Harris-Fombrun model Corporate Reputation Quotient

Corporate Reputation Quotient of Harris-Fombrun

Emotional Appeal Workplace Environment

- good feeling about the company - is well managed

- admire and respect the company - looks like a good company to work for

- trust the company - looks like it has good employees

Products and Services Financial Performance

- stands behind products/services - record of profitability

- offers high quality products/services - looks like a low risk investment

- develops innovative products/services - strong prospects for future growth

- offers products/services that are good value - tends to outperform its competitors

Vision and Leadership Social Responsibility

- has excellent leadership - supports good causes

- has a clear vision for the future - environmentally responsible

- recognizes/takes advantage of market opportunities - treats people well

Making random checks, these criteria taken together result in lists of most reputable and/or visible
companies.

Ajzen Theory of Planned Icek Ajzen

Behavior (TPB)
Theory of Planned
 Behavior Ajzen
The Theory of
Planned Behavior
(TPB) of Icek Ajzen
(1988, 1991) helps to
understand how we
can change the
behavior of people.
The TPB is a theory
which predicts
deliberate behavior,
because behavior can
be deliberative and
planned.

TPB is the successor

of the similar Theory of Reasoned Action of Ajzen and Fishbein (1975, 1980). The succession was the
result of the discovery that behavior appeared not to be 100% voluntary and under control, which resulted in
the addition of perceived behavioral control. With this addition the theory was called the Theory of Planned
Behavior.

Briefly, according to TPB, human action is guided by three kinds of considerations:

1. Behavioral Beliefs (beliefs about the likely consequences of the behavior)

2. Normative Beliefs (beliefs about the normative expectations of others)
3. Control Beliefs (beliefs about the presence of factors that may facilitate or impede performance of the
behavior).

Ajzen's three considerations are crucial in circumstances / projects / programs when changing behavior of
people.

In their respective aggregates, behavioral beliefs produce a favorable or unfavorable attitude toward the
behavior, normative beliefs result in perceived social pressure or subjective norm, and control beliefs give rise
to perceived behavioral control. In combination, attitude toward the behavior, subjective norm, and
perception of behavioral control lead to the formation of a behavioral intention. As a general rule, the more
favorable the attitude and subjective norm and the greater the perceived control, the stronger should be the
person’s intention to perform the behavior in question.

Recently (2002) Ajzen investigated Residual Effects of Past on Later Behavior. He

came to the conclusion that this factor indeed exists but cannot be described to habituation
as many people think. A review of existing evidence suggests that the residual impact of
past behavior is attenuated when measures of intention and behavior are compatible and
vanishes when intentions are strong and well formed, expectations are realistic, and
specific plans for intention implementation have been developed.
A research project in the travel industry resulted in the conclusion that past travel choice
contributes to the prediction of later behavior only if circumstances remain relatively
stable.

Example: The Theory of Planned Behavior of Ajzen can help to explain why advertising campaigns
merely providing information do not work. Increasing knowledge alone does not help to change behavior
very much. Campaigns that aim at attitudes, perceived norms and control in making the change or buying
certain goods have better results.

Similarly in Value Based Management, programs that focus only on explanation of the importance of
Managing for Value (knowledge transfer) will likely not succeed. Rather one should convince people to
change their intention to change by giving a lot of attention to attitudes, subjective norms and perceived
behavior control.
What is Value Based Management? Definition.

Definition 1: Value Based Management is the management approach that ensures corporations are
run consistently on value (normally: maximizing shareholder value).

It is useful to understand that Value Based Management includes all three of the following:

1. Creating Value (ways to actually increase or generate maximum future value ≈ strategy).
2. Managing for Value (governance, change management, organizational culture, communication,
leadership), and
3. Measuring Value (valuation).

Definition 2: Value Based Management aims to provide consistency of:

• the corporate mission (business philosophy),

• the corporate strategy (courses of action to achieve corporate mission and purpose),
• corporate governance (who determines the corporate mission and regulates the activities of the
corporation),
• the corporate culture,
• corporate communication,
• organization of the corporation,
• decision processes and systems,
• performance management processes and systems, and
• reward processes and systems,

with the corporate purpose and values a corporation wants to achieve (normally: maximizing
shareholder value).

Note 1: Value Based Management is dependent on the corporate purpose and the corporate values.

Note 2: The corporate purpose can either be economic (Shareholder Value) or can also aim at other
constituents directly (Stakeholder Value).
“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be
counted”.

(Albert Einstein 1879 - 1955, American theoretical physicist)

“Everything that can be counted does not necessarily count; everything that counts cannot necessarily be
counted”.

(Albert Einstein 1879 - 1955, American theoretical physicist)

Organizations serve a purpose. They exist to deliver certain value(s). Organizations also use a tremendous
amount of time, effort, investments, assets and resources.

So it makes perfect sense to ensure, manage, measure, monitor, encourage and support that maximum value
is realized. This is what Value Based Management is all about.

Another way to explain why Value Based Management is important is to realize that your organization
is operating and competing in four markets:

1. the market for its products and services

2. the market for corporate management and control (competition on determining who is in charge of an
organization, threat of takeovers, restructuring and/or leveraged buyouts)

3. the capital markets (competition for investors' favor and savings)

4. the employee and managers market (competition for company imago and ability to attract top talent)

Value Based Management can help organizations to win in each of these 4 markets. Failure to be
competitive on one or more of these markets will seriously jeopardize the survival chances of a corporation.

In recent years, accounting metrics have turned out to be very unreliable. This also supports the
emergence of new value-based metrics such as Economic Value Added, CFROI, Market Value Added
and other valuation mechanisms.

The following comprehensive list of benefits of Value Based Management clearly demonstrates why
Value Based Management is by far the most powerful mechanism existing today to manage corporations:

• VBM can maximize value creation consistently,

• VBM increases corporate transparency,
• VBM helps organizations deal with globalized and deregulated capital markets,
• VBM aligns the interests of (top) managers with the interests of share- and stakeholders,
• VBM facilitates communication with investors, analysts and communication with stakeholders,
• VBM improves internal communication on strategy,
• VBM prevents undervaluation of the stock,
• VBM sets clear management priorities,
• VBM facilitates to improve decision making,
• VBM helps to balance short-term, mid-term and long-term trade-offs,
 • VBM encourages value-creating investments,
• VBM improves the allocation of resources,
• VBM streamlines planning and budgeting,
• VBM sets effective targets for compensation,
• VBM facilitates the use of stock for mergers or acquisitions,
• VBM prevents takeovers,

• VBM helps to better deal with increased complexity and greater uncertainty and risk.
The strategic triangle of 3C's framework of Kenichi
Kenichi Ohmae
3C's Ohmae
The 3C's model (three C's framework) of Kenichi Ohmae, a famous Japanese strategy guru, stresses
that a strategist should focus on three key factors for success. "In the construction of any business strategy,
three main players must be taken into account:

• the corporation itself,

• the customer, and
• the competition".

Only by integrating the three C's (Customer, Competitor, and Company) in a strategic triangle, sustained
competitive advantage can exist. He refers to these key factors as the three C's or the strategic triangle.

3C's model: Customer-based strategies are the basis of all strategy. ..."There is no doubt that a
corporation's foremost concern ought to be the interest of its customers rather than that of its stockholders
and other parties. In the long run, the corporation that is genuinely interested in its customers is the one that
will be interesting to investors".

Segmenting by objectives:
Here, the differentiation is done in terms of the different ways different customers use the product. Take
coffee, for example. Some people drink it to wakeup or keep alert, while others view coffee as a way to relax
or socialize (coffee breaks).

Segmenting by customer coverage:

This type of strategic segmentation normally emerges from a trade-off study of marketing costs versus
market coverage. There appears always to be a point of diminishing returns in the cost-versus-coverage
relationship. The corporation's task, therefore, is to optimize its range of market coverage, be it geographical
or channel, so that its cost of marketing will be advantageous relative to the competition.

Resegmenting the market:

In a fiercely competitive market, the corporation and its head-on competitors are likely to be dissecting the
market in similar ways. Over an extended period of time, therefore the effectiveness of a given initial
strategic segmentation will tend to decline. In such a situation it often pays to pick a small group of key
customers and reexamine what it is that they are really looking for.

Changes in customer mix:

Such a market segment change occurs where the forces at work are altering the distribution of the user-mix
over time by influencing demography, distribution channels, customer size, etc. This kind of change calls for
shifting the allocation of corporate resources and/or changing the absolute level of resources committed in
the business, failing which severe losses in the market share can occur.

3C's framework: Corporate-based strategies. They aim to maximize the corporation's strengths relative
to the competition in the functional areas that are critical to success in the industry.

Selectivity and sequencing:

In order to win the corporation does not need to have a clear lead in every function from sourcing to
functioning. If it can gain a decisive edge in one key function, it will eventually be able to pull ahead of the
competition in other functions that may now be no better than mediocre.

A case of make or buy:

In case of rapidly rising wage costs, it becomes a critical decision for a company to subcontract a major share
of its assembly operations. Its competitors may not be able to shift production so rapidly to subcontractors
and vendors, and the resulting difference in cost structure and/or in the company's ability to cope with
demand fluctuations could have significant strategic implications.

Improving cost-effectiveness:
This can be done in three basic methods. The first is by reducing basic costs much more effectively than the
competition. The second method is simply to exercise greater selectivity in terms of orders accepted, product
offered, or functions to be performed which means cherry-picking the high-impact operations so that as
others are eliminated, functional costs will drop faster than sales revenues. The third method is to share a
certain key function among the corporation's other businesses or even with other companies. Experience
indicates that there are many situations in which sharing resources in one or more basic sub-functions of
marketing can be advantageous.

3 C's model: Competitor-based strategies according to Kenichi Ohmae can be constructed by looking at
possible sources of differentiation in functions ranging from purchasing, design, and engineering to sales and
servicing.

The power of an image:

Both Sony and Honda outsell their competitors as they invested more heavily in public relations and
promotion and managed these functions more carefully than did their competitors. When product
performance and mode of distribution are very difficult to differentiate, image may be the only source of
positive differentiation. But as the case of the Swiss watch industry reminds us, a strategy built on image can
be risky and must be monitored constantly.

Capitalizing on profit- and cost-structure differences:

Firstly, the difference in source of profit might be exploited, for e.g. profit from new product sales, profit
from services etc. Secondly, a difference in the ratio of fixed cost to variable cost might also be exploited
strategically for e.g. a company with a lower fixed cost ratio can lower prices in a sluggish market and win
market share. This hurts the company with a higher fixed cost ratio as the market price is too low to justify its
high-fixed-cost-low-volume operation.

Tactics for flyweights:

If such a company chooses to compete in mass-media advertising or massive R&D efforts, the additional
fixed costs will absorb such a large portion of its revenue that its giant competitors will inevitably win. It
could though calculate its incentives on a graduated percentage basis rather than on absolute volume, thus
making the incentives variable by guaranteeing the dealer a larger percentage of each extra unit sold. The
Big Three, of course, cannot afford to offer such high percentages across the board to their respective
franchised stores; their profitability would soon be eroded if they did.

Hito-Kane-Mono
A favorite phrase of Japanese business planners is hito-kane-mono, or people, money, and things (fixed
assets). They believe that streamlined corporate management is achieved when these three critical resources
are in balance without any superfluity or waste. For example cash over and beyond what competent people
can intelligently expend is wasted. Again too many managers without enough money will exhaust their
energies and involve their colleagues in time-wasting paper warfare over the allocation of the limited funds.
Of the three critical resources, funds should be allocated last. Based on the available mono-plant, machinery,
technology, process know-how, functional strengths and so on-the corporation should first allocate
management talent. Once these hito have developed creative, imaginative ideas to capture the business's
upward potential, the kane, or money, should be allocated to the specific ideas and programs generated by
individual managers.

7-Ps Extended Marketing Mix

Bernard H. Booms and Mary J.
Bitner
Booms, Bitner 7-Ps

The 7-Ps or Extended Marketing Mix of Booms and Bitner is a Marketing Strategy tool that expands
the number of controllable variables from the four in the original Marketing Mix Model to seven. The
traditional Marketing Mix model was primarily directed and useful for tangible products. The 7-Ps model is
more useful for services industries and arguably also for knowledge-intensive environments.

