Management Style and Organizational Performance 2011

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Martin Bakker

Groningen, December 2011

Management Style and

Organizational Performance

Comparing General Motors and Toyota

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University of Groningen

Faculty of economics & business

Landleven 5

9700 AV Groningen

The Netherlands

Groningen, December 2011

Author:

Martin Bakker

E-mail:

M.Bakker.18@student.rug.nl

marbakker@yahoo.com

Student ID:

S 1270281

Supervisors:

prof. dr. L. Karsten

mr. drs. H.A. Ritsema

Master thesis

The author is solely responsible for the content of this thesis. Copyright of this thesis belongs to the author.

Management style and

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Preface

With great pride, I present to you my final master thesis. Although this is the preface, it is actually the final piece of work that I have entrusted to this paper. It is not just the final work on my thesis, personally, it signifies the ending of my student life and my educational career. Looking back on the course of my study, I‟ve realized that after a disappointing first year, in which I learned what it truly means to study, I was actually on track to finish my study with a delay of only a year and a half. Although that may sound like a significant delay, it is not uncommon, especially when compared to fellow students and considering all the extracurricular activities that I have undertaken.

Unfortunately, I was one of those students that stumbled right before the finish line. The final thesis proved a difficult affair to say the least. I will not bore you with all the reasons that led to my troubles, but it is suffice to say that the longer it took, the more difficult it became to finalize my study. There were times where I had lost the belief that I could still pull it of. A lost friend, who also encountered difficulty in writing his final thesis, showed me that it was still possible. I therefore tried to write a new thesis with renewed energy. At first, everything went well. This time it was my perfectionism that stood in my way. I was never happy with the pieces I wrote, never satisfied that it was of sufficient quality to send to my supervisor. By failing to send my work, I also deprived myself of valuable feedback that I needed to continue and that would help me to stay on track.

This time it was the support of my girlfriend that pulled me through. Without her encouragement and support, you would not be reading this master thesis right now. Sometimes helping someone demands doing nothing at all, and letting go does not come natural for a parent. I would like to take this opportunity to thank my father for supporting me in the early days of my study and for patiently trusting me to get there on my own later on. My thanks also go out to my supervisors, firstly prof. dr. Lucien Karsten for sharing the same enthusiasm on the subject and for encouraging me to move on when I was worried if a piece I wrote was of sufficient quality. Secondly, I would like to thank my other supervisor mr. drs. H.A. Ritsema who, as coordinator of the department of International Business and Management, gave me more chances than I deserved.

For those who share my interest in organizational culture and management style and their effect on organizational effectiveness, I would like to invite you into the world of the automotive industry. The journey will take you across the globe, as we compare the national culture of Japan and the United States. We will find how national culture has partly shaped the organizational culture and management style of Toyota and General Motors. We will learn how differences in the management style of Toyota and General Motors have affected the organizational performance of both organizations. In the spirit of Toyota, I would like to conclude that it is not the goal that matters, but the journey itself that does, it has been quite the journey indeed.

Martin Bakker

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Management summary

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Table of content

2. Theoretical background – Management Style ... 10

2.1 Management Style – Concept ... 10

2.1.1 Concept - 7-S framework ... 11

2.1.2 Concept - culture ... 12

2.1.3 Concept - organizational culture ... 14

2.1.4 Concept - Six dimensions of management style ... 15

2.2 Management Style – Typologies ... 16

2.2.1 Typologies - “Classic” theories ... 16

2.2.2 Typologies – supervision and decision-making ... 18

2.2.3 Typologies – Communication pattern and paternalistic orientation ... 20

2.2.4 Typologies – Control mechanism and interdepartmental relations ... 20

2.3 Management Style – Conclusion ... 21

3. Theoretical background - Organizational Performance... 23

3.1 Organizational Performance - The balanced scorecard ... 23

3.2 Organizational Performance - Financial measures ... 24

3.2.1 Financial measures - sales / revenue / turnover ... 25

3.2.2 Financial measures - Costs ... 26

3.2.3 Financial measures - gross margin and net profit margin ... 26

3.2.4 Financial measures - Profit and Profitability ... 27

3.3 Organizational Performance - Customer oriented measures ... 27

3.3.1 Customer oriented measures - customer satisfaction ... 28

3.3.2 Customer oriented measures - customer retention ... 30

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3.3.4 Customer oriented measures - customer profitability ... 35

3.3.5 Customer oriented measures - market share ... 38

3.4 Organizational Performance - Internal business processes ... 41

3.4.1 Internal business processes - operating processes ... 41

3.4.2 Internal business processes - customer management processes ... 43

3.4.3 Internal business processes - innovation processes ... 44

3.4.4 Internal business processes - regulatory and social processes ... 48

3.5 Organizational Performance - Innovation and learning ... 51

3.5.1 Innovation and learning - people ... 52

3.5.2 Innovation and learning – systems and information ... 53

3.5.3 Innovation and learning - organizational procedures ... 54

3.6 Organizational Performance - Conclusion ... 55

4. Research methodology ... 59

4.1 Research methodology – Type of research ... 59

4.1 Research methodology - Data collection and scope ... 59

4.2 Research methodology - Conceptual model ... 60

4.3 Research methodology - Research design ... 61

5. Comparing General Motors and Toyota ... 62

5.1 Comparing GM and Toyota – Management Style ... 62

5.1.1 Management Style – National culture... 62

5.1.2 Management Style - Organizational culture ... 64

5.1.3 Management Style – Typologies ... 69

5.2 Comparing GM and Toyota – Organizational Performance ... 73

5.2.1 Organizational Performance – Financial indicators ... 73

5.2.2 Organizational Performance – Customer oriented indicators... 74

5.2.3 Organizational Performance – Internal business process ... 76

5.2.4 Organizational Performance – Innovation and learning ... 79

5.3 Comparing GM and Toyota – GM’s bankruptcy and Toyota’s recalls: lessons learned ... 82

5.3.1 GM‟s bankruptcy and Toyota‟s recalls: lessons learned – General Motors ... 82

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5.4 Comparing GM and Toyota – Conclusion ... 85

