product. A service audit is a special type of product audit, and it examines the physical attributes of the service that is performed. If the service is traceable, the audit can check (e.g. the provision of labels, tags, cleanliness and records). When the service performed is not traceable (e.g. an engine repair, receiving education or training or receiving personal services), the process audit has to be audited.

13.8.2 Process Audit The purpose of the process audit is to examine activities to verify that inputs, tasks and outputs comply with defined requirements. A process audit looks at only a single activity, such as marketing, finance and R&D, of the whole system and takes less time than a system audit. The effectiveness of the activity is determined by evaluating predetermined parameters, such as the time to complete a task, accuracy of financial reports and storage of goods. Heat treatment, soldering and the sterilisation effectiveness of food are examples of special processes that are included in a process audit. An important task of a process audit is to examine the resources (raw materials or ingredients, equipment, methods) used to convert input into outputs, and the environmental impact and process controls employed to assure compliance to stated requirements. The audit usually follows the process.

13.8.3 System Audit A system audit is conducted on a management system to evaluate objective evidence that applicable elements of the system are appropriate, adequate and effective and have been developed, documented and implemented to satisfy stated requirements. A quality management system (QMS) audit evaluates the company’s quality management programme in order to verify that it meets company policies, contractual obligations and regulatory requirements. Quality plans and checklists, and the implementation of detailed activities and performance metrics, are all assessed during the audit. An environmental management system (EMS) audit examines the environmental management programme, and the focus is on the environmental impact of the company’s activities. A food safety management system (FSMS) audit examines the firm’s ability to produce and deliver safe and wholesome food.

13.8.4 Desk Audit or Document Review A desk audit or document review refers to the examination of documents relating to the management system and is usually done before a process or product audit. The purpose of a desk audit or document review is to evaluate whether the documents are appropriate, adequate and effective to meet specified requirements, which are usually external standards such as ISO standards. These audits are performed at predetermined intervals or after a system review when documents are amended.

254  ◾  Integrating Business Management Processes

13.8.5 Internal and External Audits An internal audit is an audit conducted by or at the direction of members of an organisation. External audits are conducted by an external agency at the request of the organisation. Internal audits are also called first-party audits, whereas second- and third-party audits are external audits.

13.8.5.1 First-Party Audits First-party audits are internal audits conducted by the organisation against its own procedures or methods and/or against external standards adopted by the organisation. Essential features of internal audits are: (a) top management must be totally committed to the internal audit programme; (b) all aspects of the management programme must be assessed at predetermined intervals; (c) high-risk areas and important processes must be audited more frequently and the audit methodology must be defined and (d) auditors should be independent of the activities they are auditing. Sometimes the organisation might employ external auditors to conduct internal audits.

13.8.5.2 Second-Party Audits Second-party audits are external audits conducted by a supplier or a customer or by a contract organisation on behalf of the customer. These audits are performed according to a contract and at the direction of the customer. Second-party audits are more formal than first-party audits and can influence the purchasing behaviour of the customer. Funding authorities may request a third party to conduct an audit on a charitable organisation’s management system before funding assistance is given.

13.8.5.3 Third-Party Audits Third-party audits are independent audits performed by an external agency at the request of the organisation or as a mandatory requirement. These audits may result in certification, registration, recognition, an award, licence approval, citation, a fine or a penalty by a regulatory body. The following are the features of third-party audits: ◾ ◾ ◾ ◾ ◾ ◾ ◾

The auditor understands the requirements of the customer and/or applicable standards. Gains senior management commitment. Assesses compliance with standards. The auditor may be accompanied by a technical expert in the area being audited. Approaches the audit positively and with commitment. Expects complete compliance. Provides useful feedback on the organisation’s ability to satisfy stated requirements.

13.9 Audit Styles The style of auditing or reviewing a management system significantly affects the outcome of the audit. An auditor might prefer to view an auditor as a person who improves performance by facilitating change. Unfortunately, some auditees may not share this view and favour the view that an auditor is “an individual who visits the battlefield after the battle is over and attacks the

Audits  ◾  255

wounded”. This perception is perpetuated by auditors who adopt an aggressive attitude with the aim of deliberately finding fault. Audits and reviews should be a positive experience for both the auditor and the auditee. A successful audit or a management review results in a win-win outcome. There are three main styles of auditing: inspectorial, “show and tell” and collaborative (De Silva, 2013).

13.9.1 Inspectorial Style Auditors adopting this approach assume the role of an inspector deliberately trying to find noncompliance. The auditee is threatened, and it is not possible to carry out an open and honest communication. Minimum information is presented to the auditor voluntarily, just like a person visiting a medical practitioner for a medical examination at the request of an insurance company. The audit is carried out using checklists such as those used by regulatory body inspectors.

13.9.2 “Show and Tell” Style In this approach, the auditee attempts to distract the auditor by “showing off”, making it difficult for them to conduct a proper audit. Activities that do not comply are rarely brought to the attention of the auditor. Unless the auditor is assertive, the outcome of the audit does not result in improved performance and is not beneficial to either party.

13.9.3 Collaborative Style A collaborative approach is beneficial to the organisation and the auditor, and the end result is a win-win situation. An open and honest discussion takes place between the two parties, and noncompliance and weaknesses are handled in a non-threatening manner. The auditee cooperates fully and provides the necessary information voluntarily, just like a person visiting the doctor for an ailment. This approach is successful when the auditee realises that the role of the auditor is to facilitate change for improvement.

13.10 Audit Process A successful audit starts with good planning. Internal audits are usually conducted by a nominated employee of the organisation who is generally familiar with the management systems and activities to be audited. Therefore, the process of internal audit is much simpler than an external audit process.

13.11 I internal Audits 13.11.1 Purpose Internal audits are essential to monitor the performance of the organisation so that timely corrective action can be taken to address weaknesses. An internal audit serves the following purposes (Russell, 2013): ◾ Ensures compliance to stated objectives ◾ Evaluates the effectiveness of the management system

256  ◾  Integrating Business Management Processes

◾ Identifies opportunities for process/product/service improvement ◾ Ensures product design activities are carried out in accordance with management system requirements ◾ Assesses the progress towards meeting ISO standard requirements ◾ Identifies process efficiencies towards the delivery of products and services ◾ Identifies organisational risks for resolution. The internal audit process is presented in Figure 13.1.

13.11.2 Audit Schedule The audit schedule is prepared well in advance by the management representatives of the quality, environment and FSMSs in consultation with the business unit team. Priority is given to activities which are significant to business performance. A sample audit schedule is shown in Table 13.1.

Prepare audit schedule

Distribute audit schedule Assign auditor Prepare audit Perform audit Report findings

Corrective action

Yes

Agreed and audit report complete

No Audit report complete

CA complete Yes CA closed out

Figure 13.1

internal audit process.