Booms and Bitner's expanded the marketing mix by adding the following 3 additional P's:
5. People: All people directly or indirectly involved in the consumption of a service are an important part of
the extended marketing mix. Knowledge Workers, Employees, Management and other Consumers often
add significant value to the total product or service offering.
6. Process: Procedure, mechanisms and flow of activities by which services are consumed (customer
management processes) are an essential element of the marketing strategy.
7. Physical Evidence: The ability and environment in which the service is delivered, both tangible goods
that help to communicate and perform the service and intangible experience of existing customers and the
ability of the business to relay that customer satisfaction to potential customers.

The first two additional Ps are explicit (People, Process) and the third one (Physical Evidence) is an implicit
factor.

Booms and Bitner also suggest that Place in a service-oriented company includes the accessibility of the
service, and that Promotion in a service-oriented company includes the input of front-line service
personnel.
 7-S
frame
work
of
McKi
nsey

Description
of the 7-S
framework
of
McKinsey
The 7-S framework of
McKinsey is a Value Based
Management (VBM) model
that describes how one can
holistically and effectively
organize a company. Together these factors determine the way in which a corporation operates.

Shared Value

The interconnecting center of McKinsey's model is: Shared Values. What does the organization stands for
and what it believes in. Central beliefs and attitudes.
Strategy

Plans for the allocation of a firms scarce resources, over time, to reach identified goals. Environment,
competition, customers.
Structure

The way the organization's units relate to each other: centralized, functional divisions (top-down);
decentralized (the trend in larger organizations); matrix, network, holding, etc.

System

The procedures, processes and routines that characterize how important work is to be done: financial
systems; hiring, promotion and performance appraisal systems; information systems.
Staff

Numbers and types of personnel within the organization.

Style

Cultural style of the organization and how key managers behave in achieving the organization’s goals.
Management Styles.
Skill

Distinctive capabilities of personnel or of the organization as a whole. Core Competences.

Brainstorming explained Brainstorm model
The Brainstorming (Brainstorm) method is a semi-structured creative group activity, used most often in
ad-hoc business meetings to come up with new ideas for innovation or improvement. Members of the
group are encouraged to put forward ideas about a problem and how it may be solved, in order to generate
as many ideas as possible, even if they are not always usable alternatives. The idea behind it is that a group of
people can achieve a higher (synergy) level of creativity than the sum of the participants separately.

Three major rules for a successful brainstorm session are:

1. participants should be encouraged to come up with a much ideas as possible, however wild they are (there
are no bad ideas),

2. no judgment should be passed on any idea until the end of the session (whether negative or positive), and

3. participants should be encouraged to build on each others ideas, creating unlikely combinations and taking
each one in unexpected directions.
Some additional tips for a successful brainstorm session are:

- use an experienced (external?) facilitator

- identify a precise topic to be discussed

- no more than 8-10 people in one session, if there are more participants split up the brainstorm and report
back to each other afterwards

- make somebody write everything down

- evaluate the ideas in 2 steps: A. define the criteria B. score the results on the criteria

- at the end of the brainstorming session, discuss the steps needed to implement the ideas. If this is
complicated, do another brainstorming session on how to implement the ideas.

Although brainstorms are used frequently worldwide for over 70 years, the effectiveness of them for
generating new ideas is debatable. Brainstorms are most effective to generate a lot of ideas in a short
timeframe. Group processes are also effective for evaluating existing ideas. However (bright) individuals are
said to be better at creating original and higher-quality ideas.
Internal benchmarking, competitive benchmarking, functional benchmarking and
generic benchmarking
Benchmarking is a systematic comparison of organizational processes and performance to create new
standards or to improve processes. Benchmarking models are used to determining how well a business
unit, division, organization or corporation is performing compared with other similar organizations. A
Benchmark is often used for improving communication, professionalizing the organization / processes or
for budgetary reasons. Traditionally, performance measures have been compared with previous measures
from the same organization at different times. Although this can be a good indication of the rate of
improvement within the organization, it could be that although the organization is improving, the
competition is improving faster.

There are four types of benchmarking methods:

1. internal (benchmark within a corporation, for example between business units)

2. competitive (benchmark performance or processes with competitors)

3. functional (benchmark similar processes within an industry)

4. generic (comparing operations between unrelated industries)

Typically, benchmarking models involves the following steps:

- scope definition

- choose benchmark partner(s)

- determine measurement methods, units, indicators and data collection method

- data collection

- analysis of the discrepancies

- present the results and discuss implications / improvement areas and goals

- make improvement plans or new procedures

- monitor progress and plan ongoing benchmark.

Benchmarking is a tough process that needs a lot of commitment to succeed. More than once
benchmarking projects end with the 'they are different from us' syndrome or competitive sensitivity prevents
the free flow of information that is necessary. However comparing performances and processes with 'best
in class' is important and should ideally be done on a continuous basis (the competition is improving its
processes also...).

Historically, benchmarking is based on Kaizen and competitive advantage thinking.

Break-even Point analysis Break-even Method

The Break-even point is, in general, the point at which gains equal losses. The point where sales or
revenues equal expenses. Or also the point where total costs equal total revenues. There is no profit
made or loss incurred at the break-even point. This is important for anyone that manages a business since the
break-even point is the lower limit of profit when setting prices and determining margins.

Breaking even today does not return the losses occurred in the past, or build up a reserve for future losses, or
provide a return on your investment (the reward for exposure to risk).

The Break-even method can be applied to a product, an investment, or the entire company's operations
and is also used in the options world. In options, the break-even point is the market price that a stock must
reach for option buyers to avoid a loss if they exercise. For a call, it is the strike price plus the premium paid.
For a put, it is the strike price minus the premium paid.

The Break-even point analysis must not be mistaken for the payback period, the time it takes to recover
an investment.

In Value Based Management terms, a break-even point should be defined as the operating profit margin
level at which the business / investment is earning exactly the minimum acceptable rate of return, that is, its
total cost of capital.
Core competencies Core competences model
(Hamel Prahalad)
corporate strategy inside-out strategy
The core competencies model of Hamel and Prahalad is an inside-out corporate strategy model that
starts the strategy process by thinking about the core strengths of an organization.

Where the outside-in approach (such as Porter's five forces model) places the market, the competition, and
the customer at the starting point of the strategy process, the core competence model does the opposite by
stating that in the long run, competitiveness derives from an ability to build, at lower cost and more speedily
than competitors, the CC that spawn unanticipated products. The real sources of advantage are to be found
in management's ability to consolidate corporate-wide technologies and production skills into competencies
that empower individual businesses to adapt quickly to changing circumstances. As CC can be seen any
combination of specific, inherent, integrated and applied knowledge, skills and attitudes.

In their article "The CC of the Corporation" (1990) Prahalad and Gary Hamel dismiss the portfolio
perspective as a viable approach to corporate strategy. In their view, the primacy of the Strategic Business
Unit is now clearly an anachronism. Hamel and Prahalad carry on to argue that a corporation should be
build around a core of shared competences.

Business units should use and help to further develop the CC(s). The corporate center should not be just
another layer of accounting, but must add value by enunciating the strategic architecture that guides the
competence acquisition process.
Three tests to identifying a CC are:
1. provides potential access to a wide variety of markets,
2. should make a significant contribution to the perceived customer benefits of the end product(s), and
3. a CC should be difficult for competitors to imitate.

Core competencies are built through a process of continuous improvement and enhancement (compare:
Kaizen). They should constitute the focus for corporate strategy. At this level, the goal is to build world
leadership in the design and development of a particular class of product functionality. Top management can
not be just another layer of accounting consolidation, but must add value by enunciating the strategic
architecture that guides the competence acquisition process.

Once top management (with the help of divisional and Strategic Business Unit managers) has identified an
overarching CC, it must ask businesses to identify the projects and the people closely connected with them.
Corporate auditors should direct an audit of the location, number, and quality of the people who embody the
CC. CC carriers should be brought together frequently to trade notes and ideas.
McKinsey matrix /
GE matrix Portfolio analysis - Strategic Business Units

portfolio analysis GE model framework McKinsey

model
The GE matrix / McKinsey matrix is a model to
analysis on the Strategic Business Units of a corp

A business portfolio is the collection of Strategic Bu

corporation. The optimal business portfolio is one th
strengths and helps to exploit the most attractive ind
Business Unit (SBU) can either be an entire mid-siz
corporation, that formulates its own business level s
from the parent company.

The aim of a portfolio analysis is:

1) Analyze its current business portfolio and de

more or less investment, and
2) Develop growth strategies for adding new p
portfolio

3) Decide which businesses or products should

The BCG Matrix (Boston Consulting Group Matrix) is the best-known portfolio planning framework. The GE / McKinsey Matrix
form of the BCG Matrix.

The McKinsey matrix / General Electric Matrix

The GE / McKinsey Matrix is more sophisticated than the BCG Matrix in three aspects:

1. Market (Industry) attractiveness replaces market growth as the dimension of industry attractiveness. Market Attractiveness inc
other than just the market growth rate that can determine the attractiveness of an industry / market. Compare also: Porter's Five Com

2. Competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed. Comp
a broader range of factors other than just the market share that can determine the competitive strength of a Strategic Business Unit.

3. Finally the GE / McKinsey Matrix works with a 3*3 grid, while the BCG Matrix has only 2*2. This also allows for more sop

Typical (external) factors that affect Market Attractiveness: Typical (internal) factors that affect Competitive S
 Unit:

- Strength of assets and competencies

- Market size
- Relative brand strength (marketing)
- Market growth rate
- Market share
- Market profitability
- Pricing trends
- Market share growth
- Competitive intensity / rivalry
- Customer loyalty
- Overall risk of returns in the industry
- Relative cost position (cost structure compared w
- Entry barriers
- Relative profit margins (compared to competitor
- Opportunity to differentiate products and services
- Distribution strength and production capacity
- Record of technological or other innovation
- Demand variability
- Segmentation
- Quality
- Distribution structure
- Access to financial and other investment resourc
- Technology development
- Management strength

Often, Strategic Business Units are portrayed as a circle plotted in the GE McKinsey Matrix, whereby:

- The size of the circles represent the Market Size

- The size of the pies represent the Market Share of the SBU's

- Arrows represent the direction and the movement of the SBU's in the future

A six-step approach to implementation of portfolio analysis (using the GE / McKinsey Matrix) could look like this:

1. Specify drivers of each dimension. The corporation must carefully determine those factors that are important to its overall strategy
2. Weight drivers. The corporation must assign relative importance weights to the drivers
3. Score SBU's each driver
4. Multiply weights times scores for each SBU
5. View resulting graph and interpret it
6. Perform a review/sensitivity analysis using adjusted other weights (there may be no consensus) and scores.

Some important limitations of the GE matrix / McKinsey Matrix are:

- Valuation of the realization of the various factors

- Aggregation of the indicators is difficult

- Core competencies are not represented

- Interactions between Strategic Business Units are not considered

Content, Process and
3 Dimensions of Strategic
Context
Change: Pettigrew, A.M. Pettigrew and R. Whipp
Whipp
3 Change Dimensions
In their book 'Managing Change for Competitive Success' (1991) Pettigrew and Whipp distinguish
between three dimensions of strategic change:

1. Content (objectives, purpose and goals) - WHAT

2. Process (implementation) - HOW

3. Context (the internal and external environment) - WHERE

Pettigrew and Whipp emphasize the continuous interplay between these change dimensions. The
implementation of change is an "iterative, cumulative and reformulation-in-use process." Successful change
is a result of the interaction between the content or what of change (objectives, purpose and goals); the
process or how of change (implementation); and the organizational context or where of change (the internal
and external environment).

Based on substantial empirical research, they also present five central interrelated factors belonging to
successfully managing strategic change:

1. Environmental assessment (continuous monitoring of both the internal and external environment
[competition] of the organization through open learning systems)
2. Human resources as assets and liabilities (employees should know they are seen as valuable and feel
trusted by the organization)
3. Linking strategic and operational change (Intentions are implemented and transformed through time,
bundling of operational activities is powerful and can lead to new strategic changes)
4. Leading change (Move the organization forwards; creating the right climate for change, coordinating
activities, steering. Setting the agenda not only for the direction of the change, but also for the right vision and
values)
5. Overall coherence (a change strategy should be consistent (clear goals), consonant (with its
environment), provide a competitive edge and be feasible.
Hierarchy of Needs framework

Abraham Maslow biography

Abraham Maslow was born April 1, 1908 in Brooklyn, New York. He was the first of
seven children born to his parents, who themselves were uneducated Jewish immigrants from
Russia. His parents, hoping for the best for their children in the new world, pushed him hard
for academic success. Not surprisingly, he became very lonely as a boy, and found his refuge
 in books.