6. Conclusion and recommendations ... 88

6.1 Conclusion and recommendations – Conclusion ... 88

6.2 Conclusion and recommendations – Recommendations ... 90

7. Discussion and future research ... 92

7.1 Discussion and future research - Discussion ... 92

7.2 Discussion and future research - Future research ... 93

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1. Introduction

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” Charles Darwin

Charles Darwin created an interest in the evolution and diversity of species. His theory changed our perception of the living world around us; how the world changed and how life forms adapted to cope with these changes. I‟m captivated by the fact that one can apply his ideas to a different type of entity: an organization. Just as life forms need to adapt to changes in its environment in order to survive, this concept can also be applied to organizations. Changes spurred by innovation (internet, mobile communication), political developments (fall of socialism, privatization), changes in the environmental conditions (oil prices, competition) are all examples of factors that require changes in the way an organization operates (de Wit and Meyer, 2004:163; Kelly and Amburgey, 1991; Greve and Taylor, 2000; Caslione, 2009). Although there is no consensus on how organizations should balance environmental conditions and their own distinct capabilities, there are two opposite views that can be distinguished (de Wit and Meyer, 2004:249).

The positioning approach (Mintzberg et al, 1998) suggest that firms should first assess the environment and then position the organization in a profitable position in order to obtain competitive advantage (Porter, 1985; Lieberman and Montgomery, 1988; Day, 1990; Porter, 1998). The competence-based or capabilities-based view focuses on the firms‟ competences and suggests that firms should develop unique capabilities that provide them sustainable competitive advantage in the market (Prahalad and Hamel, 1990; Barney, 1991; Stalk et al, 1992; Miller et al, 2002). Although a definitive answer on whether firms should base their strategies on internal strengths or environmental conditions has not been universally accepted, it is clear that it is important for firms to balance their unique capabilities with the environmental conditions they encounter (Porter, 1998; Day, 1994).

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retain, motivate, develop and use human capital in a firm. Secondly, organizational culture helps achieve company goals by means of values, rituals, behaviours, management systems, decision criteria and visionary planning. This implies that organizational culture helps to mobilize human capital and utilize it as a source of (sustained) competitive advantage.

Hofstede et al (1990) concluded that organizational culture is shaped by the values of its founders and leaders. The national culture of the founders and leaders determine their values that in turn shape an organizational culture. Lewin and Stephens (1994) came to similar conclusions and argued that the properties of a CEO are dependent upon his background, attitudes and demographics, which in turn shaped his management philosophy, style and strategic perspective. A clear corporate culture has been found to be the main reason of success on numerous occasions, as in the case of IKEA (Martenson, 2001; Edvardsson and Enquist, 2002) and McDonalds (Ritzer, 1993). In contrast, having a dysfunctional culture has been named as a reason for organizational failure (Balthazard et al, 2006). In a study on firms‟ ability to innovate, Smith et al (2008) argued that organizational culture is a key factor in managing innovation. Organizational culture is reflected in the technology, organizational structure, resources and the management style a firm employs. Management Style is one of the more visible aspects of organizational culture and an important tool for management to instil desirable shared practices (Hofstede et al, 1990).

As organizational culture has been named an important source of sustained competitive advantage and Management Style is an important part of organizational culture, this study focuses on Management Style as a determinant of Organizational Performance. This leads to the following problem statement:

In order to deal with the abovementioned problem statement, a literature review will answer the following research questions:

Management Style (MS)

How can we define MS?

How does MS relate to culture?

Which dimensions of MS exist?

Which typologies of MS can be distinguished?

“Can differences in Management Style explain Organizational Performance?”

Organizational Performance (OP)

Which elements of OP can be distinguished?

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This research than continues by placing the theories on Management Style and Organizational Performance in a real life context by comparing Toyota and General Motors. Organizational Performance cannot simply be regarded in a true / false sense. A clear cut answer on the question to what extent firms are performing satisfactorily cannot easily be given, but it is hard to view a bankruptcy as anything else than a failure of Organizational Performance. One of the most prominent bankruptcies lately was when General Motors (GM) filed for chapter 11 protection on June the 1st, 2009. In 1953, GM was the world‟s largest manufacturer, America‟s largest employer and viewed as the symbol of US economic power. Now, Wal-Mart is the largest employer in America and Toyota has surpassed GM as the world‟s largest car manufacturer (Financial times, 2009). What has happened, and why did Toyota fare much better despite its recent quality scandals (e.g. Treece, 2007; Johnson, 2010)? Toyota has been chosen as the benchmark organization in this study because it faces the same global environmental conditions as GM: they are both active in the automotive industry and both are global players. But the manner in which both organizations utilize their core competencies to interact with and adapt to their environment may well be very different. Specifically, this case study treats Management Style as a unique core competence and it tries to answer the following research questions:

After the case and relevant data has been discussed, the results of this case study will be presented and explained and a solution to the problem statement will be given. The final chapter will discuss the implications of this research, scrutinize the research methodology and will offer suggestions for future research.