No

CP 004

CP 002

IQFSE

IQFSE

Ref

Offering contracts

Purchasing

Title

T

Purchasing

Purchasing

Dept

Annually

6 monthly

Frequency X

Jan

Feb

Mar

Apr

May

X

Jun X

Jul

Planned Audit Aug

Sep

Oct

Nov

Dec

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258  ◾  Integrating Business Management Processes

13.11.3 Distribute the Schedule The audit schedule is circulated among the business units so that the necessary preparations can be done by individual departments/business units.

13.11.4 Assign Auditor(s) The Management Representative appoints an auditor or an audit team, depending on the number of activities to be audited, and assigns their roles. Assigned auditors cannot audit their own departments or activities they are involved with. All auditors must possess competence in auditing management systems.

13.11.5 Prepare the Audit Audit preparation is made by the Management Representative, and it involves the following arrangements (Russell, 2013): Define the purpose and scope of the audit Identify the auditee and the activities to be audited Establish the audit team including a Lead Auditor Define audit criteria such as the standards, contract or procedures against which the audit will be conducted ◾ Logistical information such as dates, place of audit, audit duration, interview schedule and meetings with auditee ◾ Preparation of working documents, which includes forms for recording supporting evidence and audit findings, meetings and other observations.

◾ ◾ ◾ ◾

13.11.6 Conduct the Audit The audit is conducted by examining the records, data and documents and observing the activities being performed, talking to the staff and identifying any problems. The audit strategy may be trace backwards, trace forward, the discovery or element method, or a combination of these strategies (Surak & Wilson, 2014). The trace backward strategy starts with the termination of the activity and ends with the beginning of the activity. For example, the audit commences with the shipping end of the process and then works towards the receiving end. The trace forward strategy follows the chronological progress of the product as it flows from inputs to delivery. The discovery method audits the functions in a random manner. The simplest approach is the element method where the functions are audited according to a specific standard or requirement.

13.11.7 Report Findings The auditor should issue the report as soon as possible after the conclusion of the audit. The report is kept at reasonable length and presents a balanced summary of the status of activities audited. Positive actions and practices observed during the audit should always be mentioned in the report. It should also include any non-compliance identified during the audit and opportunities for improvement. The non-compliance should refer to the clause or requirement from the appropriate standard or procedure for which the non-compliance was written.

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13.12 E external Audits External audits are conducted at the request of a client. The external agency conducting the thirdparty audit is usually an accredited certifying body.

13.12.1 Four-Phase Model The four phases of this model are: (a) acceptance of the client’s request; (b) plan the audit; (c) document the audit plan and strategy, perform the audit and collect audit evidence and (d) complete the audit and issue the report. The decision to accept the audit is based on the integrity of the client, the firm’s competency to conduct the audit and that it is compliant with the ethical standards for auditors. Careful consideration should be given to the points raised above in order to avoid engaging a client who has an unacceptable level of risk (Lydon, 2016; Nosberger, n.d.).

13.12.2 Purpose Assess the degree of conformance to the requirements of a standard (e.g. ISO 9001, ISO 14000, ISO 22000) in order to: (a) gain certification of the company’s management system; (b) recommend the organisation for certification to a standard or approval of a licence; (c) be recommended as an approved supplier; (d) gain competitive advantage in the marketplace and (e) enhance the reputation of the organisation. Good planning and preparation are keys to a successful external audit (Russell, 2013). Figure 13.2 presents the external audit process.

13.12.3 External Audit Activities 13.12.3.1 Client’s Request Third-party audits are usually performed at the request of a client. A contract is usually drawn up between the client and the certifying body. As part of the request, the client must define the purpose and scope of the audit. The Lead Auditor is responsible for the execution of the audit.

13.12.3.2 Select the Team The team is selected by a Lead Auditor of the certifying body. The Lead Auditor is responsible for selecting the audit team and assigning the team members specific audit functions. The team is selected based on the complexity of the audit and the team members’ technical skills. They must have the necessary skills in the areas to be audited and audit skills. If special skills are needed when auditing special organisations, such as a nuclear facility or a medical facility, the Lead Auditor may call upon a specialist in the areas to be audited. Technical expertise is especially important when auditing food processing organisations due to the risk of harmful health effects (Surak & Wilson, 2014).

13.12.3.3 Develop Audit Plans A successful audit commences with a properly designed audit plan because it ensures a systematic audit (Russell, 2013). The Lead Auditor should prepare the audit plan in consultation with the audit members. Table 13.2 shows a sample audit plan.

260  ◾  Integrating Business Management Processes

Third party accepts Select the audit team

Management system

Develop plans

Client’s request

Visit client

Conduct desk audit

Entry meeting

Yes

Documents comply

Collect evidence

No

Analyse evidence

Amend documents Prepare and submit report

No

Close out

Noncompliances

Exit meeting

Yes Prepare and submit report specifying timeframe for taking corrective action. Agreed timeframe may vary depending on the seriousness of the noncompliance.

Yes

Figure 13.2

external audit process.

Corrective action OK

No

Audits  ◾  261 T Item

Description

Auditee

The organisation being audited

Management Representative

Contact details of the Management Representative

Purpose

Establish the purpose for the audit

Scope

Define the operational boundaries of the audit

Objectives

State the objectives of the audit

Requirements

Standards to be applied for the audit. Include both internal and external requirements

Audit strategy

Define the strategy to be used: trace forward, trace backward, discovery or element or a combination of these

Applicable documents

List of all records and data that will be used in the assessment. It can include, for example, Hazard Analysis and Critical Control Point (HACCP) plans, corporate policies, regulatory requirements and international standards

Audit area

List the departments, business units and activities to be audited

Overall schedule

List the planned time and the length of meetings, facility tour, interviews, meals and breaks

Audit team

Name the members of the team

Approval

Signatures from the Management Representative of the organisation

During this phase, the audit timetable and working documents are prepared. The audit timetable should be as detailed as possible. For example, it should list the times when each department will be audited. During the course of audit, if there are any changes to the timetable, the Lead Auditor should inform the auditee at the earliest opportunity so that the changes can be accommodated by the auditee. The audit should not disrupt the normal activities of the organisation. The Lead Auditor coordinates the preparation of the working documents necessary to perform the audit. These working documents may include forms for recording supporting evidence and audit findings, procedures and checklists used for evaluating the management system, sampling plans and records of meetings. However, checklists and forms should not restrict the extent of audit activities, which can change as a result of the audit findings. The checklists generally refer to the elements of a standard against which the audit is performed or to operational activities of the organisation. Tables 13.3 and 13.4 show sections of audit checklists. Audit checklists: (a) enable planning for the audit; (b) ensure a systematic approach for conducting the audit; (c) act as a sampling plan and a time manager and (d) serve as a memory aid and a platform for recording audit findings (QA Sigma, n.d.). Checklists adopted for this type of audit should leave room for the auditor’s comments.