To satisfy his parents, he first studied law at the

City College of New York (CCNY). He married
Bertha Goodman, his first cousin, against his
parents wishes. Abe and Bertha went on to have
two daughters.

Abraham Maslow and Bertha moved to

Wisconsin so that he could attend the University of
Wisconsin. Here, he became interested in
psychology, and his school work began to improve
dramatically. He spent time there working with
Harry Harlow, who is famous for his experiments
with baby rhesus monkeys and attachment
behavior.

Abraham Maslow received his BA in 1930, his

MA in 1931, and his PhD in 1934, all in
psychology, all from the University of Wisconsin.
A year after graduation, he returned to New York to work with E. L. Thorndike at Columbia, where
Maslow became interested in research on human sexuality.

He began teaching full time at Brooklyn College. During this period of his life, he came into contact with the
many European intellectuals that were immigrating to the US, and Brooklyn in particular, at that time --
people like Adler, Fromm, Horney, as well as several Gestalt and Freudian psychologists.

In 1951, Abraham Maslow served as the chair of the psychology department at Brandeis for 10 years,
where he met Kurt Goldstein (who introduced him to the idea of self-actualization) and began his own
theoretical work. It was also here that he began his crusade for a humanistic psychology -- something
ultimately much more important to him than his own theorizing. He spend his final years in semi-retirement
in California, until, on June 8 1970, he died of a heart attack after years of ill health.

The Hierarchy of Needs model of Abraham Maslow

Each human being is motivated by needs. Our most basic needs are inborn, having evolved over tens of
thousands of years. Abraham Maslow's Hierarchy of Needs helps to explain how these needs motivate
us all.

Hierarchy of Needs - Physiological needs

These are the very basic needs such as air, water, food, sleep, sex, etc. When these are not satisfied we may
feel sickness, irritation, pain, discomfort, etc. These feelings motivate us to alleviate them as soon as possible
to establish homeostasis. Once they are alleviated, we may think about other things.

Hierarchy of Needs - Safety needs

These have to do with establishing stability and consistency in a chaotic world. These needs are mostly
psychological in nature. We need the security of a home and family. However, if a family is dysfunction,
i.e., an abusive husband, the wife cannot move to the next level because she is constantly concerned for her
safety. Love and belongingness have to wait until she is no longer cringing in fear. Many in our society cry
out for law and order because they do not feel safe enough to go for a walk in their neighborhood.

Hierarchy of Needs - Love and belongingness needs

These are next on the ladder. Humans have a desire to belong to groups: clubs, work groups, religious
groups, family, gangs, etc. We need to feel loved (non-sexual) by others, to be accepted by others.
Performers appreciate applause. We need to be needed.

Hierarchy of Needs - Self-Esteem needs

There are two types of esteem needs. First is self-esteem which results from competence or mastery of a
task. Second, there's the attention and recognition that comes from others. This is similar to the
belongingness level, however, wanting admiration has to do with the need for power.

Hierarchy of Needs - The need for self-actualization

This is "the desire to become more and more what one is, to become everything that one is capable of
becoming." People who have everything can maximize their potential. They can seek knowledge, peace,
esthetic experiences, self-fulfillment, oneness with God, etc.

Maslow's Hierarchy of Needs model was developed between 1943-1954, and first widely published in
Motivation and Personality in 1954. At this time the Hierarchy of Needs model comprised five needs.
Maslow's most popular book is Toward a Psychology of Being (1968), in which more layers were added.
The original 5 layer-version still remains for most people the definitive Hierarchy of Needs.

Impact/Value framework
Hammer and Mangurian
Value of Information
Impact/Value framework
Technology
 In their 1987 article
"The changing value
of communications
technology" Michael
Hammer and
Glenn Mangurian
presented the
Impact/Value
framework that can
be used to think about
the value of
Information
Technology.

As for Time, in particular time compression is important

As for Distance, in particular overcoming geographical limitations are significant
As for Relationships, sometimes organizational relationships can be redefined.

Efficiency is Doing the “thing” right, for example increased productivity.

Effectiveness is Doing the “right” thing, for example better management.

Innovation is Doing “new” things, for example improved products and services.

Alternatively, the benefits of Information Technology can be categorized as:

A. Strategic Benefits

A1. Competitive Advantage

A2. Alignment

A3. Customer Relations

B. Informational Benefits

B1. Information access

B2. Information quality

B3. Information flexibility

C. Transactional Benefits
C1. Communications Efficiency
 C2. Systems Development Efficiency
C3. Business Efficiency

Analyzing Industry
Product Life Cycle
Maturity Stages Fox, Wasson, Hofer, Anderson
& Zeithaml, Hill & Jones
(Industry Life Cycle)
Product Life Cycle
The Product Life
Cycle model can help
analyzing Product
and Industry
Maturity Stages.

Any Business is
constantly seeking
ways to grow
future cash flows
by maximizing
revenue from the
sale of products
and services. Cash
Flow allows a
company to maintain viability, invest in new product development and improve its
workforce; all in an effort to acquire additional market share and become a leader in its
respective industry.

A consistent and sustainable cash flow (revenue) stream from product sales is key to any
long-term investment, and the best way to attain a stable revenue stream is a Cash Cow
product, leading products that command a large market share in mature markets.

Also, product life cycles are becoming shorter and shorter and many products in mature
industries are revitalized by product differentiation and market segmentation.
Organizations increasingly reassess product life cycle costs and revenues as the time
available to sell a product and recover the investment in it shrinks.

Even as product life cycles shrink, the operating life of many products is lengthening. For
example, the operating life of some durable goods, such as automobiles and appliances,
has increased substantially. This leads the companies that produce these products to take
their market life and service life into account when planning. Increasingly, companies are
attempting to optimize life cycle revenue and profits through the consideration of product
warranties, spare parts, and the ability to upgrade existing products.

It's clear the concept of life cycle stages has a significant impact upon business strategy
and performance. The Product Life Cycle method identifies the distinct stages affecting
sales of a product, from the product's inception until its retirement.

In the Introduction stage, the product is introduced to the market through a focused and intense marketing
effort designed to establish a clear identity and promote maximum awareness. Many trial or impulse
purchases will occur at this stage. Next, consumer interest will bring about the Growth stage, distinguished
by increasing sales and the emergence of competitors. The Growth stage is also characterized by sustaining
marketing activities on the vendor's side, with customers engaged in repeat purchase behavior patterns.
Arrival of the product's Maturity stage is evident when competitors begin to leave the market, sales
velocity is dramatically reduced, and sales volume reaches a steady state. At this point in time, mostly loyal
customers purchase the product. Continuous decline in sales signals entry into the Decline stage. The
lingering effects of competition, unfavorable economic conditions, new fashion trends, etc, often explain the
decline in sales.

Several variations of the industry life cycle model have been developed to address the
development of the product, market, and/ or industry. Although the models are similar,
they differ as to the number and names of the stages. Here are some major ones:

Modeling Business Simulation

What is business modeling?

The Business modeling method is a technique to model business processes. Business models provide ways
of expressing business processes or strategies in terms of business activities and collaborative behavior so we
can better understand the business process and the participants in the process. Models are helpful for
documenting, comprehending and communicating complexity. By documenting business processes from
various perspectives, business models help managers understand their environment.

Business Simulation has grown from operations research in the 1950s. With the arrival of increasingly
cheap and powerful computers, and increasingly user-friendly software, business modeling techniques now
allow also non-technical managers to try out various options or scenario's to assist in the decision-making
process.

Another factor that has contributed to the increasing usage of the business modeling method, is the
increasing pace of change in business. There is not enough time to try-out new products in reality, and
correcting mistakes, once they have occurred, is often extremely costly.

Common uses of business modeling and simulation:

- Financial Planning, quantifying the impact of business decisions on balance sheet and P&L.

- Risk Management, determining, measuring and managing the balance between profitability and certain
types of risks.

- Forecasting, analyzing historical data and using that to predict future scenario's and trends.

- Business Process Modeling, mapping processes, tasks and process steps in a visual representation to the
resources required.
Kaizen philosophy
Kaizen method
continuous incremental
improvements
The Kaizen method of continuous incremental improvements is an originally Japanese management
concept for incremental (gradual, continuous) change (improvement). K. is actually a way of life philosophy,
assuming that every aspect of our life deserves to be constantly improved. The Kaizen philosophy lies
behind many Japanese management concepts such as Total Quality Control, Quality Control circles, small
group activities, labor relations. Key elements of Kaizen are quality, effort, involvement of all employees,
willingness to change, and communication.

Japanese companies distinguish between innovation (radical) and Kaizen (continuous). K. means literally:
change (kai) to become good (zen).

The foundation of the Kaizen method consists of 5 founding elements:

1. teamwork,

2. personal discipline,

3. improved morale,

4. quality circles, and

5. suggestions for improvement.

Out of this foundation three key factors in K. arise:

- elimination of waste (muda) and inefficiency

- the Kaizen five-S framework for good housekeeping

1. Seiri - tidiness

2. Seiton - orderliness

3. Seiso - cleanliness

4. Seiketsu - standardized clean-up

5. Shitsuke - discipline- standardization.

When to apply the Kaizen philosophy? Although it is difficult to give generic advice it is clear that it fits
well in incremental change situations that require long-term change and in collective cultures. More
individual cultures that are more focused on short-term success are often more conducive to concepts such
as Business Process Reengineering.
When Kaizen is compared to BPR is it clear the K. philosophy is more people-oriented, more easy to
implement, requires long-term discipline. BPR on the other hand is harder, technology-oriented, enables
radical change but requires major change management skills.

Chris Argyris and Donald

Chris Argyris and Donald Schön
Organization Learning Schön
(OL)
Fiol, Lyles, Dodgson, Huber
Organizational Learning

Chris Argyris and Donald Schön (1978) defined organizational learning as: "the detection and
correction of error". Fiol and Lyles later define learning as "the process of improving actions through better
knowledge and understanding" (1985). Dodgson describes organizational learning as "the way firms build,
supplement, and organize knowledge and routines around their activities and within their cultures and adapt
and develop organizational efficiency by improving the use of the broad skills of their workforces" (1993).
Huber states that learning occurs in an organization "if through its processing of information, the range of its
[organization's] potential behaviors is changed" (1991).

A "learning organization" is a firm that purposefully constructs structures and strategies so as to enhance
and maximize OL (Dodgson, 1993). The concept of a learning organization has become popular since
organizations want to be more adaptable to change. Learning is a dynamic concept and it emphasizes the
continually changing nature of organizations. The focus is gradually shifting from individual learning to
organizational learning. Just as learning is essential for the growth of individuals, it is equally important for
organizations. Since individuals form the bulk of the organization, they must establish the necessary forms
and processes to enable organizational learning in order to facilitate change.

OL is more than the sum of the parts of individual learning (Dodgson, 1993; Fiol & Lyles, 1985). An
organization does not lose out on its learning abilities when members leave the organization. Organizational
learning contributes to organizational memory. Thus, learning systems not only influence immediate
members but also future members due to the accumulation of histories, experiences, norms, and stories.
Creating a learning organization is only half the solution to a challenging problem (Prahalad & Hamel,
1994). Equally important is the creation of an unlearning organization which essentially means that the
organization must forget some of its past. Thus, learning occurs amidst such conflicting factors (Dodgson,
1993).

Strategic Planning Process

Management by
Peter Drucker
Objectives method
Management by Objectives
Management by Objectives (MBO) relies on the defining of objectives for each employee and then
comparing and directing their performance against the objectives which have been set. It aims to increase
organizational performance by aligning goals and subordinate objectives throughout the organization.
Ideally, employees get strong input to identifying their objectives, time lines for completion, etc. MBO
includes ongoing tracking and feedback in the process to reach objectives.

Management by Objectives was first outlined by Peter Drucker in 1954 in his book 'The practice of
Management'. According to Drucker managers should avoid 'the activity trap', getting so involved in their
day to day activities that they forget their main purpose or objective. One of the concepts of MBO was that
instead of just a few top-managers, all managers of a firm should participate in the strategic planning process,
in order to improve the implementability of the plan. Another concept of MBO was that managers should
implement a range of performance systems, designed to help the organization stay on the right track.
Clearly, Management by Objectives can thus be seen as a predecessor of Value Based Management!