The case of Toyota and General Motors (GM)

1. Which management styles are employed by Toyota and GM?

2. How are Toyota and GM performing on the different elements of Organizational Performance?

3. How can the differences in performance be explained by Management Style? 4. What can we learn from the case of Toyota and GM with regard to Management

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2. Theoretical background – Management Style

This is one of two chapters that will provide an overview of existing literature and theories that will form the theoretical background of this case study. This first chapter discusses Management Style. Although Management Style has been a subject of researchers for some years, theory development is still an ongoing process. According to Albaum et al (2010), this is because of a lack and acceptance of a definition of “style” as it relates to management decision-making. Decision-making in itself has been defined as the process of identifying problems and opportunities and then resolving them (Daft, 2000:269). There are many factors that determine the type of Management Style used. For example, in a study on personal and organizational variables and its impact on leadership style, Oshagbemi (2008) found that age and hierarchy is related to the type of Management Style used. The effects and results of different management styles have also been researched (e.g. Edelenbos and Klein, 2009; Clark et al., 2009). It is also well accepted that culture relates to Management Style (e.g. Hofstede, 1980; Glunk et al., 1997; Zhu, 2007), a view that is of particular concern to this study. This first paragraph defines Management Style by means of a literature review. This chapter will then go on and explain the relationship between Management Style and culture. The components of a Management Style will then be identified and explained, after which a distinction will be made between the different types of Management Style. The chapter will end with a summary and conceptual model of Management Style.

2.1 Management Style – Concept

As already stated in the introduction to this chapter, a clear cut definition of Management Style has not yet been universally accepted. Tannenbaum and Schmidt (1958) were among the earlier scholars to theorize on management styles. They define Management Style as the manner a manager relates himself to the group or individuals he is supervising. According to them, differences in Management Style are discernible depending on the use of managerial authority on the one hand and area of freedom for subordinates on the other hand. This leads to two ends of the spectrum: boss-centred leadership and subordinate-centred leadership. This is a view which is also supported by contemporary literature (e.g. Clark et al., 2009). Ouchi (1982:4) viewed Management Style as the manner in which people are managed and organized together to work effectively. McGregor (1960:4) in his book “The human side of enterprise”, viewed Management Style as the assumptions, implicit and explicit, about the most effective way to manage people in order to organize human effort in the service of the economic objectives of the enterprise.

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al (2009) contributes to the debate by defining Management Style as the way individuals and groups are influenced towards accomplishing goals. Mentioning goals in the definition of a Management Style is an important contribution, as the overall goal (or mission) gives an organization its raison d‟être and provides its employees with a sense of direction and guides its decision-makers (Daft, 2001:53). Although it is safe to claim that Management Style is a determining factor in the success of a firm, it‟s place among other determining factors has yet to be explained. Peters and Waterman (1982) developed the 7-S framework which differentiates between seven determining success factors. This framework is discussed in the next paragraph.

2.1.1 Concept - 7-S framework

In a comparison study of top American firms, Peters and Waterman (1982) used the 7-S framework to review several organizations and describe their success factors. This framework revolves around seven internal aspects that an organization needs to align in order to become successful. These seven S‟s are divided into hard and soft elements. strategy, structure and systems are hard elements of an organization, while shared values, skills, staff and Management Style are regarded as soft elements. The 7-S framework can be viewed in Figure 2-1. Management style is defined as the characterization of how key managers behave in achieving the organization‟s goals (Tanner and Pascale, 1983:81). As Management Style is named as one of the seven key internal aspects of an organization, the 7-S framework also lends credit to the claim that Management Style can be an important factor for firm performance.

Shared values (organizational culture) Skills Staff Management style Systems Strategy Structure

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In a study on German-style management, Glunk et al. (1997) defined Management Style as the unique, culturally embedded management practices within a nation and considered both behavioural as institutional aspects of the business system. That culture is an important aspect of Management Style is a well accepted notion, Hofstede (1980) already argued that the effectiveness of a certain Management Style can depend on the characteristics of the (national) culture. The concept of culture is discussed next.

2.1.2 Concept - culture

Although we can provide a number of definitions for culture, Kroeber and Kluckhohn (1952) were one of the first to define culture and their definition has been used as a reference in many publications on culture:

“Culture consists of patterns, explicit and implicit, of and for behaviour acquired and transmitted by symbols, constituting the distinctive achievement of human groups, including their embodiment in artefacts; the essential core of culture consists of traditional (i.e., historically derived and selected) ideas and especially their attached values; culture systems may, on the one hand, be considered as products of action, on the other, as conditioning elements of future action.”

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Norms and values

Basic assumptions

Logo’s, uniforms, identities, physical representations.

“The way we do things around here”; what’s right

and wrong; what’s normal.

Deep assumptions about life; unspoken rules that we

all accept.