262  ◾  Integrating Business Management Processes T Item No. 1

Requirement Has ABCCL established a QMS in accordance with the requirements of ISO 9000:2015

Compliance Yes/No Yes

Reference MP… and SOP….

Comments ABCCL has established an IQFSE manual in the plant and consists of two parts: a procedures manual and work instructions. 2

Is there evidence to show that the IQFSE Management System is • Documented • Implemented • Maintained • Continually improved

No framework for continual improvement

As above

Comments The QMS has been adequately documented, implemented and maintained through reviews and change control procedure. However, there is no framework for continual improvement. ABCCL staff has the necessary skills and resources to develop an effective continual improvement programme. 3

Has ABCCL documented all the procedures necessary for effective operation and control of its processes?

Yes (see 2 above)

MP, CP, SP, AP and SOPs

Comments All activities from receiving to delivery to customers are covered through management, core, support and assurance processes. 4

Quality Management System (QMS)

4.1

General requirements

T Environmental Management System Auditor:

Date:

C: Critical non-compliance M: Major non-compliance N: Minor non-compliance OK: Complies O: Observation

(Continued )

Audits  ◾  263 Table 13.4 (Continued)  Section of an Internal Audit checklist

Section

Management System Reference

Activities

ABCCL internal Audit Checklist 7.4 Communication ISO 14001:2015

SP 005 SP 006

1. Has the organisation established, implemented and maintained procedures for communicating its environmental aspects and EMS internally and externally? 2. Has the organisation considered legal obligations in the communication planning process? 3. How does the organisation determine the reliability of communication information? 4. Has the organisation established, implemented and maintained procedures for receiving, documenting and responding to communications from external agencies? 5. Has the organisation decided whether to communicate externally about its significant environmental aspects? 6. Has the decision documented? 7. If the organisation has decided to communicate this information, has it established and implemented the method(s) for this communication? 8. How does the organisation communicate EMS-related information to all functions? 9. How do employees contribute to continual improvement? 10. How does the organisation document communication information?

Documents examined:

Auditor’s Comments

264  ◾  Integrating Business Management Processes

However, checklists have certain disadvantages: ◾ They may be too narrow in scope to identify specific problem areas and limit the scope of questions. ◾ They can be intimidating to auditees. ◾ They can be restrictive if used as the only auditing tool. ◾ Poorly prepared checklists can slow down the audit process. ◾ Generic checklists do not reflect specific organisational management system, may not add value and may even interfere with the audit.

13.12.3.4 Conduct Desk Audit The desk audit refers to the process of inspecting the document management system of the organisation in order to assess the degree of compliance to the clause of the specific standard. Any deficiencies should be addressed before commencing the audit. If defects are significant, the certifying body may request the organisation to address the deficiencies for a second review. However, if they are not significant enough, the Lead Auditor may decide to review the sections at the audit visit.

13.12.3.5 Conduct the Audit a. Entry meeting: This is a formal meeting between the audit team and the auditee. It sets the stage and tone for the evidence collecting phase of the audit. The audit team meets the representatives of the auditee, usually the management representatives (Quality Assurance Manager, EMS Manager, Food Safety Manager, General Manager and Lead Supervisors). The Lead Auditor is responsible for conducting the entry meeting at which the roles and responsibilities of both the audit team and auditee are clarified (Surak & Wilson, 2014; Russell, 2013). At the meeting, the Lead Auditor performs the following tasks: – Thanks the auditee – Introduces the audit team – Defines the purpose, scope of the audit and the standards against which it will be conducted – Presents the audit plan, audit schedule and any changes made to them – Defines the audit strategy, rating system and audit methods and techniques that will be used in the audit – Clarifies issues arising from the desk audit – Verifies whether the audit plan has been communicated to the relevant business units – Defines how non-compliances will be handled – Establishes the time of the exit meeting and the expected time of presenting the final report. The entry meeting should not be more than 10–15 minutes. The auditee also has these responsibilities: – Introduces the auditee’s management team – Communicates applicable documents such as corporate procedures including health and safety – Confirms the availability of amenities and an office space for the audit team

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– Identifies the individual’s reporting to the audit team during the audit and escorts – Verifies the audit team’s understanding of the health and safety requirements – Presents an overview of the facility and location for parking as well as the access to phone, restroom, etc. The escorts assigned for each audit team member should provide the necessary resources to conduct the audit and assist the team. If the team has not visited the facility before, a tour of the plant is well worth doing before commencing the audit. b. Gathering evidence: Audit evidence is information obtained by the auditor to draw conclusions to evaluate the management system. Collecting evidence is not unique to auditors. Lawyers, scientists, historians and archaeologists use evidence to draw conclusions. Not all evidence is equally reliable. The objective of the auditor is to design and perform the audit procedure to enable the auditor to collect sufficient, appropriate and reliable evidence (Moeller, 2009). Sufficient evidence relates to the quantity of evidence, and appropriateness of evidence relates to the quality of reliability and relevance of evidence. The amount of evidence required is influenced by the assessment of risk; the higher the risk, the greater the amount of evidence required to make decisions. Sufficient and appropriate evidence is influenced by: – Materiality of the item – Risk and how it is controlled – Internal controls – Sources of information/evidence available and sources and reliability of information provided – Previous audit experience – The results of audit tests conducted. The reliability of audit information is influenced by the source and type of information and where it is held. Examples of more reliable information are documentary evidence, external evidence, auditor-generated information and documents created by third parties and held by the auditor. However, oral evidence, internally generated entity records and internally generated evidence are less reliable (Pitt, 2014). c. Techniques of gathering evidence: There are several techniques for gathering evidence (Smieliauskas & Bewley, 2016), and the audit team may use a combination of methods as required. – Inspection: Physical examination or review of records, documents and tangible assets. Examples: Inspection of purchase orders, performing an inventory count and process control documents. – Observation: Observing a task being performed by an individual to ensure that the activity is being carried out in accordance with the documented procedure. Examples: Performing the bottling procedure or the production data entry procedure. – Inquiry: Seeking relevant information from knowledgeable individuals inside or outside the organisation, whether formally or informally, orally or in writing. Examples: Checking the confirmation of an order placed with a supplier. – Confirmation: The response from an independent third party to a request for verification of accuracy or information from the auditor. The features of confirmation are: (a) the information is requested by the auditor; (b) both the request and the response are in writing; (c) the response is from a third party and (d) the receipt of response.

266  ◾  Integrating Business Management Processes

– Recalculation/computation: Checking the numerical accuracy of source documents and accounting records or performing independent calculations: Example: Checking the inventory level of an item in stock. – Analytical procedure: Analysis of significant ratios, trends, fluctuations and relationships that are inconsistent with other relevant information or that deviates from expected results. Example: An unusual trend that has not been explained has to undergo further testing. – Non-compliances: These are generally agreed between the auditor and the auditee before the report is submitted. In case of a conflict, the auditor may refer the matter to the Lead Auditor.