MBO principles are:

• Cascading of organizational goals and objectives,

• Specific objectives for each member,
• Participative decision making,
• Explicit time period, and
• Performance evaluation and feedback.

Management by Objectives also introduced the SMART method for checking the validity of the
Objectives, which should be 'SMART':

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

In the 90s, Peter Drucker put the significance of this organization management method into perspective,
when he said: "It's just another tool. It is not the great cure for management inefficiency... MBO works if you
know the objectives, 90% of the time you don't."

M&A: Acquisition
Mergers and Acquisitions (M&A) Philippe Haspeslagh
Integration
Approaches
Acquisition Integration Approaches model David Jemison
framework
The Acquisition Integration Approaches model of Philippe Haspeslagh and David Jemison provides
insight and guidance in Mergers and Acquisitions (M&A) on choosing the optimal integration approach.

In mergers and acquisitions, the motto was traditionally often "Make them like us", or relatively simple
criteria where used to choose an approach (such as the size and and quality of the acquired firm).
 Haspeslagh and
Jemison (1990) have
stated that the
approach a company
should take towards
integration should be
understood by
considering two
(additional) criteria:

1. The need for

strategic
interdependence

2. The need for organizational autonomy

Strategic Interdependence

Obviously, the goal and central task in any acquisition is to create the value that is enabled when the two
organizations are combined. There are four types of value creation:

I. Resource sharing (value is created by combining the companies at the operating level)

II. Functional skills transfer (value is created by moving people or sharing information, knowledge and
know-how)

III. General management skill transfer (value is created through improved insight, coordination or control)

IV. Combination benefits (value is created by leveraging cash resources, borrowing capacity, added
purchasing power or greater market power)

Organizational Autonomy

Haspeslagh and Jemison warn that managers must not lose sight of the fact that the strategic task of an
acquisition is to create value (I-IV), and must not grant autonomy too quickly, although obviously people are
important and should be treated fairly and with dignity. The need for organizational autonomy can be
answered using three questions:

A. Is autonomy essential to preserve the strategic capability we bought?

B. If so, how much autonomy should be allowed?

C. In which areas specifically is autonomy important?

The Preferred M&A model

Depending on the score on these two factors (see graph), the preferred acquisition integration approaches
are:

- Absorption (management needs courage to ensure that its vision for the acquisition is carried out)

- Preservation (management focus is to keep the source of the acquired benefits intact, "nurturing")

- Symbiosis (management must ensure simultaneous boundary preservation and boundary permeability,
gradual process)

- Holding (non intention of integrating and value is created only by financial transfers, risk-sharing or
general management capability)
Existence, Relatedness,
ERG Theory
Growth
Clayton P. Alderfer
Alderfer
ERG Theory
The ERG Theory of
Clayton P. Alderfer
is a model that
appeared in 1969 in a
Psychological Review
article entitled "An
Empirical Test of a
New Theory of
Human Need". In a
reaction to Maslow's
famous Hierarchy of
Needs, Alderfer
distinguishes three
categories of human
needs that influence
worker’s behavior;
existence, relatedness
and growth.

These ERG Theory categories are:

- Existence Needs: physiological and safety needs (such as hunger, thirst and sex)(Maslow's first two levels)

- Relatedness Needs: social and external esteem (involvement with family, friends, co-workers and
employers)(Maslow's third and fourth levels)

- Growth Needs: internal esteem and self actualization (desires to be creative, productive and to complete
meaningful tasks)(Maslow's fourth and fifth levels)

Contrarily to Maslow's idea that access to the higher levels of his pyramid required satisfaction in the lower
level needs, according to Alderfer the three ERG areas are not stepped in any way.

ERG Theory recognizes that the order of importance of the three Categories may vary for each
individual. Managers must recognize that an employee has multiple needs to satisfy simultaneously.
According to the ERG theory, focusing exclusively on one need at a time will not effectively motivate.

In addition, the ERG theory acknowledges that if a higher level need remains unfulfilled, the person may
regress to lower level needs that appear easier to satisfy. This is known as the frustration-regression
principle. This frustration-regression principle impacts workplace motivation. For example, if growth
opportunities are not provided to employees, they may regress to relatedness needs, and socialize more with
co-workers.

If management can recognize these conditions early, steps can be taken to satisfy the frustrated needs until
the subordinate is able to pursue growth again.

Baldrige Award
Baldrige Award criteria
Framework

The categories performance criteria model of the Baldrige Award can be

used to assess management systems and identify major improvement
areas.

The Baldrige Award was established by the US Congress in 1987 and named after former Secretary of
Commerce, Malcolm Baldrige. It aims to promote quality awareness and is based on a weighted score
of seven categories of performance criteria:

1 Leadership (120 pts.) 5 Human Resource Focus (85 pts.)

1.1 Organizational Leadership (70 pts.) 5.1 Work Systems (35 pts.)

1.2 Social Responsibility (50 pts.) 5.2 Employee Learning and Motivation (25 pts.)

2 Strategic Planning (85 pts.) 5.3 Employee Well-Being and Satisfaction (25 pts.)

2.1 Strategy Development (40 pts.) 6 Process Management (85 pts.)

2.2 Strategy Deployment (45 pts.) 6.1 Value Creation Processes (50 pts.)

3 Customer and Market Focus (85 pts.) 6.2 Support Processes (35 pts.)
 3.1 Customer and Market Knowledge (40 pts.) 7 Business Results (450 pts.)

3.2 Customer Relationships and Satisfaction (45 7.1 Customer-Focused Results (75 pts.)
pts.)
7.2 Product and Service Results (75 pts.)
4 Measurement, Analysis, Knowledge
Management (90 pts.) 7.3 Financial and Market Results (75 pts.)

4.1 Measurement and Analysis of Organizational 7.4 Human Resource Results (75 pts.)
Performance (45 pts.)
7.5 Organizational Effectiveness Results (75 pts.)
4.2 Information and Knowledge Management (45
pts.) 7.6 Governance and Social Responsibility Results
(75 pts.)

The maximum attainable score is 1000. The Seven categories of Performance model of the Baldrige
Award can be used to assess management systems and identify major improvement areas. The model fits
well in organizations taking a continuous improvement philosophy.

The Baldrige Criteria for Performance Excellence are about winning business success
with a high-performing, high integrity, ethical organization. The Criteria help
organizations respond to current challenges and address all the complexities of delivering
today’s results while preparing effectively for the future. The 2005 Criteria have been
updated to deal with the specific pressures on senior leaders; the needs for organizational,
not just technological, innovation; and the challenges of long-term viability and
sustainability as a high-performing business. The Criteria deal more directly with the
topic of execution: being agile and still executing with speed.
Identifying Strengths, Weaknesses,
SWOT Analysis
Opportunities and Threats - SWOT
A SWOT analysis is an instrumental framework in Value Based Management and Strategy Formulation to identify the Strengths,
Opportunities and Threats for a particular company.

Strengths and Weaknesses are internal value creating (or destroying) factors such as assets, skills or resources a company has at its d
its competitors. They can be measured using internal assessments or external benchmarking.

Opportunities and Threats are external value creating (or destroying) factors a company cannot control, but emerge from either the c
dynamics of the industry/market or from demographic, economic, political, technical, social, legal or cultural factors.

Typical examples of factors in a SWOT Analysis diagram:

Strengths

Weaknesses
- specialist marketing expertise

- exclusive access to natural resources - lack of marketing expertise

- undifferentiated products and service (i.e. in relation to
- patents - location of your business
- new, innovative product or service
- location of your business - competitors have superior access to distribution channe
- poor quality goods or services
- cost advantage through proprietary know-how - damaged reputation
- quality processes and procedures
- strong brand or reputation

Opportunities

Threats
- developing market (China, the Internet)
- mergers, joint ventures or strategic alliances
- moving into new attractive market segments - a new competitor in your home market
- a new international market - price war
- competitor has a new, innovative substitute product or s
- loosening of regulations - new regulations

- removal of international trade barriers - increased trade barriers

- a market led by a weak competitor - taxation may be introduced on your product or service

Any organization must try to create a fit with its external environment. The SWOT diagram is a very good tool for analyzing the (int
weaknesses of a corporation and the (external) opportunities and threats. However, this analysis is just the first step. Actually creating
a more hazardous job, because in reality the two sides of the SWOT analysis often point in opposite directions, leaving strategists wi
creating alignment either from the outside-in (market-driven strategy) or from the inside-out (resource driven strategy).

New Rules for the Internet Age

Twelve Principles of the
Kevin Kelly (Wired,
Network Economy -
Twelve Principles of the Network 1997)
Kevin Kelly
Economy
In a groundbreaking article in Wired (5th September, 1997) Kevin Kelly described the Twelve Principles
of the Network Economy. According to Kelly, the emerging new economy represents a tectonic upheaval
in our commonwealth, a social shift that reorders our lives more than mere hardware or software ever can. It
has its own distinct opportunities and its own new rules. Those who play by the new rules will prosper; those
who ignore them will not.

Kelly argues the new rules governing the global restructuring revolve around 4 axes:

- First, wealth in this new regime flows directly from innovation, not optimization; that is, wealth is not
gained by perfecting the known, but by imperfectly seizing the unknown.

- Second, the ideal environment for cultivating the unknown is to nurture the supreme agility and
nimbleness of networks.

- Third, the domestication of the unknown inevitably means abandoning the highly successful known -
undoing the perfected.

- And last, in the thickening web of the Network Economy, the cycle of "find, nurture, destroy" happens
faster and more intensely than ever before.

The following 12 principles of the Network (New) Economy were supposed to provide New
Rules for the Internet Age:

1. The Law of Connection - Embrace the dumb power: Of the collapsing microcosm of chips and the exploding telecosm
of connections
2. The Law of Plentitude - More gives more: Mathematicians have proven that the sum of a network increases as the
square of the number of members. In other words, as the number of nodes in a network increases arithmetically, the
value of the network increases exponentially.
3. The Law of Exponential Value - Success is nonlinear: During its first 10 years, Microsoft's profits were negligible. Its
profits rose above the background noise only around 1985. But once they began to rise, they exploded.
4. The Law of Tipping Points - Significance precedes momentum: In epidemiology, the point at which a disease has
infected enough hosts that the infection moves from local illness to raging epidemic can be thought of as the tipping point.
The contagion's momentum has tipped from pushing uphill against all odds to rolling downhill with all odds behind it. In
biology, the tipping points of fatal diseases are fairly high, but in technology, they seem to trigger at much lower
percentages of victims or members.
5. The Law of Increasing Returns - Make virtuous circles: Value explodes with membership, and the value explosion
sucks in more members, compounding the result. An old saying puts it more succinctly: Them that's got shall get.
6. The Law of Inverse Pricing - Anticipate the cheap: Through most of the industrial age, consumers experienced slight
improvements in quality for slight increases in price. But the arrival of the microprocessor flipped the price equation. In the
information age, consumers quickly came to count on drastically superior quality for less price over time. The price and
quality curves diverge so dramatically that it sometimes seems as if the better something is, the cheaper it will cost.
7. The Law of Generosity - Follow the free: Now, giving away the store for free is an applauded, level-headed strategy
that banks on the network's new rules. Because compounding network knowledge inverts prices, the marginal cost of an
additional copy (intangible or tangible) is near zero. Because value appreciates in proportion to abundance, a flood of
copies increases the value of all the copies. Because the more value the copies accrue, the more desirable they become,
the spread of the product becomes self-fulfilling. Once the product's worth and indispensability is established, the company
sells auxiliary services or upgrades, enabling it to continue its generosity and maintaining this marvelous circle.
8. The Law of the Allegiance - Feed the web first: The distinguishing characteristic of networks is that they have no clear
center and no clear outer boundaries. The vital distinction between the self (us) and the nonself (them) - once exemplified
by the allegiance of the industrial-era organization man - becomes less meaningful in a Network Economy. The only
"inside" now is whether you are on the network or off.
9. The Law of Devolution - Let go at the top: The biological nature of this era means that the sudden disintegration of
established domains will be as certain as the sudden appearance of the new. In the Network Economy, the ability to
relinquish a product or occupation or industry at its peak will be priceless.
 10. The Law of Displacement - The net wins: The question "How big will online commerce be?" will have diminishing
relevance, because all commerce is jumping onto the Internet.
11. The Law of Churn - Seek sustainable disequilibrium: The Network Economy moves from change to churn. Change,
even in its toxic form, is rapid difference. Churn, on the other hand, is more like the Hindu god Shiva, a creative force of
destruction and genesis. Churn topples the incumbent and creates a platform ideal for more innovation and birth. It is
"compounded rebirth." And this genesis hovers on the edge of chaos.