Figure 2-2 Trompenaars and Hamden-Turner, a model of culture

The best known research on national culture is Hofstede‟s cultural dimensions (Hofstede, 1983; Hofstede and Bond, 1988). Based on a large survey he distinguished 5 dimensions one can use to distinguish between cultures (Figure 2-3). Power distance is the extent that members of an organization and institutions accept and expect that power is distributed unequally. Individualism (and its opposite, collectivism) is the degree to which individuals are integrated into groups. Within individual societies, individuals have loose ties and everyone is expected to take care of himself. Individuals in collective societies are integrated in strong, cohesive groups which continue protecting the individual in exchange for unquestioning loyalty to the group. Uncertainty avoidance addresses a society‟s tolerance for uncertainty and ambiguity. Countries that score high on uncertainty avoidance minimize uncertainty with rules, regulations and safety and security measures. Low uncertainty avoiding cultures have as few rules as possible and feel comfortable in unstructured circumstances.

High Power distance Low

Individualism Collectivism

Uncertainty avoidance

High Low

Masculinity Femininity

Orientation

Long term Short term

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Masculinity (as opposed to femininity) refers to the degree to which a society sticks with traditional male and female roles. In highly masculine countries, men are expected to be assertive, materialistic, self-centred, strong and powerful whereas women are expected to be loving and caring. In feminine countries the distinction between men and females roles is blurred and men and women are more readily seen to fulfil both roles. The long term orientation dimension (as opposed to short term orientation) deals with a culture‟s orientation to time (the past, present and future). Long term oriented society‟s value thrift, perseverance and making sacrifices for a long-term goal and embrace long-term commitments. Short term oriented society‟s expect effort to produce quick results and find it important to maintain stability and happiness in the present. Changes occur relatively fast as they are not impeded by long term traditions. One of the levels of significant interest to researchers in the field of business administration is organizational culture. This is evidenced by the many instruments that can be found in the literature to explore organizational culture (Jung et al., 2009). Organizational culture is examined in the subsequent section.

2.1.3 Concept - organizational culture

It was understood that organizational culture was determined by the values that members shared (Peters and Waterman, 1982). These values consisted of the “consciously held values of the culture”, like its strategies, goals and philosophies (Thomas, 2002:40). These studies did not distinguish between founders and top managers and the majority of organization members. Hofstede et al (1990) argue that the culture (values) of founders and top managers characterize organizational culture, which consists of symbols, heroes and rituals, and that these elements are shared with other organizational members by shared practices (routines). Figure 2-4 is an adaptation of the “onion model” of culture, specified to depict organizational culture. This theory has been validated by other research.

Symbols Heroes

Values

Words, gestures, pictures, objects

Persons, dead or alive, real or imaginary, serve as

models of behaviour

Collective activities, technically unimportant,

but socially essential Rituals

Practices

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A lot of academics have studied the concept “organizational culture” and its effect on for example organizational performance. In McKinsey‟s 7-S model, organizational culture is (in addition to Management Style) one of the seven internal aspects of an organization (Figure 2-1) and is placed in the centre of the model (Peters and Waterman, 1982:10). It is defined by Pascale and Athos (1981) as the overarching purposes to which an organization and its members dedicate themselves. Organizational culture has been regarded as a tool executives can use (Trice and Beyer, 1993) for “sense making” and “sense giving” (Ravasi and Schultz, 2006) and as a means of creating competitive advantage (Bennis and Nanus, 1985). The role organizational culture plays in the business environment is still a subject of debate. A study by Gregory et al (2008) suggested that organizational culture influences employee attitudes, which in turn influences organizational outcome. Tellis et al (2009) found evidence to suggest that corporate culture is a strong predictor of radical innovation, as opposed to factors such as national labour, capital, government regulation and national culture.

According to Wilkins and Ouchi (1983), the benefits of maintaining a “strong” corporate culture do not necessarily outweigh the costs. They argued that the more ambiguity or uncertainty exists in governing transactions, the more an organization benefits from a strong culture, but a strong culture can be too costly when there is less ambiguity or uncertainty. It has also been argued that a distinct corporate culture is hard to change. Wilkins and Ouchi (1983) however, argue that an organization is more adaptive if its culture is focused more on principles than on practices. In a research brief on culture and leadership styles, Zhu (2007) supported the hypothesis that culture plays a moderating role in the relationship between Management Style and employee attitudes (e.g. satisfaction, commitment). This supports the hypothesis that susceptibility to certain management styles is culturally bound. This raises the following question: which elements actually determine the differences between management styles? This is the topic of the following subsection.

2.1.4 Concept - Six dimensions of management style

In a comparison study on the management styles and unit effectiveness, Culpan and Kucukemiroglu (1993) discerned six dimensions of management style:

1. Supervision (manager – subordinate relationship)

2. Decision-making processes (How decisions are made and problems are solved) 3. Communication pattern

4. Control mechanism (manner of influencing people toward accomplishing goals) 5. Paternalistic orientation (degree of concern for subordinates personal lives)

6. Interdepartmental relations (degree of interaction between different departments within an organization)

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output through the use of power, authority, and a wide range of bureaucratic, cultural, and informal mechanisms. Paternalistic orientation refers to the manager‟s concern for his subordinates personal and family life. Interdepartmental relations measures the degree of interaction among departments within an organization.