13.12.3.6 Report Audit Findings At the conclusion of the audit, the audit team members review and agree on the attributes of findings and the manner of reporting these findings. The Lead Auditor presents the audit findings to the auditee at the exit meeting. The report is generally handwritten and includes any non-compliance. Later, a more detailed formal report is given to the auditee. The purpose of the audit report is to summarise the findings in a manner that the auditee management can understand and realise the impact of these findings. Often audit findings are used to: (a) initiate necessary corrective and preventive action by the auditee; (b) facilitate cost-effective financial decisions relating to improvement; (c) support the claim as an approved supplier and (d) gain certification of the management system to an international standard.

13.12.3.7 Content of an Audit Report The audit report should include both positive and negative findings and should not include surprises. The audit report should not offer suggestions for corrective action or solutions to problems. It is the responsibility of the auditee to resolve issues and implement corrective actions (Health Canada, 2011).





a. Preliminary information: i. Information about the client Information about the auditee includes the name and address of the auditee, the auditee’s identification number, the corporate identity of the auditee and the auditee’s description. ii. Scope of certification The scope includes activities and products being audited. iii. Identification of critical suppliers The report identifies the names and addresses of products or services of critical suppliers that provide products or services to the audited processes such as sterilisation services or software development. iv. Management Representative The name and information about the Management Representative of the audited organisation with whom communication takes place.

Audits  ◾  267





v. Status of any QMS certification The report should include the status of any relevant certification or registration of the management systems of the auditee. vi. Exclusions Activities which are not audited or not applicable to the relevant standard are listed here. b. Information about the audit: i. Audit type: Audit programme, e.g. certification, surveillance and recertification. ii. Audit criteria: Standard against which the audit was performed, e.g. ISO 9001, ISO 22000, ISO 14000 or any other standard. iii. Audit objectives: The objective of the audit includes, but is not limited to, the assessment of conformity of client’s management system to the relevant standard and the assessment of the capability of their system to meet the stated regulatory requirements. iv. Audit scope: List the activities and the processes that are included in the audit programme. v. Audit dates: States the dates during which the audit was conducted as agreed with the client. vi. Audit team: The audit team includes the names of all auditors who performed the audit. vii. Results of the desk audit: Record the results of the document review conducted prior to the audit visit and any follow-ups. viii. Audit findings: The audit findings shall include: • Both positive and negative findings to support the conclusions made in the report. For example, a positive comment: “The organisation is using a very effective statistical process control method to monitor production capabilities. Deviations in fill weight of product X have been identified in four instances during the period under review and effective corrective action had been taken”. • Assessments based on objective evidence and evaluations against appropriate audit criteria. • A complete and accurate record of the audit, observations and findings. • Observations which appear to be non-conforming, but sufficient evidence was not collected. Auditors should refrain from providing specific advice on improvements, suggestions or instructions for resolving issues and for the development and implementation of the management system. Findings and any non-conformance should be reported in terms of the appropriate clause of the standard. For example, Form 13.2 shows an example of an external audit report. The audit team has observed that the organisation has not established the authority in their procedure OP XX for the approval of purchase orders in the absence of the Purchasing Manager. This non-conformance can be considered as a violation of Clause 5.5.1 of the ISO 9000 standard. It can also be considered as a non-compliance in terms of Clause 4.1 where the organisation has failed adequately to document and implement the QMS. Internal audit reports are less formal, and an example of an internal audit report is shown in Form 13.1. When non-conformances are identified, the auditor generates a non-conformance report (NCR) (Form 13.3). ix. Audit summary: An audit summary is a brief description of audit activities and the findings, and an example is given in Form 13.2.

268  ◾  Integrating Business Management Processes

Form 13.1 Section of an internal audit report Procedure title:

Auditor:

Audit no:

Procedure no:

Auditee:

Date:

Procedure PRP XX was audited against ISO 22000, Section 7.2.3 (i) Pest control Item No:

Audited Item

Observation

Rating

0

Corrective actions from previous audit

No corrective actions

1

Records of pest control visits and treatment

Quarterly visits by the Pest Control Contractor have been recorded. Last visit…….. Treatments are also recorded

2

Pest control contract

Annual contract dated …….was sighted but not listed in the approved supplier list

NC

3

Map of bait stations

All bait stations in the plant were sighted. But there is no map of bait stations

NC

4

Pest sightings

Staff report pest sightings

C

5

Material Safety Data Sheets (MSDS)

Up-to-date MSDS are displayed where chemicals are stored. Sighted MSDS sheets…….

C

6

Action following pest activity

Rodent activity has been recorded in storage area 1 and immediate action has been taken by the contractor. Treatment date…..

C

7

Pest entry points

All pest entry points have been adequately sealed

C

C

Audit summary: Pest control procedure PRP XX was audited against the ISO 22000 Clause 7.2.3 (i) Pre-requisite Programme on pest control and the Food Safety Management System. Strengths: An effective Pest Management Programme is in place. There is no evidence of pests in the facility. Weaknesses: Since the last visit, the pest control agency has been taken over by a new organisation, and it has not been listed as an approved supplier. This should be corrected by updating the list of approved suppliers. Bait stations have not been recorded. O N 1. The map of bait stations was not available. 2. New pest control agency shall be listed in the approved supplier list. These non-compliances (minor) should be addressed within 1 week from today. No follow-up visit is necessary and corrective action will be reviewed at the next audit. 

Audits  ◾  269

Form 13.2 Section of an external audit report Name of the external agency: Address of the external agency: Contact details:

1. Information about the client

2. Scope of the certification 3. Client’s critical suppliers 4. Management Representative 5. Status of management systems certification 6. Exclusions

7. Information about the audit a. Audit type b. Audit criteria c. Audit objectives d. Audit scope e. Audit dates f. Audit team Lead Auditor Other auditors g. Results of desk audit h. Audit findings [Example below]

Item No.

Client’s QMS reference

Activity

Observation

Compliance Yes/No

270  ◾  Integrating Business Management Processes

Item No.

Client’s QMS reference

6

XP xxx

Activity

Purchasing

Observation

Organisation has an approved supplier list. It has been updated on dd/mm/yyyy. There are seven suppliers in the list out of which two are critical suppliers. Eighty purchasing orders (POs) have been issued during the last 3 months. POs 5.7.10, 12, 39, 41, 58, 65, 78 were scrutinised. All have been approved by the Purchasing Manager. All orders have been confirmed by the supplier. XP xxx makes no provision to delegate authority to approve purchase orders in the absence of the Purchasing Manager.

Compliance Yes/No

No; (NC 1)

Documents reviewed Purchase orders Approved supplier list Responsibility and authority



i. Non-conformances Audit date: Auditor: Representative

Non-conformance No: NCR 1

Non-conformance No delegation of authority has been established to approve purchase orders in the absence of the Purchasing Manager

Classification Minor

ISO 9001 Clause 5.3: Top management shall ensure that the responsibilities and authorities for relevant roles are assigned, communicated and understood within the organisation.