12. The Law of Inefficiencies - Don't solve problems: In the Network Economy, productivity is not our bottleneck. Our
ability to solve our social and economic problems will be limited primarily by our lack of imagination in seizing opportunities,
rather than trying to optimize solutions. In the words of Peter Drucker, as echoed recently by George Gilder, "Don't solve
problems, seek opportunities."
Studying and Managing
System Dynamics - Systems
Complex Feedback - Jay R. Forrester (1961)
Thinking
Systems Thinking
Systems Thinking is an approach for studying and managing complex feedback systems, such as one
finds in business and other social systems. In fact it has been used to address practically every sort of
feedback system.

SD is more or less the same as Systems Thinking, but emphasizes the usage of computer-simulation tools.

The term System means an interdependent group of items forming a unified pattern. Feedback refers to
the situation of X affecting Y and Y in turn affecting X perhaps through a chain of causes and effects. One
cannot study the link between X and Y and, independently, the link between Y and X and predict how the
system will behave. Only the study of the whole system as a feedback system will lead to correct results.

The Steps in the SD methodology are roughly as follows:

1. Identify a problem,
2. Develop a dynamic hypothesis explaining the cause of the problem,
3. Build a computer simulation model of the system at the root of the problem,
4. Test the model to be certain that it reproduces the behavior seen in the real world,
5. Devise and test in the model alternative policies that alleviate the problem, and
6. Implement the solution.

Often these steps have to be reviewed and refined going back to an earlier step. For instance, the first
problem identified may be only a symptom of a still greater problem.

SD is based on Systems Thinking, but takes the additional steps of constructing and testing a computer
simulation model.
The SD field developed initially from the book Industrial Dynamics of Jay W. Forrester.

Typical applications of SD can be found in:

• strategy and corporate planning

• business process development
• public management and policy
• biological and medical modeling
• energy and the environment
• theory development in the natural and social sciences
 • dynamic decision making

• complex nonlinear dynamics

IAS - International International Accounting

Accounting Standards Standards

The IAS (International Accounting Standards) is a set of standards stating how particular types of
transactions and other events should be reflected in financial statements.

The IAS are issued by the IASB, the Board of the International Accounting Standards Committee (IASC).

Although IASC has no formal authority to require compliance with its accounting standards, many
countries and the EC require the financial statements of publicly-traded companies to be prepared in
accordance with IAS.

Many countries already endorse International Accounting Standards (IAS) as their own either without
amendment or else with minor additions or deletions. Furthermore, important developments are taking place
in the European Union, where the European Commission is progressing proposals that will require all listed
companies in the European Union to prepare their consolidated financial statements using International
Accounting Standards. Already, both inside and outside the EU, many leading companies have stated that
they prepare their financial reports in accordance with International Accounting Standards.

Other countries do not permit companies to use IAS (International Accounting Standards) without a
reconciliation to domestic generally accepted accounting principles. Most notable among these countries are
Canada, Hong Kong, Japan, and the United States.
Corporate Strategy model
Scenario Planning
Scenario planning
Scenario planning is a model for learning about the future in which a corporate strategy is formed by
drawing a small number of scenarios, stories how the future may unfold, and how this may affect an issue
that confronts the corporation.

Royal Dutch Shell, one of the first and leading adopters, defines scenarios as follows: Scenarios are
carefully crafted stories about the future embodying a wide variety of ideas and integrating them in a way
that is communicable and useful. Scenarios help us link the uncertainties we hold about the future to the
decisions we must make today.

The scenario planning method works by understanding the nature and impact of the most uncertain and
important driving forces affecting the future. It is a group process which encourages knowledge exchange
and development of mutual deeper understanding of central issues important to the future of your business.
The goal is to craft a number of diverging stories by extrapolating uncertain and heavily influencing driving
forces. The stories together with the work getting there has the dual purpose of increasing the knowledge of
the business environment and widen both the receiver's and participant's perception of possible future events.
The method is most widely used as a strategic management tool, but it is also used for enabling group
discussion about a common future.

Typically, the scenario planning process is as follows:

• identify people who will contribute a wide range of perspectives

• comprehensive interviews/workshop about how participants see big shifts coming in society, economics, politics,
technology, etc.
• cluster or group these views into connected patterns
• group draws a list of priorities (the best ideas)
• sketch out rough pictures of the future based on these priorities (stories, rough scenarios)
• further work out to detailed impact scenarios (determine in what way each scenario will affect the corporation)
• identify early warning signals (things that are indicative for a particular scenario to unfold)
• monitor, evaluate and review scenarios

Some traps to avoid in Scenario Planning:

1) treating scenarios as forecasts

2) constructing scenarios based on too simplistic a difference, such as optimistic and pessimistic
3) failing to make scenario global enough in scope
4) failing to focus scenarios in areas of potential impact on the business
5) treating scenarios as an informational or instructional tool rather than for participative learning / strategy
formation
6) not having an adequate process for engaging executive teams in the scenario planning process
7) failing to put enough imaginative stimulus into the scenario design

8) not using an experienced facilitator

Cash Ratio model - method for measuring liquidity

The Cash Ratio
(CAR) method is a
formula for
measuring the
liquidity of a
company by
calculating the ratio
between all cash and
cash equivalent assets
and all current
liabilities.

It excludes both
inventory and
accounts receivable in
comparison to the
Current Ratio.

The CAR model

measures only the
most liquid of all
assets against current
liabilities, and is
therefore seen as the
most conservative of
the three liquidity
ratios.

For the Cash Ratio

formula, see the
picture on the left.

This CAR ratio is also

known as the
Liquidity Ratio and
Cash Asset Ratio.

The formula is an
indicator of the extent
to which a company
can pay current
liabilities without
relying on the sale of
inventory and without
 relying on the receipt
of accounts
receivables.

A thing to remember
when using the Cash
Ratio formula is that it
ignores timing of both
cash received and
cash paid out.

Net Present Value method NPV

The Net Present Value (NPV) of an investment (project) is the difference between the sum of the
discounted cash flows which are expected from the investment and the amount which is initially invested. It
is a traditional valuation method (often for a project) used in the Discounted Cash Flow measurement
methodology, whereby the following steps are undertaken:

1. calculation of expected free cash flows (often per per year) that result out of the investment

2. subtract /discount for the cost of capital (an interest rate to adjust for time and risk)

The intermediate result is called: Present Value.

3. subtract the initial investments

The end result is called: NPV.

So NPV is an amount that expresses how much value an investment will result in. This is done by
measuring all cash flows over time back towards the current point in present time.

If the NPV method results in a positive amount, the project should be undertaken.
Some simple advice on
Crisis Management method
Crisis Management
Obviously, any corporation hopes not to face "situations causing a significant business disruption which
stimulates extensive media coverage" (crisis). The public scrutiny that is a result from this media coverage
often affects the normal operations of the company and can have a (negative) financial, political, legal and
governmental impact. Substantial value destruction is to be feared of, especially when the crisis is not
handled well in the perception of the media / public opinion. Crisis management deals with giving the right
crisis response (precautionary, structural and ad-hoc).

Some generic help and tips on crisis management:

1. Prepare contingency plans in advance (crisis management team and members can be formed at very short notice,
rehearsing of crises of various kinds)
 2. Immediately and clearly announce internally that the the only persons to speak about the crisis to the outside world are
the crisis team members)
3. Move quickly (the first hours after the crisis first breaks are extremely important, because the media often build upon the
information in the first hours)
4. Use crisis management consultants (advice by objectivity of PR consultants is important, bring in specialist corporate
image expertise)
5. Give accurate and correct information (trying to manipulate information will seriously backfire if it is discovered, also
internally!)
6. When deciding upon actions, consider not only the short-term losses, but focus also on the long term effects.

Executives at all levels of the organization are employed to manage crises and often do so on a daily basis.
Their skills are really tested when they have to manage significant crises that have the potential to disrupt the
organization's value creation process, income sources, operating expenses, stock price, competitive position
and ongoing business.
The most effective crisis management occurs when potential crises are detected and dealt with quickly--
before they can impact the organization's business. In those instances they never come to the attention of the
organization's key stakeholders or the general public via the news media.

In instances where the crisis already has erupted, or it is inevitable the crisis will impact the organization's key
stakeholders, a business continuity plan is helpful to minimize the disruption and damage. Developing such
a plan can seem like a daunting task, but in actuality it is a common-sense document. It involves identifying
those functions and processes that are critical to the business, then designing the operational and
communications contingency plans to deal with the potential failure of one or more of them and how key
stakeholders will react when they find out.
Corporations with business continuity plans for responding to likely disruptions will be in a better position to
minimize the business impact and financial damage. However, their executives find the process of
developing these plans has an indirect benefit. Their organizations are more sensitive to possible crisis
situations that could disrupt the business and affect its operating expenses, profits and overall growth. As a
result their managers respond more rapidly and effectively to head them off.
Geert Hofstede
Cultural Dimensions Theory Geert Hofstede
National Differences
According to Geert Hofstede, there is no such thing as a universal management method or management
theory across the globe. Even the word 'management' has different origins and meanings in countries
throughout the world. Management is not a phenomenon that can be isolated from other processes taking
place in society. It interacts with what happens in the family, at school, in politics, and government. It is
obviously also related to religion and to beliefs about science.

The cultural dimensions model of Geert Hofstede is a framework that describes five sorts (dimensions)
of differences / value perspectives between national cultures:

• power distance (the degree of inequality among people which the population of a country
considers as normal)
• individualism versus collectivism (the extent to which people feel they are supposed to take care
for or to be cared for by themselves, their families or organizations they belong to)
• masculinity versus femininity (the extent to which a culture is conducive to dominance,
assertiveness and acquisition of things versus a culture which is more conducive to people, feelings
and the quality of life)
• uncertainty avoidance (the degree to which people in a country prefer structured over
 unstructured situations)
• long-term versus short-term orientation (long-term: values oriented towards the future, like
saving and persistence - short-term: values oriented towards the past and present, like respect for
tradition and fulfilling social obligations)

To understand management in a country, one should have both knowledge and empathy with the entire
local scene. However, the scores of the unique statistical survey that Hofstede carried out should make
everybody aware that people in other countries may think, feel, and act very differently from yourself, even
when confronted with basic problems of society. Any person dealing with Value Based Management or
Corporate Strategy is well advised to bear the lessons from Hofstede's Cultural Dimensions Theory
constantly in mind (human beings have a tendency to think and feel and act from their own experiences),
especially when working internationally.
Harrison M. Trice
Changing Organizational
Tips for changing organizations
Cultures - Trice Beyer
Janice M. Beyer
"Because it entails introducing something new and substantially different from what prevails in existing
cultures, cultural innovation is bound to be more difficult than cultural maintenance. When innovation
occurs, some things replace or displace others... People often resist such changes. They have good reasons
to. The successful management of the processes of culture change or culture creation often entails
convincing people that likely gains outweigh the losses".

In their excellent book "The Cultures of Work Organizations" (1993)( ), Harrison Trice and
Janice Beyer provide eight considerations to keep in mind when changing organization cultures:

1. Capitalize on Propitious Moments (for example poor financial performance, making sure people actually perceive the
need for change)
2. Combine Caution with Optimism (create an optimistic outlook on what the change effort will bring)
3. Understand Resistance to Culture Change (both at the individual level [fear of the unknown, self-interest, selective
attention and retention, habit, dependence, need for security] and at the organizational or group level [threats to
power and influence, lack of trust, different perceptions and goals, social disruption, resource limitations, fixed investments,
interorganizational agreements]
4. Change Many Elements, But Maintain Some Continuity (for example identify the principles that will remain
constant)
5. Recognize the Importance of Implementation (initial acceptance and enthusiasm are insufficient to carry change
forward; a) adoption --> b) implementation --> c) institutionalization)
6. Select, Modify, and Create Appropriate Cultural Forms (employing symbols, rituals, languages, stories, myths,
metaphors, rites, ceremonies)
7. Modify Socialization Tactics (because the primary way that people learn the corporate culture is through the
socialization process at the beginning of their employment, if these socialization processes are changed, an organization's
culture will begin to change)

8. Find and Cultivate Innovative Leadership (members are unlikely to give up whatever security they derive from
existing cultures and follow a leader in new directions unless that leader exudes self-confidence, has strong convictions, a
dominant personality, and can preach the new vision with drama and eloquence)
Defining organizational
Three Levels of Culture
culture
Edgard Schein, 1992
Edgard Schein
Three Levels of Culture
 Cultures surrounds us
all. Cultures are deep
seated, pervasive and
complex.