Although the literature has not offered us a clear cut definition of management style, the various definitions and descriptions have definite elements in common which lead to the following conclusion on Management Style. Management Style is culturally embedded and is one of the 7 key internal aspects of the organization, it contains the following dimensions:

1. Supervision (manager – subordinate relationship)

2. Decision-making processes (How decisions are made and problems are solved) 3. Communication pattern

4. Control mechanism (manner of influencing people toward accomplishing goals) 5. Paternalistic orientation (degree of concern for subordinates personal lives)

6. Interdepartmental relations (degree of interaction between different departments within an organization)

The next paragraph outlays the different components of management style and the typologies found in the literature.

2.2 Management Style – Typologies

There is a lot of literature on different management styles. This section first starts with early theories on the concept of management and ends with a review of the latest typologies of Management Style. Although the concept of management is as old as men, The scientific management school is known as one of the earliest theories of the modern age.

2.2.1 Typologies - “Classic” theories

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In 1960, McGregor introduced his theory X and theory Y principles of management. He theorized that management (including the scientific management school) based its decisions on traditional assumptions of human nature and behaviour. McGregor named this traditional view Theory X (McGregor, 1960:33). The theory X assumptions are that the average human being has an inherent dislike of work and will avoid it if he can. Because of this human characteristic of dislike of work, most people must be coerced, controlled, directed, threatened with punishment to get them to put forth adequate effort toward the achievement of organizational objectives and the average human being prefers to be directed, wishes to avoid responsibility, has relatively little ambition, wants security above all.

In contrast, theory Y is based on assumptions which are supported by new breakthroughs in the social sciences (McGregor, 1960:47) The theory Y assumptions are that the expenditure of physical and mental effort in work is as natural as play or rest. The average human being does not inherently dislike work. Depending on conditions, it may be a source of satisfaction or a source of punishment. External control and the threat of punishment are not the only means for bringing about effort toward organizational objectives. Man will exercise self-direction and self-control in the service of objectives to which he is committed. Commitment to objectives is a function of the rewards associated with their achievement. The most significant of such rewards, e.g., the satisfaction of ego and self–actualization needs, can be direct products of effort directed towards organizational objectives. The average human being learns, under proper conditions, not only to accept, but to seek responsibility. Avoidance of responsibility, lack of ambition, and emphasis on security are generally consequences of experience, not inherent human characteristics. The capacity to exercise a relatively high degree of imagination, ingenuity, and creativity in the solution of organizational problems is widely, not narrowly, distributed in the population. Under the conditions of modern industrial life, the intellectual potential of the average human being are only partially utilized.

To summarise, theory X assumes that managers must direct employees, control them through close supervision, and coerce them into putting in effort with threats of punishment. In contrast, theory Y presumes that the average person enjoys work, wants responsibility, and is ambitious. The employees' effort and creativity can be harnessed by gaining their commitment to the organization's goals, which entails allowing self-direction and discretion, which must be reinforced through a system of feedback and rewards. Ouchi (1982) supplemented McGregor‟s theory X and Y with his own Theory Z, founded on the Japanese school of thought. It is a “managing style that focuses on a strong company philosophy, a distinct corporate culture, long-range staff development, and consensus decision-making” (Ouchi, 1981). In other words, Theory Z revolves around a strong corporate culture and tradition, cooperative relationships between the employee and the organization, dedication and moral obligations, long-term employment and development of skills through training and job rotation.

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between the different components of Management Style. As previously mentioned, Culpan and Kucukemiroglu (1993) discerned six dimensions of Management Style: supervision, decision-making, communication pattern, control mechanism, paternalistic orientation and interdepartmental relations (Figure 2-5).

Supervision

style

Communication

pattern

Management

_style

Paternalistic

orientation

Decision

making

Control

mechanism

Interdepartmental

relations

Unit effectiveness

Figure 2-5 Model for management style and unit effectiveness (Culpan and Kucukemiroglu, 1993) 2.2.2 Typologies – supervision and decision-making

As supervision deals with the relationship between managers and subordinates, a study on the effects of leadership styles on employee commitment by Clark et al. (2009) offers a simple but useful typology to portray the differences. Three specific leadership styles were identified and used in their research: directive, participative and empowering (Clark et al., 2009). These leadership styles are based on a loose continuum of the degree of supervision exercised by employees and managers. With directive leadership, supervision lies mostly with management. With participative leadership, control and influence is shared, and with empowering leadership, control and influence relies mostly on self-control by employees (Figure 2-6).

Supervision

Directive

Participative

Empowering

Managerial

supervision

Self-control

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The decision-making process is another element of Management Style. According to Daft (2000:284), decisions can be made by using one of four types of decision style models: the directive style, the analytical style, the conceptual style and the behavioural style. The directive style relies on existing rules and procedures for making decisions and managers make decisions quickly, usually without consulting people. Managers adopting an analytical style gather as much data as they can and make an informed decision, albeit based on rational, objective data. A conceptual style is similar to an analytical style although it is more socially oriented, relying on information from systems, as well as people. The behavioural style is adopted by those that have a deep concern for others as individuals, care for personal development and help others achieve their goals.