Audits  ◾  271



j. Audit summary [The audit team concludes that the organisation has established and maintained its quality management system in line with the requirements of the standard and demonstrated its ability to achieve agreed requirements for products and services within the scope and the organisation’s policy and objectives. Number of non-conformities identified: __0__ Major __1__ Minor; therefore based on the results of this audit results, the team finds that the Quality Management System of the organisation has reached a state of development and maturity, and therefore the management system certification be: Granted / Continued / Withheld / Suspended until satisfactory.] Necessary corrective action shall be taken to address the identified non-conformance and it shall be taken up for review at the next scheduled audit.

Signed: Lead Auditor

Management Representative

Date:

Form 13.3 Non-conformance report Date: Time: NCR No: Page 1 of 1 Classification:

Critical

Major

Minor

Observation

Auditor (for non-conformances identified during an audit): Management System Reference: Activity: Non-conformance details Quantity affected Work order/ PO Issued to:

Issued by:

Issue Date

Requirement (Why it is a non-conformance?) Does not comply with……..[State the relevant clause in the standard]

Non-conformance (What is the problem?)

Department/Location: Management: HOLD label

Segregated: Yes/ No Yes/No

272  ◾  Integrating Business Management Processes

Issued to:

Issued by:

Issue Date

CAR issued? If Yes CAR number:

Yes/No

QA Manager

Date

13.13 Audit Skills Auditors are trained and qualified professionals who conduct monitoring and audits in an organisation to evaluate the effectiveness of management systems and determine whether they comply with the appropriate international standard. Internal auditors are appointed by the management of the organisation, and external auditors are members of a third-party certifying body. Both internal and external auditors require specific skills and competence requirements. Auditor competence is achieved through a combination of education, experience and auditor training (Manco, 2011). Three types of skills are essential for an auditor (Chartered Institute of Public Finance and Accountancy: CIPFA, 2011): behaviour skills, technical skills and management skills.

13.13.1 Behaviour Skills Behaviour skills influence the interaction between the auditor and the auditee and are vital to perform well in their role. a. Negotiating skills: These skills enable to auditor to: (a) recognise situations where negotiation is appropriate and there is room for negotiation; (b) demonstrate empathy; (c) plan negotiations and (d) achieve the goals of the audit. b. Influencing skills: These skills are important for an auditor to develop good relations with both colleagues and clients and seek agreement on facts. Effective auditors are able to use appropriate and relevant questions to adopt different approaches to different people. They influence clients to raise concerns and lead them to common conclusions and proposals for change. Influencing skills also enable the auditors to identify the strengths and weaknesses of clients, and this motivates them to achieve the desired results, which in turn leads to more effective corrective and preventive actions. c. Communication and assertiveness: An auditor has to interact with people at all levels; therefore, they should be able to communicate effectively with clients and colleagues. Listening is a fundamental skill in understanding. Communication skills enable the auditor to: (a) develop effective oral and written communication patterns; (b) adapt appropriate language to suit the environment; (c) identify and address communication barriers; (d) present information accurately and effectively to clients and colleagues and (e) facilitate discussion. When an auditor encounters uncooperative situations, the auditor needs to be assertive and professional at all times.

Audits  ◾  273

d. Enthusiasm and initiative: An audit is a learning experience for both auditors and clients. Effective auditors are proactive in coming up with new ideas for improvements and making effective decisions. They seek assignments requiring new skills. e. Teamwork and people skills: Auditor works in a team environment with colleagues and clients. An effective auditor acknowledges the views, contributions and skills of colleagues and supports and encourages their full cooperation and participation in team meetings and debates. Towards the client, they demonstrate empathy and understanding. Generally, an audit is a stressful experience for the auditees, and therefore, an auditor has to develop skills to put people at ease. f. Professionalism: Professional skills enable the auditor to take decisions fairly, ethically, with due professional care, independently and using evidence-based approach. A professional auditor focuses on clients’ needs and is able to develop effective relationships.

13.13.2 Technical Skills









a. Audit methodology and scope A professional auditor is fluent with various types of audits and their purposes. They are able to apply audit principles, procedures and the type of methodology applicable to the work being undertaken. Awareness of financial and non-financial risks that are achievable and relevant within the audit scope is an important skill of a professional auditor. Organisational skills allow the comprehension of the auditee organisation and operating principles. The auditor is able to understand the laws and regulations applicable to the industry sector and the auditee organisation. They undertake adequate consultation with appropriate parties, review audit findings and complete documentation efficiently. b. Analytical review Analytical review skills enable the auditor to analyse and comprehend the data and recognise when analytical review techniques should be used. Both relevant and timely financial and non-financial information are obtained and analysed to identify trends or changes within the system. The results are interpreted accurately in order to arrive at logical conclusions. c. Testing skills These skills ensure that auditors are able to identify and objectively review key controls to ensure continuing relevance to the management system and identify compensatory controls. They can select a suitable testing strategy to meet the objectives of the audit and evaluate the results. An essential testing skill is the ability to recognise cases of fraud and unsafe food processing and determine appropriate action. A skilled auditor demonstrates conscientiousness in approach and in completion of the testing. d. Sampling skills During the audit, an auditor is presented with a large amount of documents (e.g. internal audit reports, corrective actions, minutes of management reviews). Therefore, the auditor needs to examine a specific number of documents according to a sampling plan. Sampling skills enable the auditor to understand the various sampling techniques and apply the most appropriate technique. e. Information technology (IT) skills IT has been applied to almost all business activities of an institution. An auditor should be competent in the use of day-to-day applications and be capable of using in-house software.

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13.13.3 Management skills

a. Planning skills In order to perform an effective and efficient audit, it has to be planned carefully. Depending on the industry sector and type of audit, it may take few hours to several weeks to complete. The auditor has to complete the audit within the agreed timescale, prioritise tasks and meet deadlines. b. Leadership skills An auditor should always demonstrate leadership skills in order to take an active part in the development of the team and add value to the audit. They are able to assess the situation and evaluate options to make informed decisions. Leadership skills enable the auditor to use initiative proactively in appropriate situations. An important skill is the ability to develop the team and delegate tasks. The audit is a stressful experience for both auditors and their clients. The role of the Lead Auditor is to put the team and the auditees at ease so that they actively participate in the audit and presents the relevant information voluntarily. An effective audit not only helps develop the team and adds value to the audit but also contributes towards the improvement of business activities of the organisation.