Yet, according to
Edgard Schein,
"Organizational
learning,
development, and
planned change
cannot be understood
without considering
culture as the primary
source of resistance to
change."

And "The bottom line for leaders is that if they do not become conscious of the cultures in which they are
embedded, those cultures will manage them. Cultural understanding is desirable for all of us, but it is
essential to
leaders if they are to lead".

With the Three Levels of Culture, Edgard Schein offered an important contribution to defining what
organizational culture actually is.

Schein divides organizational culture into three levels:

1. Artifacts: these "artifacts" are at the surface, those aspects (such as dress) which can be easily discerned, yet are hard to
understand;
2. Espoused Values: beneath artifacts are "espoused values" which are conscious strategies, goals and philosophies
3. Basic Assumptions and Values: the core, or essence, of culture is represented by the basic underlying assumptions
and values, which are difficult to discern because they exist at a largely unconscious level. Yet they provide the key to
understanding why things happen the way they do. These basic assumptions form around deeper dimensions of human
existence such as the nature of humans, human relationships and activity, reality and truth.

In his classic book: Organizational Culture and Leadership" (1992) Schein defines the culture of a
group as: "A pattern of shared basic assumptions that the group learned as it solved its problems of external
adaptation and internal integration, that has worked well enough to be considered valid and, therefore, to
be taught to new members as the correct way to perceive, think, and feel in relation to those problems".

In a more recent publication Schein defines organizational culture as "the basic tacit assumptions about
how the world is and ought to be that a group of people share and that determines their perceptions,
thoughts, feelings, and, their overt behavior" (Schein, 1996)

Schein (1992) acknowledges that, even with rigorous study, we can only make statements about elements of
culture, not culture in its entirety. The approach which Schein recommends for inquiring about culture is an
iterative, clinical approach, similar to a therapeutic relationship between a psychologist and a patient.
Schein’s disciplined approach to culture stands in contrast to the way in which culture is referred to in some
of the popular management magazines.

Fourteen Points of
Management
Total Quality Management Edward Deming (1986)
Edward Deming - TQM
The Fourteen Points of Management of Dr. W. Edward Deming represent for many people the
essence of Total Quality Management (TQM).

Deming's Fourteen Points of Management are:

1. Create constancy of purpose for improvement of product and service (Organizations must allocate resources for
long-term planning, research, and education, and for the constant improvement of the design of their products and
services)
2. Adopt the new philosophy (government regulations representing obstacles must be removed, transformation of
companies is needed)
3. Cease dependence on mass inspections (quality must be designed and built into the processes, preventing defects
rather than attempting to detect and fix them after they have occurred)
4. End the practice of awarding business on the basis of price tags alone (organizations should establish long-term
relationships with [single] suppliers)
5. Improve constantly and forever the system of production and service (management and employees must
search continuously for ways to improve quality and productivity)
6. Institute training (training at all levels is a necessity, not optional)
7. Adopt and institute leadership (managers should lead, not supervise)
8. Drive out fear (make employees feel secure enough to express ideas and ask questions)
9. Break down barriers between staff areas (working in teams will solve many problems and will improve quality and
productivity)
10. Eliminate slogans, exhortations, and targets for the work force (problems with quality and productivity are
caused by the system, not by individuals. Posters and slogans generate frustration and resentment)
11. Eliminate numerical quotas for the work force and numerical goals for people in management (in order to meet
quotas, people will produce defective products and reports)
12. Remove barriers that rob people of pride of workmanship (individual performance reviews are a great barrier to
pride of achievement)
13. Encourage education and self-improvement for everyone (continuous learning for everyone)
14. Take action to accomplish the transformation (commitment on the part of both [top] management and employees
is required).

Change Management Change Iceberg Wilfried Krüger

 The Change Management Iceberg of
Wilfried Krüger is a strong visualization of
what is arguably the essence of change in
organizations: dealing with barriers.

According to Krüger many C. managers

only consider the top of the iceberg: Cost,
Quality and Time ("Issue Management").

However, below the surface of the water

there are two more dimensions of C. and
implementation M.:

- M. of Perceptions and Beliefs, and

- Power and Politics M.

What kind of barriers arise, and what kind of

Implementation M. is consequently needed, depends on:

- the kind of C.

- hard things "only" (information systems, processes) just scratches the surface,

- soft things also (values, mindsets and capabilities) is much more profound

- the applied C. strategy

- revolutionary, dramatic change as in Business Process Reengineering

- evolutionary, incremental change as in Kaizen

Below the surface of the CM Iceberg:

- Opponents have both a negative general attitude towards C. AND a negative behaviour towards this
particular personal C. They need to be controlled by M. of Perceptions and Beliefs to change their minds as
far as possible.

- Promoters on the other hand have both a positive generic attitude towards C. AND are positive about this
particular C. for them personally. They take advantage of the C. and will therefore support it.

- Hidden Opponents have a negative generic attitude towards C. although they seem to be supporting the
C. on a superficial level ("Opportunists"). Here M. of Perceptions and Beliefs supported by information
(Issue M. ) is needed to change their attitude.

- Potential Promoters have a generic positive attitude towards C. , however for certain reasons they are not
convinced (yet) about this particular C. Power and Politics M. seems to be appropriate in this case.

According to Krüger dealing with C. is a permanent task and challenge for general M. Superficial Issue M.
can only achieve results at a level consistent with the Acceptance that is below the surface. The base of the
CM is rooted in both the interpersonal and behavioural dimension and the normative and cultural
dimension, and is subject to Power and Politics M. and to the M. of Perceptions and Beliefs.
Organizational
Mintzberg organizational Configurations
configurations model framework of Henry
Mintzberg
The organizational
configurations framework of
Mintzberg is a model that
describes six valid
organizational configurations:

1. entrepreneurial organization

2. machine organization

3. professional organization

4. diversified organization

5. innovative organization

6. missionary organization

and 7. political organization (=

an organizational lacking a real
coordinating mechanism)

According to the organizational configurations model of Mintzberg each organization can consist of a
maximum of six basic parts:

1. Strategic Apex (top management)

2. Middle Line (middle management)

3. Operating Core (operations, operational processes)

4. Technostructure (analysts that design systems, processes, etc)

5. Support Staff (support outside of operating workflow)

6. Ideology (halo of beliefs and traditions; norms, values, culture)

According to the organizational configurations framework there are six valid coordinating mechanisms in
organizations:

1. Direct supervision (typical for entrepreneurial organizations)

2. Standardization of work (typical for machine organizations)

3. Standardization of skills (typical for professional organizations)

4. Standardization of outputs (typical for diversified organizations)

5. Mutual Adjustment (typical for innovative organizations)

6. Standardization of norms (typical for missionary organizations)

Transferring business
(Business Process)
processes: Insourcing, Offshoring
Outsourcing
Outsourcing
Outsourcing is a strategic management model transferring business processes to another company. The
concept is to have the management and/or day-to-day execution of one or more business functions performed
by a third party service provider, who is insourcing those same processes. Outsourcing occurs when a
company uses an outside firm to provide a necessary business function that might otherwise be done in-house.
Its aim is mostly to make an organization more competitive by staying focused on its core competencies.

It is different from subcontracting because the function is provided on an ongoing basis, rather than for a
specific project. It can be provided on or off premises, in the same country or in a separate country
(Offshoring).

In its most advanced form, outsourcing makes it possible to build a large, entirely virtual company with only
a single employee: the entrepreneur.

Potential Benefits of Outsourcing:

• Renewed focus on core business.

• Mitigation of risks by reliance on an expert.
• Improved customer satisfaction through improved processes not previously part of the enterprise's culture or experience.
• Ability to reward workers with career opportunities in a specialty company.
• Project enhancement.
• Service improvements.
• Skills upgrade.
• Skills retention.
• Skills access.
• Technology infusion.
• Cost accounting and overall visibility of accounting and performance in a business process.
• Cost reduction.
• Management of volatility in costs through financial engineering.
• Asset conversion.

• Avoidance of capital investment.

People Capability Maturity Continuously developing Carnegie Mellon
Model workforce maturity:
The People Capability Software Engineering Institute
People CMM Maturity Model (SEI)
 The People
Capability
Maturity Model
(People CMM)
framework
maintained by the
Carnegie Mellon
SEI helps
organizations in
developing their
workforce
maturity and in
addressing their
critical people
issues. Based on
the best current
practices in fields
such as human resources, knowledge management, and organizational development,
P-CMM guides organizations in improving their processes for managing and developing
their workforces. P-CMM helps organizations characterize the maturity of their
workforce practices, establish a program of continuous workforce development, set
priorities for improvement actions, integrate workforce development with process
improvement, and establish a culture of excellence.

People CMM provides a roadmap for implementing workforce practices that

continuously improve the capability of an organization’s workforce. Since an
organization cannot implement all of the best workforce practices in an afternoon, P-
CMM takes a staged approach. Each progressive level of the P-CMM produces a unique
transformation in the organization’s culture by equipping it with more powerful practices
for attracting, developing, organizing, motivating, and retaining its workforce. Thus, P-
CMM establishes an integrated system of workforce practices that matures through
increasing alignment with the organization’s business objectives, performance, and
changing needs.

The philosophy underlying People CMM is based on ten principles:

1. In mature organizations, workforce capability is directly related to business

performance.
2. Workforce capability is a competitive issue and a source of strategic advantage.
3. Workforce capability must be defined in relation to the organization’s strategic
business objectives.
4. Knowledge-intense work shifts the focus from job elements to workforce
competencies.

5. Capability can be measured and improved at multiple levels, including individuals,

workgroups, workforce competencies, and the organization.
6. An organization should invest in improving the capability of those workforce
competencies that are critical to its core competency as a business.
7. Operational management is responsible for the capability of the workforce.
8. The improvement of workforce capability can be pursued as a process composed from
proven practices and procedures.
9. The organization is responsible for providing improvement opportunities, while
individuals are responsible for taking advantage of them.
10. Since technologies and organizational forms evolve rapidly, organizations must
continually evolve their workforce practices and develop new workforce competencies.

The People Capability Maturity Model consists of five maturity levels that establish
successive foundations for continuously improving individual competencies, developing
effective teams, motivating improved performance, and shaping the workforce the
organization needs to accomplish its future business plans. Each maturity level is a well-
defined evolutionary plateau that institutionalizes new capabilities for developing the
organization's workforce. By following the maturity framework, an organization can
avoid introducing workforce practices that its employees are unprepared to implement
effectively.

The five stages of the People CMM framework are:

1. P-CMM - Initial Level (Typical characteristics: Inconsistency in performing practices, Displacement of responsibility, Ritualistic
practices, and Emotionally detached workforce).
2. P-CMM - Managed Level (Typical characteristics: Work overload, Environmental distractions, Unclear performance objectives
or feedback, Lack of relevant knowledge, or skill, Poor communication, Low morale)
3. P-CMM - Defined Level (Although there are performing basic workforce practices, there is inconsistency in how these
practices are performed across units and little synergy across the organization. The organization misses opportunities to
standardize workforce practices because the common knowledge and skills needed for conducting its business activities have not
been identified)
4. P-CMM - Predictable Level (The organization manages and exploits the capability created by its framework of workforce
competencies. The organization is now able to manage its capability and performance quantitatively. The organization is able to
predict its capability for performing work because it can quantify the capability of its workforce and of the competency-based
processes they use in performing their assignments)

5. P-CMM - Optimizing Level (The entire organization is focused on continual improvement. These improvements are made to
the capability of individuals and workgroups, to the performance of competency-based processes, and to workforce practices
and activities. The organization uses the results of the quantitative management activities established at Maturity Level 4 to guide
improvements at Maturity Level 5. Maturity Level 5 organizations treat change management as an ordinary business process to
be performed in an orderly way on a regular basis)
Measuring Stakeholder
Performance Prism
Value
Cranfield University
Cranfield University
Performance Prism
 The Performance Prism
(Cranfield University) is an
innovative second generation
performance measurement
and management
framework. Its advantage
over other frameworks is that
it addresses all of an
organisation’s stakeholders -
principally investors,
customers & intermediaries,
employees, suppliers,
regulators and communities.
It does this in two ways: by
considering what the wants and needs are of the stakeholders are and, uniquely, what the organisation
wants and needs from its stakeholders. In this way, the reciprocal relationship with each stakeholder is
examined.