In a study on country compatible incentive design, Gunkel et al (2009) discerned four types of management styles: authoritarian, mentor, consultative and collaborative. Authoritarian managers make their decisions promptly, communicate them clearly and firmly and expect employees to carry them out loyally and without raising difficulties. Mentor type managers also make their decisions promptly, but try to explain them fully to employees and answer any questions they might have. Consultative managers usually consult their employees before making decisions. They are usually good listeners and consider advice from employees. The final decision is made by the manager however. Collaborative managers usually try and obtain consensus. If consensus is achieved by the group, the manager will usually accept the group‟s opinion as the decision.

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Decision-making power

Manager

Subordinates

Procedural

Social

Decision-making

legitimacy

Mentor

Consultative

Collaborative

Conceptual

Directive

Bureacratic

Democratic

Participative

Figure 2-7 The decision-making continuum

2.2.3 Typologies – Communication pattern and paternalistic orientation

Communication pattern is another element of Management Style (Lu and Hee, 2005). The elements of communication patterns were described in a study on European management styles and communication styles by Tixier (1994): trust, communication form, style of expression and level of formality. Trust is the extent to which managers trust subordinates with information. Form of communication deals with the preference for either oral (face to face) or written communication. Style of expression is the extent to which information is expressed explicit or implicit. Differences in communication can also be distinguished by the level of formality, such as the use of formal titles, first names and the formal form of the pronoun you. Paternalistic orientation pertains to the level of management‟s concern for employees‟ non-work related matters, like personal and family life. In countries with high power distance, and high collectivity (Hofstede, 1983; Hofstede & Bond, 1988), a manager behaves like a father and employees expect this. In contrast, in cultures with high individualism, personal issues have no place in the workplace.

2.2.4 Typologies – Control mechanism and interdepartmental relations

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Organizational structure is the formalized manner in which departments, divisions or subsidiaries are controlled. Daft (2001:95) specified five types of organizational structure: the functional structure, the geographical structure, the divisional structure, the multifocused (also known as a matrix or hybrid) structure and the horizontal structure. In functional structures, employees are placed together who perform similar tasks and have similar knowledge (e.g. marketing, manufacturing). Organizations can also be organized around geographic locations (e.g. Europe, America‟s, Asia). In divisional structures, people are organized based on what the organization produces (e.g. household appliances, healthcare products). In multifocused structures, an organization embraces two structural grouping alternatives at the same time. Horizontal groupings organize employees around core processes (e.g. product development, procurement and logistics). Now that we‟ve distilled the different elements of Management Style and identified some useful typologies, it is time to summarise what we‟ve learned from the literature. The final part of this chapter will offer a rundown of the most important elements found in the literature on management style and will form part of the foundation of this research.

2.3 Management Style – Conclusion

This chapter started with a literature review to enable us to define the (different) concepts of Management Style. Management Style is the combined assumptions on the most effective manner in which people are managed (organised) in order to achieve the economic objectives of the firm. From a different perspective, organizational culture and Management Style are viewed as two of the 7 key internal aspects of an organization that determines performance. Organizational culture and Management Style are closely related and both are regarded as soft elements. Human assumptions are culturally bound, and culture plays a large role in shaping organizational culture and management styles. Management Style itself consists of several elements. A framework was developed with which one can categorize management styles based on supervision (manager – subordinate relationship), decision-making processes (how decisions are made and problems are solved), communication pattern, control mechanism (manner of influencing people toward accomplishing goals), paternalistic orientation (degree of concern for subordinates personal lives) and interdepartmental relations (degree of interaction between different departments within an organization).

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Shared values

(Organizational

culture)

7-S

Management

Style

Culture

Management Style

Figure 2-8 summarising management style

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3. Theoretical background - Organizational Performance

In order to determine the effectiveness of organizations, it is important to define the various indicators that determine Organizational Performance. Traditionally, organizations were managed by financial performance (e.g. Schneider, 1969; Ranard, 1972; Good, 1983). Executives managed their organization by controlling financial measures, such as assets, liabilities, equity, revenue, expenses and income (Hallal, 1998). Tools were developed to enable this, such as Return on Investment (ROI) (e.g. de Vos and Kabat, 1968; de Vos and Walker, 1968; Kierulff, 1976) or Activity Based Costing (ABC) (e.g. Horngren and Foster, 1991; Kaplan, 1990; Partovi, 1991). In recent years, the need to include operational measures of performance became apparent and was voiced by executives (e.g. Webb, 1991). In French, the tableau de bord was developed (Pezet, 2009) and in the U.S. Kaplan and Norton (1992) introduced the Balanced Scorecard (BSC). The BSC uses other perspectives besides the financial one to assess Organizational Performance: the customer perspective, the internal business perspective and the innovation and learning perspective. In the next segment, the BSC will be explained, as the BSC will form the framework of this study and will help us to determine and structure the performance indicators on which both organizations will be compared. After the BSC has been reviewed, we‟ll discuss the four elements of the BSC in depth. We‟ll start off with a review of performance indicators regarding the financial perspective, followed by the customer perspective. Next are the indicators of the internal business perspective and the indicators for innovation and learning. The chapter ends with a summary of performance indicators, captured in a conceptual model depicting Organizational Performance.

3.1 Organizational Performance - The balanced scorecard

As discussed in the introduction to this chapter, traditionally, organizations were managed based on financial measures only. Kaplan and Norton (1992) argued that financial measures alone do not offer top managers any information on (long-term) profitability of the organization as they are mostly based on historic performance. They argued that Organizational Performance should be measured based on other dimensions than financial ones alone. Kaplan and Norton (1992; 1996) developed the BSC to enable managers to do so. The BSC is used as a means to measure company performance on four sets of parameters: 1) the financial perspective, 2) the customer perspective, 3) the internal business perspective and 4) the innovation and learning perspective (Figure 3-1).