References Askey, J. M. and Dale, B. G. (1994). Internal quality management auditing: An examination. Managerial Auditing Journal, 9 (4), 3–10. Cianfrani, C. A. and West, J. E. (2013). Auditing Process-Based Quality Management Systems. Milwaukee, WI: ASQ Quality Press. CIPFA. (2011). The Excellent Auditor: A Good Practice Guide to Skills and Competencies. London: CIPFA. Collingham, D. (2010). Effective internal audit planning: ISO 9000 user group –ASQ Section 509. Retrieved January 16, 2018 from http://www.asq509.org/ht/a/GetDocumentAction/id/47405. De Silva, T. (2013). Essential Management Skills for Pharmacy and Business Managers. Boca Raton, FL: CRC Press. EBME. (2015). Procedure for management review meetings. Retrieved January 3, 2018 from http://www. ebme.co.uk/articles/ebme-quality-management/355-procedure-for-management-review-meetings. Health Canada. (2011). GD 211: Guidance on the Content of Quality Management System Audit Reports. Ottawa: Therapeutic Products Directorate. ISO. (2011). Guidelines for Auditing Management Systems. Geneva: ISO. Lydon, P. (2016). Audit acceptance and planning process. Certified Public Accountants, Ireland. Retrieved March 25, 2018 from http://www.cpaireland.ie/docs/default-source/Students/Exam-Related-Articles2016/2016-articlep1auditing.pdf?sfvrsn=2. Manco, N. (2011, January). Thoughts on auditor training and audit sampling. Paper Presented at the ASQ/ FDC North East Conference, Somerset, NJ. Moeller, R. R. (2009). Brink’s Modern Internal Auditing: A Common Body of Knowledge. Hoboken, NJ: John Wiley & Sons. Nosberger, T. (n.d.). Audit methodology: A short overview. Retrieved March 24, 2018 from http://www.unifr. ch/ses/pdf/cours/Audit_methodology_FS_10.pdf. Pinero, E. (n.d.). Introduction to EMS auditing concepts and ISO 14000. Retrieved January 3, 2018 from https:// www.fedcenter.gov/_kd/Items/actions.cfm?action=Show&item_id=660&destination=ShowItem. Pitt, S. A. (2014). Internal Audit Quality: Developing a Quality Assurance and Improvement Program. Hoboken, NJ: John Wiley & Sons.

Audits  ◾  275 QA Sigma. (n.d.). Role of the checklist for quality management system. Retrieved January 16, 2018 from http:// www.qasigma.com/2008/11/role-of-audit-checklist-for-quality.html. Russell, J. P. (2013). The ASQ Auditing Handbook (4th Ed). Milwaukee, WI: ASQ Quality Press. Smieliauskas, W. J. and Bewley, K. (2016). Auditing: An International Approach (7th Ed). Toronto: McGraw Hill. Surak, J. G. and Wilson, S. (2014). The Certified HACCP Auditor Handbook (3rd Ed). Milwaukee, WI: ASQ Quality Press.

Appendix: Abbreviations and Acronyms ASQ CEO CEM CRM EBME EPA FAO FDA FSMS HTML ISO IT KM LAN MSG NASA UNEP VAN VPN WHO

American Society for Quality Chief executive officer Customer experience management Customer relations management Electronic and biomedical engineering Environmental Protection Agency Food and Agriculture Organization Food and Drug Administration Food safety management system Hyper text markup language International Organization for Standardization Information technology Knowledge management Local area network Management study guide National Aeronautics and Space Administration United Nations Environment Programme Virtual area network Virtual private network World Health Organization

277

I A Accuracy, 234–237 ADDIE, see Analysis–design–develop–implement– evaluate (ADDIE) AI, see Artificial intelligence (AI) AIAG, see Automotive Industry Action Group (AIAG) Alavi and Leidner’s model, 179, 180 American Management Association (AMA), 112 Analysis–design–develop–implement–evaluate (ADDIE), 130 Analytical CRM, 156 Apprenticeship training, 134 Artificial intelligence (AI), 75, 81 Association for Talent Development (ASTD), 130 Asynchronous Transfer Mode (ATM), 15 Attribute Agreement Analysis (AAA), 239, 240 Attribute data, 239 Audio-visual methods, 136 Audit skills behavior, 272–273 management, 273 technical, 273 styles, 254 collaborative, 255 inspectorial, 255 “show and tell”, 255 strategy, 258 types desk, document review, 253 external, 254, 259–272 first party, 254 internal, 254 process, 253 product, 252–253 second party, 254 system, 253 third party, 254 Audits benefits of, 250 definitions, 249–250 features of, 252 misconceptions, 251

objectives, 250 principle, 251–252 Audits internal process assign auditor(s), 258 conduct the audit, 258 distribute the schedule, 258 perform the audit, 258 prepare schedule, 258 report findings, 258 Audits, external activities, 259–262, 264–266 four phase model, 259 report, 266–267 Automotive Industry Action Group (AIAG), 243

B Batch processing, see Information system, types Best fit/contingency model, see Human resource management (HRM), models BFRs, see Brominated flame retardants (BFRs) Bottom-up channels, 30 BPM, see Business process management (BPM) Brominated flame retardants (BFRs), 86, 87 Budget types capital, 200 cash, 201 master, 201 operating, 200 Budgeting activities, 200 bottom-up, 202 purpose of, 200 top-down, 202 zero-based, 202 Business documents business letters, 7 business reports, 7 emails/memorandums, 7 financial documents, 8 transactional documents, 7 Business process management (BPM), 15

279

280  ◾ Index C Capital budgeting, see Budget, types Career development, 97 Cash budgets/cash flow statement, see Budget, types Cash flow statement, 205 Cash ratio, 207 Cathode ray tubes (CRTs), 86 CCPS, see Centre for Chemical Process Safety (CCPS) CEM, see Customer experience management (CEM) Centre for Chemical Process Safety (CCPS), 216, 217, 219 CIPP, see Context, input, process, product (CIPP) Cloud computing, 79 CLV, see Customer lifetime value (CLV) Coaching, see Training methods Communication barriers cultural, 36 organisational, 35 overcoming hurdles in, 37 physical, 36 semantic, 36 socio-psychological, 35 benefits/best practice, 43 channels bottom-up, 30 external networking, 31 horizontal, 30 informal, 31 richness, 28 top-down, 30 competencies, see communication, skills definition, 22 disasters Air New Zealand flight TE 901, 21 effectiveness, 22 factors influencing authority structure, 23 formal channels, 23 information ownership, 23 job specialization, 23 “Google ebola” search, 21 manager’s role, 40 5 W’s of communications, 40 media, 28–30 process, 25–26, 31–33 decoding, 33 encoding, 25–26 message non-verbal, 27 verbal, 26 written, 27 receiver, 31–33 sender, 25 seven C’s of, 34

skills, 38–39 expressive, 39 listening, 39 managing the process, 39 Tower of Babel, 21 Communicating management issues external communication, 41–43 internal communication, 40–41 Communicators amiable style of, 25 analytical style of, 24 assertiveness/responsiveness, 24 competencies, 38, 39 driver style of, 24 expressive style of, 25 conversation improving, 38 Compensation, 98 Competencies, development of, 109, 110 Computing Technology Industry Association (CompTIA), 81 Context, input, process, product (CIPP), 144–145 Contingency planning, 61 Continual improvement, 223–225 Continuous data, 239 Corrective/preventive action, 219 misconceptions, 219–220 process damage control, 221 define the problem, 221 follow-up, 223 identify the problem, 211 implement solution, 222 plan, 222 CRTs, see Cathode ray tubes (CRTs) Cultural barriers, 36 Customer experience management (CEM), 157, 166 Customer lifetime value (CLV), 61, 153, 158, 165 Customer relations management (CRM), 79 basics, 151 benefits of, 156 elements of, 153–154 evolution of, 152–153 failure of, 163–164 future of, 166 implementation, 161–162 management action, 155 metrics, 159 misconception of, 164–166 optimizing gaining customers, 162 retaining customers, 162 people driven factors affecting, 159–160 privacy issues, 159 process