The five facets of the Performance Prism:

1. Stakeholder Satisfaction

2. Stakeholder Contribution

3. Strategies

4. Processes

5. Capabilities

These five perspectives are distinct, but logically interlinked.

Philosophy

The Performance Prism is based on the belief that those organisations aspiring to be successful in the
long term within today’s business environment have an exceptionally clear picture of who their key
stakeholders are and what they want.
They have defined what strategies they will pursue to ensure that value is delivered to these
stakeholders. They understand what processes the enterprise requires if these strategies are to be
delivered and they have defined what capabilities they need to execute these processes. The most
sophisticated of them have also thought carefully about what it is that the organisation wants from its
stakeholders – employee loyalty, customer profitability, long term investments, etc. In essence they
have a clear business model and an explicit understanding of what constitutes and drives good
performance.
 Approach: Starting with
Stakeholders, not with
Strategy

According to Performance
Prism vision, one of the great
fallacies of performance
measurement is that measures
should be derived from
strategy. Listen to any
conference speaker on the
subject. Read any management
text written about it. Nine times
out of ten the statement will be
made – “derive your measures
from your strategy”. This is
such a conceptually appealing
notion, that nobody stops to question it. Yet to derive measures from strategy is to misunderstand
fundamentally the purpose of measurement and the role of strategy. That's why the Performance Prism
starts its process with thinking about the Stakeholders and what they want.

Five key questions for measurement design:

1. Stakeholder Satisfaction – who are the key stakeholders and what do they want and need?
2. Strategies – what strategies do we have to put in place to satisfy the wants and needs of these key
stakeholders?
3. Processes – what critical processes do we require if we are to execute these strategies?
4. Capabilities – what capabilities do we need to operate and enhance these processes?
5. Stakeholder Contribution – what contributions do we require from our stakeholders if we are to maintain
and develop these capabilities?

Complexity and the Prism

The history of Value Based Management is basically a history of increasing complexity. A prism refracts
light. It illustrates the hidden complexity of something as apparently simple as white light and decomposes it
in its elements. So it is with the Performance Prism. It illustrates the hidden complexity of our corporate
world. Single dimensional, traditional frameworks pick up elements of this complexity. While each of them
offers a unique perspective on performance, it is essential to recognise that this is all that they offer – a single
uni-dimensional perspective on performance. Performance, however, is not uni-dimensional. To understand
it in its entirety, it is essential to view from the multiple and interlinked perspectives offered by the
Performance Prism.
Groupthink Consensus-seeking
tendency in groups: Irving Janis (1972)
(Janis) Groupthink
Irving Janis developed a study on group decision making called Groupthink Theory. It is based on
human social behavior in which maintaining group cohesiveness and solidarity is felt as more important
than considering the facts in a realistic manner. Janis gave the following definition of Groupthink:
A mode of thinking that people engage in when they are deeply involved in a cohesive group, when the
members' strivings for unanimity override their motivation to realistically appraise alternative courses of
action.

Groupthink is a result of cohesiveness in groups, already discussed by Lewin in the 1930s and is an
important factor to consider in decision processes, such as workshops, meetings, conferences,
committees, etc.
Certain conditions are conducive to Groupthink, such as:

- the group is highly cohesive,

- the group is isolated from contrary opinions, and

- the group is ruled by a directive leader who makes his or her wishes known.

The following negative outcomes of Groupthink are possible:

1) the group limits its discussion to only a few alternatives.

2) the solution initially favored by most members is never restudied to seek out less obvious pitfalls

3) the group fails to reexamine those alternatives originally disfavored by the majority.

4) expert opinion is not sought

5) the group is highly selective in gathering and attending to available information

6) the group is so confident in its ideas that it does not consider contingency plans.

A few methods to prevent Groupthink are:

1) appoint a devil's advocate

2) encourage everyone to be a critical evaluator

3) do not have the leader state a preference up front

4) set up independent groups

5) divide into subgroups

6) discuss what is happening with others outside the group

7) invite others into the group to bring fresh ideas

8) gather anonymous feedback via a suggestion box or an online forum

What are typical symptoms of Groupthink?

Janis listed eight symptoms that show that concurrence seeking has led the group astray. The first two stem
from overconfidence in the group’s powers. The next pair reflect the tunnel vision members use to view the
problem. The final four are signs of strong conformity pressure within the group.

1. Illusion of Invulnerability: Janis summarizes this attitude as ‘‘everything is going to work out all right because we are a
special group." Examining few alternatives.
2. Belief in Inherent Morality of the Group: under the sway of groupthink, members automatically assume the
rightness of their cause.
3. Collective Rationalization: a collective mindset of being rational. Being highly selective in gathering information.
4. Out-group Stereotypes
5. Self-Censorship: people only offer equivocal or tempered opinions. Not seeking expert or outside opinions. Pressure to
conform within group; members withhold criticisms.
6. Illusion of Unanimity. Individual group members look to each other to confirm theories.
7. Direct Pressure on Dissenters. Pressure to protect group from negative views or information.

8. Self-Appointed Mindguards: these ‘‘mindguards" protect a leader from assault by troublesome ideas.

Political, Economic, Social,

PEST Analysis
Technological Factors
(STEEPLE)
PEST Analysis (STEEPLE)
The PEST Analysis is a framework that strategy consultants use to scan the external macro-
environment in which a firm operates. PEST is an acronym for the following factors:

• Political factors
• Economic factors
• Social factors, and
• Technological factors.

PEST factors play an important role in the value creation opportunities of a strategy. However they are
usually beyond the control of the corporation and must normally be considered as either threats or
opportunities. Remember macro-economical factors can differ per continent, country or even region, so
normally a PEST analysis should be performed per country.

In the table below you find examples of each of these factors.

Political (incl. Legal) Economic Social Technological

Environmental regulations Government research

Economic growth Income distribution
and protection spending
Tax policies Interest rates & Demographics, Industry focus on
monetary policies Population growth technological effort
 rates, Age distribution
International trade Government New inventions and
Labor / social mobility
regulations and restrictions spending development
Contract enforcement law Unemployment Rate of technology
Lifestyle changes
Consumer protection policy transfer
Work/career and leisure Life cycle and speed of
Employment laws Taxation attitudes technological
Entrepreneurial spirit obsolescence
Government
Exchange rates Education Energy use and costs
organization / attitude
(Changes in)
Competition regulation Inflation rates Fashion, hypes
Information Technology
Health consciousness
Stage of the business
Political Stability & welfare, feelings on (Changes in) Internet
cycle
safety
Consumer (Changes in) Mobile
Safety regulations Living conditions
confidence Technology

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

Sometimes extended forms of PEST analysis are used, such as SLEPT (plus Legal) or the STEEPLE
analysis: Social/demographic, Technological, Economic, Environmental (natural),
Political, Legal and Ethical factors. Also Geographical factors may be relevant.

Robert Thorndike (1937)

David Wechsler (1940)

Non-Cognitive Aspects of
Emotional Intelligence
Intelligence
Howard Gardner (1983)
Goleman
Emotional Intelligence (EI)
Salovey & Mayer (1990)

Daniel Goleman (1995)

A bit of Emotional Intelligence history

When psychologists began to write and think about intelligence, they initially focused on cognitive aspects,
such as memory and problem-solving. However, there have been researchers who recognized early on that
the non-cognitive aspects were also important:

• Robert Thorndike was writing about social intelligence in 1937,

• David Wechsler defined intelligence as the aggregate or global capacity of the individual to act
 purposefully, to think rationally, and to deal effectively with his environment (Wechsler, 1958, p.
7). As early as 1940 Wechsler referred to non-intellective as well as intellective elements
(Wechsler, 1940), by which he meant affective, personal, and social factors. Furthermore, as
early as 1943 Wechsler was proposing that the non-intellective abilities are essential for predicting
ones ability to succeed in life.
• Howard Gardner began to write about multiple intelligence in 1983, when he proposed that
intrapersonal and interpersonal intelligences are as important as the type of intelligence typically
measured by IQ and related tests.
• Salovey and Mayer actually coined the term emotional intelligence in 1990. They described
emotional intelligence as "a form of social intelligence that involves the ability to monitor ones
own and others feelings and emotions, to discriminate among them, and to use this information
to guide ones thinking and action" (Salovey & Mayer, 1990). Salovey and Mayer also initiated a
research program intended to develop valid measures of emotional intelligence and to explore its
significance.

Granted that cognitive ability seems to play a rather limited role in accounting for why some people are
more successful than others, in doing the research for his first book, Daniel Goleman becoming aware of
Salovey and Mayers work in the early 1990s, trained as a psychologist at Harvard where he worked with
David McClelland, wrote the popular bestseller "Emotional Intelligence" (1995), in which he offered the
first ' proof' that emotional and social factors are important.

The Five (Four) Domains of Emotional Intelligence

Goleman in 1995 agrees with Salovey's Five Main Domains of Emotional Intelligence (p. 43)

1. Knowing one's emotions (self-awareness - recognizing a feeling as it happens)

2. Managing emotions (the ability of handling feelings so they are appropriate)
3. Motivating oneself (marshalling emotions in the service of a goal)
4. Recognizing emotions in others (empathy, social awareness)

5. Handling relationships (skill in managing emotions in others)

JIT philosophy Just-in-time
Taiichi Ohno
Just-in-time model Supply Chain Planning
Just-in-time, pioneered by Taiichi Ohno in Japan at the Toyota car assembly plants in the early 1970s, is a
manufacturing organization philosophy. JIT cuts waste by supplying parts only when the assembly process
requires them. At the heart of JIT lies the kanban, the Japanese word for card. This kanban card is sent to
the warehouse to reorder a standard quantity of parts as and when they have been used up in the
assembly/manufacturing process. JIT requires precision, as the right parts must arrive "just-in-time" at the
right position (work station at the assembly line). It is used primarily for high-volume repetitive flow
manufacturing processes.

Historically, the JIT philosophy arose out of two other things:

1. Japan's wish to improve the quality of its production. At that time, Japanese companies had a bad
reputation as far as quality of manufacturing and car manufacturing in particular was concerned.

2. Kaizen, also a Japanese method of continuous improvement.

The Just-in-time framework regards inventories as a poor excuse for bad planning, inflexibility, wrong
machinery, quality problems, etc. The target of JIT is to speed up customer response while minimizing
inventories at the same time. Inventories help to response quickly to changing customer demands, but
inevitably cost money and increase the needed working capital.

Typical attention areas of JIT implementations include:

- inventory reduction

- smaller production lots and batch sizes

- quality control

- complexity reduction and transparency

- flat organization structure and delegation

- waste minimization

Through the arrival of Internet and Supply Chain Planning software, companies have in the mean time
extended Just-in-time manufacturing externally, by demanding from their suppliers to deliver inventory
to the factory only when it's needed for assembly, making JIT manufacturing, ordering and delivery
processes even speedier, more flexible and more efficient. In this way Integrated Supply Networks
(Demand Networks) or Electronic Supply Chains are being formed. Just-in-time is sometimes referred to as
'Lean Production'.
Growth Phases model
Greiner growth phases Larry Greiner (1972)
Greiner
The growth phases model of Greiner suggests that organizations go through 5 (6) stages of growth
and need appropriate strategies and structures to cope. It is a descriptive framework that can be used to
understand why certain management styles, organizational structures and coordination mechanisms work
and don't work at certain phases in the development of an organization. The 1972 model of Greiner
describes five (six) phases of organizational development and growth:

• Growth through creativity (start-up company, entrepreneurial, informal

communication, hard work and poor pay) [ending by a leadership crisis].
• Growth through direction (sustained growth, functional organization structure,
accounting, capital management, incentives, budgets, standardized processes) [ending by
an autonomy crisis].
• Growth through delegation (decentralized organizational structure, operational
and market level responsibility, profit centers, financial incentives, decision making is
based on periodic reviews, top management acts by exception, formal communication)
[ending by a control crisis].
• Growth through coordination and monitoring (formation of product groups,
thorough review of formal planning, centralization of support functions, corporate staff
oversees coordination, corporate capital expenditures, accountability for ROI at product
group level, motivation through lower-level profit sharing) [ending by a red tape crisis].
 • Growth through collaboration (new evolutionary path, team action for
problem solving, cross-functional task teams, decentralized support staff, matrix
organization, simplified control mechanisms, team behavior education programs,
advanced information systems, team incentives) [ending by a internal growth crisis].