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coordination and self-monitoring and motivating employees (Wiersma, 2009). Implementing a BSC in an organization often requires substantial cultural change in an organization (Chavan, 2009) and employee commitment is not always easy to obtain (Clement and Jones, 2009).

Financial

perspective

Customer

perspective

Internal business

_perspective

Innovation and

learning perspective

Mission

Strategy

goals

Figure 3-1 The Balanced Scorecard perspectives, adopted from Kaplan & Norton (1992)

In this study, the BSC will be used in a different manner. The BSC, with its four dimensions (Figure 3-1) will be used as a framework that will enable us to compare the performance of the two organizations on various levels. As such, it will be used in a benchmarking capacity. The idea to use the BSC as a benchmarking tool is fairly new, and literature on this topic is relatively scarce. Punniyamoorthy and Murali (2008) developed a model to “balance” the scores of the BSC so it can be used as a benchmarking tool. Rickards (2003) suggested using data envelopment analysis to set benchmarks in order to evaluate balanced scorecards. The flexibility of the BSC that allows organizations to choose the performance measures it wishes to include in order to achieve its goals, also enables a researcher to use it as a benchmarking tool. It is however important to base the performance indicators chosen in this research on a sound literature review. In the next paragraphs, performance measures will be discussed for each of the four dimensions: the financial perspective, the customer perspective, the internal business process perspective and the innovation and learning perspective.

3.2 Organizational Performance - Financial measures

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measures are chosen that best reflect the performance of organizations on a global scale. The concept of profit seems simple enough and is usually regarded as total revenue (also named net sales or turnover) minus total costs. According to Heyne (2000:253), there is a variety of established definitions for profit which differ mainly on what to include as revenue and costs. Dean (1951) already stated that profits must be measured differently for different purposes. Stockholders, banks, executive decision makers and tax authorities all require different kinds of information and have need of specific income statements. When one breaks down the concept of profit, one finds two important financial measures: revenue and costs. Profit cannot be attained without revenue (operating income), and revenue cannot be earned without selling something, whether it be products or services. Sales therefore, is another financial indicator of great importance. There are also costs involved when doing business. In order to sell products or services, all kinds of costs have to be incurred, such as raw materials, wages, overhead and many more. The concept of costs therefore, is another important financial measure of concern to stakeholders.

Sales figures have the tendency to mask inherent organizational problems, especially in a growing market. When sales numbers are in line with or exceed the results of previous years, one might fail to notice that the competition has far better profitability or gross margin per product. Organizations might also be unaware that despite absolute growth, market share is actually being lost. These examples strengthen the argument that a single measure does not paint the whole picture, and that performance can only be convincingly measured when one combines several performance indicators. On a more general level, the balanced scorecard allows us to combine financial measures, customer oriented performance indicators, internal business process measures and innovation and learning measures, in order to compare the performance of companies on an organizational level. On a smaller scale, by combining several financial measures, a complete picture of the financial performance of the studied organization can be painted. In that sense, triangulation will be used to increase the validity of this study, by using multiple methods, theories and data sources (e.g. Yin, 2003; Ma and Norwich, 2006). Now that we‟ve named some of the financial measures, we‟ll discuss the most important ones and describe ways of measuring them.

3.2.1 Financial measures - sales / revenue / turnover

[26] 3.2.2 Financial measures - Costs

Costs can be regarded in many ways. Economics argue that costs should be regarded as the value of sacrificed opportunities and argues that there are no “objective” costs, but that all costs are costs to someone placing value upon forgone opportunities (Heyne, 2000:45). In the field of business administration, less abstract definitions of costs are given. Just as with profits, the manner in which costs are defined depends on its usage. Costs is measured differently when it is used for stockholders, accounting, executive decision making, taxation purposes, internal control and benchmarking among others. That is also the reason why costs can be measured in many ways. The suitability of a measure is determined by its purpose. Financial accountants use historical costs for instance, but for decision-making purposes, replacement costs might be more relevant (Atkinson, Kaplan and Young, 2004:31).

Calculating costs also differs depending on the cost object, which can be a product, a batch, a product line, a department, a division or a region. But it can also be measured for specific purposes, such as product and development, training and development, marketing activities and projects among others. Costs can be divided in direct and indirect costs. A direct cost can be directly contributed to a single cost object, whereas indirect cost are incurred by more than one cost objects. One can also distinguish between costs in terms of flexibility. Flexible costs are incurred proportional to the amount of the resources used. This contrasts with capacity-related costs which depends on the capacity acquired, rather than the actual level of activity.

Organizations that outperform competitors in minimizing costs can achieve several advantages such as higher mark-up and margins, lower selling prices and even gain a competitive advantage as argued by Porter (1985), as one of his generic competitive strategies is cost leadership (Wit and Meyer, 2004:262). Given all the measures that we‟ve discussed so far, it is clear that revenue and costs alone, are not indicative of a firm‟s actual performance. Other measures have been developed that combine several performance indicators in order to paint a (more) complete picture. Margins and profitability measures for instance compare revenue with costs. These measures are discussed next.

