1.2 OBJECTIVES, STAKEHOLDERS AND THE EXTERNAL ENVIRONEMNT HIGHER LEVEL (HL)

OBJECTIVES & CHANGE (p23-24) Organizations need to change objectives in response to changes in the internal and external environment. The business environment is constantly changing and internal resources – labour, machines, technology, finances and so - also vary over time. A business does not work in a bubble. It’s activities are influenced by factors outside of the control of the business, over which it has no control.

The need to constantly review a corporate plan Key Issues An excellent corporate plan set two years ago may no longer be “fit for the purpose”. Success is the past doesn’t always guarantee success in the future. Therefore an organization’s objectives need to be kept constantly under review.

Negative Changes in the Internal Environment Negative changes in the internal environment can include HR problems like high staff turnover, lack of skills, reduction in productivity and low motivation. There may be financial issues too, such as poor cash flow. These problems are a threat to a business. Organizations will have to adjust their objectives to address these issues and put in place appropriate strategies to improve the situation.

Positive Change in the Internal Environment Positive changes in the internal environment should lead to a review of business objectives. Particularly talented employees need to be developed, unexpected revenues invested, new product ideas investigated. All of these will have implications for strategic planning and corporate objectives.

The External Environment Threats & Opportunities The external environment can provide both opportunities and threats. It is often the case that an organization may have to alter radically the way that it does business in response to a major change in the external environment, especially if the change undermines the competitive advantage or the USP that the organization enjoys. These required changes could result from many factors including new competition, changing technology or unexpected economic recession, such as the credit crunch that started in 2008.

Companies must adapt and change to their environment The history of commerce is littered with remains of “household names” that failed to adapt to the changing business environment, perhaps because they did not have the resources to do so or they became complacent or arrogant about their position. When change happens it can occur very quickly and undermine the whole foundations of a business empire.

Major Corporate Failures The bank failures of Lehman Brothers in the US and Landsbanki in Iceland are significant examples of corporate failure. In 2007, these institutions seemed completed secure, but a year later that both filed for bankruptcy with huge debts.

Strategy must be continuously checked and reviewed A strategy is not for ever. It must be continuously checked and reviewed. Targets for all business departments are set at the beginning of a planning cycle, but must be updated. The corporate plan is likely to have planning horizons – times when actual results and performance are compared to initial targets and reviews of progress are made. This review should form the basis of the next planning cycle and can lead to a business changing its objectives in response to progress, or lack of progress in achieving its goals.

Crucial Factors to consider, when evaluating the need to change objectives: How significant are the changes? Can the business continue to operate in its present form? What are the resource costs of change, eg: financial implications and costs, HR requirements and new technologies required? Can the business retain its competitive advantage? Can the business reposition its products (goods or services) or seek new customers and or products? What will be the consequences of senior management imposing new objectives on the business? How can the workforce be involved in the process of changing the direction of the business?

Changes in CSR over time (p40-41) There is a clear debate as to the level and extent of CSR (Corporate Social Responsibility) As a society changes and evolves, so does the pressure on organizations to conform to particular norms of behaviour. Businesses are made up of individuals who are also customers and citizens, so businesses are a reflection of those individual social values.

Changes in CSR over time Businesses should play a role in stewardship of our environment since they enjoy the benefits of its resources. As concerns increase about resource depletion and environmental damage from production so do the pressures on organizations to conform to defined codes of behavior and good practice

The case against socially responsibility Some economists and politicians argue that is not an organization’s role to act responsibly as this costs money and therefore reduces profit to shareholders. All businesses should be doing is being productivity efficient by making the most efficient use of scarce resources. Protection of the environment and individuals in the production chain is the role of government and the legal system, not that of commercial organizations. This narrow viewpoint dates back to the classical economist, Adam Smith.

STAKEHOLDER CONFLICT & CONFLICT RESOLUTION Stakeholders all have varying objectives and demands and it can be very difficult to reconcile competing needs and aspirations. Eg: Shareholders will want to maximize profitability while employees will want to maximize their wages – which will add to costs and reduce profits. Similarly, local communities will want to minimize pollution while the directors may want to grow the size of the business, which may add to pollution and with it their salaries. (There appears to be some correlation between organization size and directors pay).

STAKEHOLDER CONFLICT & CONFLICT RESOLUTION Conflicts and pressures between stakeholders are therefore commonplace. Happiness is when we can find a compromise or solution to the conflicting objectives that satisfies everyone.

SOLUTIONS TO STAKEHOLDER CONFLICTS There are a range of solutions to stakeholder conflict including:  Arbitration  Workers Councils  Stakeholder Directors  Performance-related play  Share option schemes for workers  Competitors joining forces

Arbitration In larger organizations, when workers and managers can not agree on changes to working practices, pay rates or how staff are managed both sides can use the services of an arbitrator or reconciliation service. These independent and respected individuals or groups will have been asked to decide on what is fair from the evidence presented by both the company and the workforce representatives. At the start of the process or talks both sides can agree that the solution is binding on them, that is, they will accept whatever solution is recommended by the arbitrator.

Workers Councils Sometimes it can be beneficial to set up a workers council made up of representatives from all areas and all positions of responsibility in the organization. They meet regularly and provide a forum for discussing concerns and issues that specific groups may face. It also means the external stakeholders feel they are being consulted about strategic changes that may be happening.

Stakeholders Directors There might be workers, bankers or community group representatives. In some cases appointing a worker director can also produce similar results to a workers council, but perhaps more detailed discussions and information can be aired. Workers directors have to bear in mind that they may receive financially sensitive information about the company and must be careful how they use this knowledge to persuade the workforce that a certain compromise is the best solution they might get.

Stakeholders Directors Community directors can work in similar ways, perhaps gaining more local charitable donations in exchange for company expansion in a town. Banks in some countries, such as Germany and Japan, often sit on the supervisory board of directors. The banks may well be stakeholders as well as lenders. In this way its it’s hoped that the interests of the company and the lenders are united and the banks are less likely to suddenly to stop providing financial support.

Performance Related Pay Paying workers more if they improve their productivity can be a compromise solution to conflict, especially when a business is struggling to increase its efficiency and where workers want more money. The problems often reappear shortly after the pay rise goes through, as workers tend to get use to the new level of wages and then want more. Where there are cycles like this, it can be because there is more underlying discontent about the management methods in the business and workers dissatisfaction is not really because of low wages.

Share Option Schemes for Workers Instead of increasing costs by increasing workers’ pay, shareholders and managers may agree to start a share option scheme, where workers can buy shares in the company at a discount. Assuming the value of the shares rises in the medium term, the workers wealth will also rise when they sell their shares. Existing shareholders will see a dilution or reduction in the proportionate stakes but it is usually quite small. Usually such schemes work in very large companies.

Competitors joining forces Competitors may join forces to form distribution groups and gain negotiating power, for example with large retailers. In some industries where power in the distribution channel is with the large retailers it pays for competitors to join together, possibly in a collusive way, and force retailers to give them more for their produce. This has happened in food retailing, for example with milk supplied from diary farmers to supermarket groups in the UK.