More recently Greiner added a sixth phase to his growth phases model: • extra-organizational
solutions (mergers, holdings, networks of organizations)
5 Bases of Social Power Identifying Power Sources: John R.P. French, Jr.

French Raven Five Social Power Bases Bertram Raven (1959)

Processes of power are pervasive, complex, and often disguised in our society. The Bases of Social Power
of French and Raven is a theory that identifies five (six) bases or sources of social (organizational)
power:

1. Reward Power (based on the perceived ability to give positive consequences or remove negative ones)
2. Coercive Power (the perceived ability to punish those who not conform with your ideas or demands)
3. Legitimate Power (organizational authority) (based on the perception that someone has the right to prescribe behavior
due to election or appointment to a position of responsibility)
4. Referent Power (through association with others who possess power)
5. Expert Power (based on having distinctive knowledge, expertness, ability or skills)
6. Similar to 5: Information Power (based on controlling the information needed by others in order to reach an important
goal)

The Five Bases of Social Power theory starts from the premise that power and influence involve
relations between at least two agents, and theorizes that the reaction of the recipient agent is the more useful
focus for explaining the phenomena of social influence and power.

French and Raven examined the effect of power derived from the various bases of attraction (the
recipient's sentiment towards the agent who uses power) and resistance to the use of power. They conclude
that the use of power from the various bases has different consequences.

For example, coercive power typically decreases attraction and causes high resistance, whereas reward
power increases attraction and creates minimal levels of resistance.

French and Raven also concluded that "the more legitimate the coercion [is perceived to be], the less it ill
produce resistance and decreased attention".
Quality Management: Six Sigma
Description

The Six Sigma model is a highly disciplined approach that helps companies focus on developing and
delivering near-perfect products and services. It is based on the statistical work of Joseph Juran, a Rumanian-
born US pioneer of quality management. The word "Sigma" is a Greek letter used for a statistical term
that measures how far a given process deviates from perfection (standards deviation). The higher the sigma
number, the closer to perfection. One sigma is not very good, six sigma means only 3.4 defects per million.
The central idea behind Six Sigma is that if you can measure how many "defects" you have in a process,
you can systematically figure out how to eliminate them and get as close to "zero defects" as possible.

The Japanese origin of Six Sigma can still be seen by the system of "belts" it uses. If you are a newbie and
go on a basic training, you get a green belt. Anyone who has the responsibility for leading a Six Sigma team
is called a black belt. Finally there is a special elite group called Master Black Belts who supervise the Black
Belts.
Result Oriented Resultaatgericht Management
Jan Schouten (1996)
Management (RGM)
Wim van Beers
Schouten Beers Result Oriented Management
Result Oriented Management is a management style described by Jan Schouten and Wim van
Beers, both from Dutch origin.

The Result Oriented Management system - or: "Resultaatgericht Management" (RGM) as it is

called in Dutch - aims to achieve maximum results based on clear and measurable agreements made
upfront. RGM is primarily a management style based on the thought that people will work with more
enthusiasm and fun if:

• they clearly know what is expected of them,

• are involved in establishing these expectations,
• are allowed to determine themselves how they are going to meet these expectations,
• and obtain feedback about their performance.

In Result Oriented Management, the manager sets goals and determines priorities and makes resources
available that are needed: time, money and capacity. The employee provides his time, knowledge and
abilities and indicates under which conditions he can deliver the required results. In doing so, he takes the
personal responsibility for achieving those results.

Result Oriented Management is a management system that works with so called Result Oriented
Agreements. All parties have the same expectations about their targets and can approach each other on
results. All agreements must always be 'SMART': Specific, Measurable, Accepted, Relevant and
Traceable. Within the borders of the agreements that are made, the employees are free to determine how
they want to achieve their targets.

RGM helps to translate corporate goals to divisional and individual goals. The process of RGM is
preferably top down and bottom up and consist of the following steps:

• Target setting: long-term corporate goals;

• Translating the corporate goals to divisional and individual goals;
• Result Oriented Agreements about goals;
• Implementation, self steering and management reporting;

• Periodic appraisals, progress control and adjustments;

Risk Management
Risk-Adjusted Return On
The Value of Risk
Capital - RAROC
RAROC Basel II
Short Description - What is RAROC?

RAROC is a risk-adjusted profitability measurement and management framework for measuring risk-
adjusted financial performance and for providing a consistent view of profitability across businesses
(strategic business units / divisions). RAROC and related concepts such as RORAC and RARORAC are
mainly used within (business lines of) banks and insurance companies. RAROC is defined as the ratio of
risk-adjusted return to economic capital.

Economic capital is attributed on the basis of three risk factors: market risk, credit risk and operational
risk. The fundamental approaches to managing these risk factors are described in the management of risk
and capital section. The use of risk-based capital strengthens the risk management discipline within business
lines, as the methodologies employed quantify the level of risk within each business line and attribute capital
accordingly. This process assists in achieving controlled growth and returns commensurate with the risk
taken.

Economic capital methodologies can be applied across products, clients, lines of business and other
segmentations, as required, to measure certain types of performance. The resulting capital attributed to each
business line provides the financial framework to understand and evaluate sustainable performance and to
actively manage the composition of the business portfolio. This enables a financial company to increase
shareholder value by
reallocating capital to
those businesses with
high strategic value
and sustainable
returns, or with long-
term growth and
profitability potential.

Economic profit
elaborates on
RAROC by
incorporating the cost
of equity capital,
which is based on the
market required rate of
return from holding a
company's equity
instruments, to assess whether shareholder wealth is being created. Economic profit measures the return
generated by each business in excess of a bank's cost of equity capital. Shareholder wealth is increased if
capital can be employed at a return in excess of the bank's cost of equity capital. Similarly, when returns do
not exceed the cost of equity capital, then shareholder wealth is diminished and a more effective deployment
of that capital is sought.

The Value of Risk Management

Efficient Risk Management can constitute value in the following dimensions (more or less in order of
significance):
1. Compliance and Prevention
 - Avoid crises in own organization

- Avoid crises in other organizations

- Comply with corporate governance standards

- Avoid personal liability failure

2. Operating Performance

- Understand full range of risk facing the organization

- Evaluate business strategy risks

- Achieve best practices

3. Corporate Reputation

- Protection of Corporate Reputation

4. Shareholder Value Enhancement

- Enhance capital allocation

- Improve returns through Value Based Management

Proactive Risk Management evaluates the probability of risk occurring, risk event
drivers, risk events, the probability of impact and the impact drivers prior to the risk
actually taking place (figure: Proactive Risk Management - Smith and Merritt).

History of RAROC

Development of the RAROC methodology began in the late 1970s, initiated by a group at Bankers Trust.
Their original interest was to measure the risk of the bank’s credit portfolio, as well as the amount of equity
capital necessary to limit the exposure of the bank’s depositors and other debt holders to a specified
probability of loss. Since then, a number of other large banks have developed RAROC or (RAROC-like
systems) with the aim, in most cases, of quantifying the amount of equity capital necessary to support all of
their operating activities -- fee-based and trading activities, as well as traditional lending.

RAROC systems allocate capital for two basic reasons: (1) risk management and (2)
performance evaluation. For risk-management purposes, the overriding goal of allocating
capital to individual business units is to determine the bank’s optimal capital structure.
This process involves estimating how much the risk (volatility) of each business unit
contributes to the total risk of the bank and, hence, to the bank’s overall capital
requirements.
For performance-evaluation purposes, RAROC systems assign capital to business units
as part of a process of determining the risk-adjusted rate of return and, ultimately, the
economic value added of each business unit. The economic value added of each business
unit, defined in detail below, is simply the unit’s adjusted net income less a capital charge
(the amount of equity capital allocated to the unit times the required return on equity).
The objective in this case is to measure a business unit’s contribution to shareholder
value and, thus, to provide a basis for effective capital budgeting and incentive
compensation at the business-unit level.

New Basel Capital Accord - Basel II

In January 2001 the Basel Committee on Banking Supervision issued a proposal for a New Basel Capital
Accord (better known as "Basel II") that, once finalized, will replace the current 1988 Capital Accord. The
proposal is based on three mutually reinforcing pillars that allow banks and supervisors to evaluate properly
the various risks that banks face. These 3 pillars are:
1. minimum capital requirements, which seek to refine the measurement framework set out in the 1988
Accord (dealing with credit risk, operational risk and market risk),
2. supervisory review of an institution's capital adequacy and internal assessment process, and
3. market discipline through effective disclosure to encourage safe and sound banking practices.
The Basel Committee received more than 250 comments on its January 2001 proposals. In April 2001 the
Committee initiated a Quantitative Impact Study (QIS) of banks to gather the data necessary to allow the
Committee to gauge the impact of the proposals for capital requirements. A further study, QIS 2.5, was
undertaken in November 2001 to gain industry feedback about potential modifications to the Committee's
proposals.

In December 2001 the Basel Committee announced a revised approach to finalizing the New Basel Capital
Accord and the establishment of an Accord Implementation Group. Previously, in June 2001 the
Committee released an update on its progress and highlighted several important ways in which it had agreed
to modify some of its earlier proposals based, in part, on industry comments.

During its 10 July 2002 meeting, members of the Basel Committee reached agreement on a number of
important issues related to the New Basel Capital Accord that the Committee has been exploring since
releasing its January 2001 consultative paper.

In April 2003 the Basel Committee on Banking Supervision has issued a third consultative paper on the
New Basel Capital Accord.
IRR - True interest yield
Internal Rate of Return -
expected from an
IRR
investment
The Internal Rate of Return (IRR) is the discount rate that results in a net present value of zero for a
series of future cash flows. It is an Discounted Cash Flow (DCF) approach to valuation and investing just as
Net Present Value (NPV). Both IRR and NPV are widely used to decide which investments to undertake
and which investments not to make.

The major difference is that while Net Present Value is expressed in monetary units (Euro's or Dollars for
example), the IRR is the true interest yield expected from an investment expressed as a percentage.

Internal Rate of Return is the flip side of Net Present Value and is based on the same principles and the
same math. NPV shows the value of a stream of future cash flows discounted back to the present by some
percentage that represents the minimum desired rate of return, often your company's cost of capital. IRR, on
the other hand, computes a break-even rate of return. It shows the discount rate below which an investment
results in a positive NPV (and should be made) and above which an investment results in a negative NPV
(and should be avoided). It's the break-even discount rate, the rate at which the value of cash outflows equals
the value of cash inflows.

Many people find the percentages of IRR easier to understand than Net Present Value. Another benefit
from IRR is that it can be calculated without having to estimate the (absolute) cost of capital.

When IRR is used, the usual approach is to select the projects whose IRR exceeds the cost of capital (often
called hurdle rate when used in the IRR context). This may seem simple and straightforward at first sight.
However a major disadvantage of using the Internal Rate of Return instead of Net Present Value is
that if managers focus on maximizing IRR and not NPV, there is a significant risk in companies where the
return on investment is greater than the Weighted Average Cost of Capital (WACC) that managers will not
invest in projects expected to earn greater than the WACC, but less than the return on existing assets. IRR is
a true indication of a project's annual return of investment only when the project
generates no interim cash flows - or when those interim investments can be invested
at the actual IRR.

The aim of the value-oriented manager should be to invest in any project that has a positive NPV! If IRR
usage is unavoidable, then managers are advised to use so called Modified IRR (which, while not perfect,
at least allows to set more realistic interim reinvestment rates) and additionally to keep a close look on
interim cash-flows, especially if they are biased to the beginning of the project period (the distortion is bigger
then).

In other words: the aim should not be to maximize the Internal Rate of Return, but to maximize Net
Present Value.