Index  ◾  281

analyse the data, 158 create a database, 158 develop a strategy, 157 select the customer, 158 target customers, 158 relationship programmes, 158 relationships, types of, 155 strategy elements, 153–154 types analytical, 156 collaborative, 156 operational, 250 understanding the customer listen for signals, 154 understand rules, 154

D Data acquisition, 70 definition, 70 inaccuracy, 246 information, 70–71 life cycle, 16–17 quality, 245–246 types of, 70 Delegation, 115–116 applicability, 116 barriers, 116 effectiveness, 115 Document control mistakes, 17 Document management benefits of, 6 best practices, 18 challenges of, 4–5 definition, 5 history early stages, 4 digital age of, 4 EDM (see Electronic document management (EDM)) technologies electronic data management (EDM), 8–10, 15–16 Documents features of, 6–7 lifecycle, 7 vs. records, 5 types of, 7–8 Dynamic random access memory (DRAM), 86

e Eco design, 63–65 Eco-labelling, 62, 87

E-commerce, 78 EDI, see Electronic data interchange (EDI) EDM, see Electronic document management (EDM) E-health, 78 E-judiciary, 78 E-learning, 78 Electronic data interchange (EDI), 75 Electronic document management (EDM), 8–9 components of, 9–10 statistics, 9 technology, 15–16 Electronic records management systems (ERMS), 14–15 E-legislature, 78 Emergency Preparedness and Response Programme (EPRP), 187 Empowerment, 116–119 EMSs, see Environmental management systems (EMSs) Enterprise Resource Planning (ERP), 156 Environmental management systems (EMSs), 41, 147, 175, 219, 253 Environment Protection Agency (EPA), 187 E-protect, 78–79 EPRP, see Emergency Preparedness and Response Programme (EPRP) ERP, see Enterprise Resource Planning (ERP) E-security, 78–79 ESS, see Executive support system (ESS) E-transport, 79 Exchange functions, 50 Executive support system (ESS), 75 Experts systems (ESs), see Information system, types Explicit knowledge, see Knowledge types Explicit-to-explicit knowledge, see Knowledge conversion Explicit-to-tacit knowledge, see Knowledge conversion External audits, see Audit, types External communication, see Communicating management issues External networking, see Communication, channels External records, see Record types

F FDA, see Food and Drug Administration (FDA) FDDI, see Fibre Distributed Data Interface (FDDI) Federal Deposit Insurance Corporation (FDIC), 23 Fibre Distributed Data Interface (FDDI), 15 Financial department dysfunction Enron, 191 structure, 198 Financial functions, 195 Financial institutions commercial banks, 197 insurance companies, 197 mutual funds, 197 Financial management

282  ◾ Index

Financial institutions (cont.) accounting/finance, 202–203 benefits of, 195 decisions dividend policy, 194 financial, 194 investment, 194 ethics, 208–209 evolution, 191 modern phase, 192 traditional phase, 192 transitional phase, 192 internal control mechanism, 207–208 objectives, 192–193 process, 199 decision making process, 199 financial analysis, 188, 205–206 financial control, 199 planning, 199 scope of, 193–194 Financial market, 197 Financial ratios, 206–207 Financial statements analysis liquidity, 206 leverage, 206 profitability, 206 balance sheet, 204–205 cash flow, 205 income/profit and loss, 205 limitations, 204 objectives, 203 Financial system model, 196–197 Fin field-effect transistors (FinFETs), 85 5C model, see HR function effectiveness Five “W’s of communication”, see Communication, manager’s role Food and Drug Administration (FDA), 17 Food safety management system (FSMS), 41 Food Safety Modernisation Act (FSMA), 88 Forming teams, stages of, see Teams forming FSMA, see Food Safety Modernisation Act (FSMA) FSMS, see Food safety management system (FSMS) Functional work teams, see Teams, types

G Gallup World Poll survey (GWP), 80 Gauge R&R (GRR) method, 239–240 Geographical information systems (GIS), 77 GFPC, see Global Food Products Company (GFPC) GIS, see Geographical information systems (GIS) Good Manufacturing Practices (GMP), 17 “Google ebola” search, 21

“Grapevine”, 31, 40 Graphic User Interface (GUI), 15 Guest’s model, see Human resource management (HRM), models GUI, see Graphic User Interface (GUI) GWP, see Gallup World Poll (GWP)

H HACCP, see Hazard Analysis and Critical Control Point (HACCP) Hard and soft HRM models, see Human resource management (HRM), models Harvard framework model, see Human resource management (HRM), models Hazard Analysis and Critical Control Point (HACCP) training, 147–148 Horizontal channels, see Communication, channels HR competencies business skills, 94 conceptual and design skills, 94 HR skills, 94 technical skills, 93–94 HR function effectiveness reasons for measuring, 105–106 the 5C model, 106 Human resource management (HRM) ethics/sustainability, 100–101 evolution of, 91–92 functions career development, 97 compensation, 98 discipline, 99–100 employee and labour relations, 100 employee protection, 98 managing legal issues, 99 manpower planning, 94 performance appraisal, 98 promotions and transfers, 100 recruitment, 95–97 training and development, 97 turnover, 95–97 safety and wellbeing, 98 succession planning, 95 gaining competitive advantage, 104–105 models best fit/contingency, 104 best practice, 104 Guest’s, 103 Hard and soft, 103 Harvard framework model, 103 objective of, 92–93 Human resources (HR) delivery of organisation excellence, 105 planning, 101–102

Index  ◾  283

I

J Job instruction method, see Training methods Job rotation, see Training methods

K Kirkpatrick four-level model, see Training programmes Knowledge acquisition of knowledge, 182 application/use, 183–184 creation, 181 definitions, 169–171 development, 182 distribution, 183 identification, 181 preservation, 185 storage/retrieval, 183 Knowledge conversion explicit to explicit, 173 explicity to tacit, 174 tacit to explicit, 173 tacit to tacit (socializing), 173 Knowledge management (KM) goals normative knowledge, 179 operational, 181 strategic, 180 historical aspects, 169 models, 179–180 role in management systems, 175–176 transfer, 184–185 Knowledge management system (KMS) effectiveness of KMS, 185 failure of, 186 requirements, 178–180 “The Knowledge Marketplace”, 184 Knowledge types explicit, 172–173 tacit, 172 Knowledge work system (KWS), see Information system, types

L LCA, see Life cycle assessment (LCA) LCD, see Liquid Crystal Display (LCD) Learning definition, 125 requirements, 125 Leverage, see Financial systems analysis Life cycle assessment (LCA), 62–63 Liquid Crystal Display (LCD), 86–87 Liquidity, see Financial systems analysis

284  ◾ Index

M Management information system (MIS), see Information systems, types Management reviews content of, 217 definitions, 214 effectiveness of, 218 evidence gathering, 216 frequency of, 216 importance, 213–214 input/output, 215–216 model agenda for, 217–218 objectives of, 214–215 participants at, 217 role of top management, 217 Management skills coordinating, 111 leading, 111 organising, 110–111 planning, 110 Marketing benefits of, 51 contingency planning, 61 customer value, 61 environmental issues, 61–62 food, 65–66 functions, 50 applications, 51 fundamentals of, 48–50 history of, 47–48 plans, 55–60 Marketing process build profitable relationships, 60–61 capture customer value, 61 establish strategy, 53–54 identify customer needs, 52 exchange and build customer relationships, 53 market offerings, 52 markets, 53 needs and demands, 52 value and customer satisfaction, 52 marketing mix (7P’s), 54–55 marketing plan, 55–60 understand the market, 52 Marketing strategy, 54 Measurement assessment of variation assessment of bias, 240–241 assessment of linearity, 241 repeatability and reproducibility, 241 resolution, 241–242 stability, 240 assurance of, 230–233 benefits of, 228–229 categories of, 227, 228

causes of variation, 242 characteristics of, 229 definition, 227–228 guidelines for, 243 pitfalls in, 243–244 quality improvement, 229 statistical analysis, 244–245 strategies for planning, 233–234 uncertainty precision and accuracy, 234 uncertainty and error, 234 taxonomy of errors, 235 Measurement scales properties, 229 types, 230 Measurement System Analysis (MSA) classification of, 236–239 implementation, 239 types, 239 attribute agreement analysis, 240 Gauge R&R method, 239 Mentoring, see Training on-the-job Mentoring–training–planning methods, 139 Message, see communication, process Millennium bug, 69 MIS, see Management information system (MIS) Moore’s law, 85 Multidisciplinary teams, see Teams, types

n National Council for Voluntary Organisation (NCVO), 195 NKGs, see Normative knowledge goals (NKGs) Non-conformance (NC), 218–219 corrective/preventive action, see Corrective/preventive action disposition of non-conforming product, 219 Non-conformance report (NCR), 271–272 Non-verbal communication, see Communication, process Normative knowledge goals (NKGs), 179–180

o Office automation system (OAS), 75 Off-the-job training methods, 135–137 OKGs, see Operational knowledge goals (OKGs) On-the-job training methods, see Training methods Operating budget, see Budget, types Operational CRM, see Customer relations management (CRM), types Operational knowledge goals (OKGs), see Knowledge management goals Organisational barriers, see Communication, barriers Osborn-Parnes problem-solving model, 119–120 “Owner’s equity”, 205

Index  ◾  285 P Patterson’s model of HRM, 104 PBDPEs, see Polybrominated diphenyl ethers (PBDPEs) People-driven CRM, see Customer relations management (CRM) Performance appraisal, 98 Personal development skills communication, 112 delegation, 115–116 empowerment, 116–119 motivation, 121–123 problem-solving, 119–121 teamwork, 112–115 Physical barriers, see Communication, barriers Plan–Do–Study–Act (PDSA), 234 Polybrominated diphenyl ethers (PBDPEs), 86, 87 The Practice of Management (Peter Drucker), 48 Problem-solving work team, see Teams, types Profitability, see Financial statements, analysis “Profit and loss statement”, see Financial statements Progressive discipline, see Human resource management (HRM), functions

Q Quality improvement, measurement, see Measurement Quality issues, communicating, 41 Quality management systems (QMSs), 175

R Receiver, see Communication, process Record types external, 12 internal, 12 reference, 12 transaction, 12 Record management challenges of, 10 definition, 5 vs. documents, 5 Recruitment process, see Human resource management (HRM), functions Robotics, 79

S Sarbanes-Oxley (SOX), 17, 209 Security First Network Bank (SFNB), 23 Self-managing work teams, see Teams, types Semantic barriers, see Communication, barriers Seven C’s of communication, see Communication SFNB, see Security First Network Bank (SFNB) “Shareholder’s equity”, 205

Short-term training, see Training programmes, implementing SKGs, see Strategic knowledge goals (SKGs) “Socialisation”, see Knowledge conversion Statistical analysis, 244–245 Strategic knowledge goals (SKGs), see Knowledge management goals Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis, 56–57, 110, 199 Succession planning, see Human resource management (HRM), functions SWOT analysis, see Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis System audit, see Audit, types

t Tacit knowledge, 24, 161, 172 Tacit-to-explicit knowledge, 173 Tacit-to-tacit knowledge, 173 Teams types, 113–114 functional, 113 multidisciplinary, 114 problem solving, 113 self-managing, 114 Teams forming stages adjourning, 114 forming, 114 norming, 114 performing, 114 storming, 114 Teamwork, 112–115 Top-down budgeting, see Budgeting Top-down channels, see Budgeting Total quality management (TQM), 176 Tower of Babel, 21 TPS, see Transaction processing system (TPS) TQM, see Total quality management (TQM) Training adult learning, 145 vs. development, 145–146 environmental issues, 147 food safety issues, 147–148 need, 127–128 process, 130–132 responsibility for, 130 role of, 128–130 success of, 148 Training methods off-the-job action training, 137 audio-visual, 136 behavior modelling, 136 case studies, 136

286  ◾ Index

Training methods (cont.) discussions, 136 lectures, 135 games, 137 role play, 133 simulation, 137 on-the-job apprenticeship, 134 coaching, 134 job instruction, 134 job rotation, 134 mentoring, 134 Training programmes designing, 132 development, 133–138 evaluating models context, process, input, product (CIPP), 144–145 input, process, output, outcome (IPO), 144–145 Kirkpatrick, 141–142 return on investment (ROI), 142–143 training validation system, 144–145 implementing conferences and seminars, 139 field trips, 139 long-term, 139 mentoring, 139 Short-term, 139 outcome Factors affecting, 126–127

Transaction processing system (TPS), see Information systems, types Transaction records, see Record types Turnover, see HR functions TVS, see Training Validation System (TVS)

U United Nations Environment Programme (UNEP), 62, 63

V Verbal communication, see Communication, process

W Web conferencing, 78 “Working capital budgeting”, 194 “Wrap around” machine, 172 Written communication, see Communication, process

Z Zero-based budgeting, see Budgeting