3.2.3 Financial measures - gross margin and net profit margin

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organization‟s raison d‟être is profit (apart from not-for-profit organizations and NGO‟s) and an organization that is unable to secure long-term profitability has lost its reason for existence. Understandably, profit is the most important financial indicator and it‟s the topic of the next paragraph.

3.2.4 Financial measures - Profit and Profitability

Profit in its most basic form is the difference between revenue and costs and can be measured over a period or a transaction. As mentioned before, profits must be measured differently for different purposes. It too can be measured in absolute monetary value or in different ratios. In order to benchmark companies, investors compare the profitability of organizations, which in general measures a firm‟s ability to generate earnings compared to the costs incurred. This is done by dividing the profit by total assets, although variations exist (Heezen 2000:162). But profitability can be measured in many ways, classic methods include calculating the expected rate of return or the net present value. Newer methods have also been developed, such as “q”, the ratio of a firm‟s market value compared to its replacement costs (McFarland, 1988), or economic value added (EVA).

Although it has been fairly recognized that decisions should be made in the interest of long-term profitability as opposed to short-term profitability, the discussion is far from resolved. Where does short-term end and long-term begin? The management of an organization has the responsibility to turn organizational activities into profit, so that the owners (stockholders) can receive their dividends. But recent scandals have shown that managers are motivated into making decisions that lead to short-term success and payment of their own bonuses, instead of making decisions that lead to long-short-term profitability of the organization (Lorsch et al., 2005). Even if the boundaries between long- and short-term were less ambiguous, profit is insufficient in itself to clarify the extent of an organization‟s performance.

We‟ve discussed important financial indicators such as sales, turnover, costs, margins and profit. We‟ve also stated in the introduction of this chapter that although financial indicators are still considered the most important of the key performance indicators, other types of indicators should also be considered. The following paragraphs consider other areas of performance, starting with customer oriented performance indicators as suggested by the balanced scorecard.

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customer loyalty rises, the share of business with that particular client increases. New customers and additional business with existing clients lead to an increase in market share. Lastly, customer profitability increases thanks to retention, since maintaining customers costs less than acquiring them (Atkinson et al, 2004:362). We‟ll start this section on customer oriented measures with a literature review of customer satisfaction.

3.3.1 Customer oriented measures - customer satisfaction

A great deal has been written on customer satisfaction and its sources. The overall premise is that satisfied customers lead to an increase in financial performance (e.g. Fornell et al, 2010). Customer satisfaction can pertain to a number of different aspects and different aggregation levels. There have for instance been customer satisfaction studies on individual products, on the environment or on measurement issues (Westbrook and Cote, 1980; Lundstrom and Lamont, 1976). There have also been studies which were more concerned with the underlying processes that influence customer satisfaction. The confirmation/disconfirmation theory is the best known example of such a study (e.g. Olshavsky and Miller, 1972; Swan and Trawick, 1981). A research conducted by Olshavsky and Miller (1972) determined that an overstatement of product quality leads to more positive satisfaction ratings and understatement leads to less favourable satisfaction ratings. If the discrepancy between prior expectations and product quality was high however, opposite findings were found. That customer satisfaction increases as performance exceeds prior expectations, has been confirmed by numerous studies (e.g. LaTour and Peat, 1980; Swan and Trawick, 1981). LaTour and Peat (1980) also found that other consumers‟ experiences also affected satisfaction judgments. They also introduced the possibility that manufacturer-supplied information (e.g. advertisements) has less weight when relevant information from past experiences and relevant information provided by other consumers can be attained.

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service and customer satisfaction should not be considered as a single construct, but as unique elements, and that they both have distinctive antecedents. Timeliness (the perceived speed of service), service recovery (how well recovery takes place if an error is made) and the appearance of the environment impacts customer satisfaction, whereas the service quality is affected by price, back-stage (behind-the-scene systems) and employee expertise. They also note that service quality is affected by attributes that are generally under managerial control, whereas customer satisfaction is influenced by attributes that affect the customer experience (Figure 3-2). In general, one could argue that service quality is concerned with managerial issues whereas satisfaction mirrors customer concerns.

Customer

satisfaction

Timeliness

Service recovery

Physical environment

Service quality

Price

Back-stage

Expertise

[30] A) Past experiences B) Others’ experiences C) Manufacturers’ promises A) Price level B) Efficiency of systems Level of expertise A) Timeliness B) Service recovery C) Physical environment 1) Confirmation / disconfirmation of expectations 2) Perception of quality 3) Provided service

C

us

to

m

e

r

sat

is

fac

ti

o

n

Figure 3-3 Constructs of customer satisfaction 3.3.2 Customer oriented measures - customer retention

The elements that determine whether a customer is likely to remain loyal to the organization are important to consider. The nature of exchanges has changed according to Harrell and Frazier (1999:19). At first, the emphasis was on a one-time exchange of value, or single-transaction. The emphasis then shifted towards the creation of repeated transactions and it has now shifted to the development of relationships (interactive and two-way connections). There are a number of ways one can account for the relation between customer satisfaction, retention and profitability and there are various means to measure it. A research conducted by Gustaffson et al (2005) distinguishes between three elements: customer satisfaction, affective commitment (created through personal interaction, reciprocity and trust), and calculative commitment (determined by the number of alternatives and switching costs). They concluded that customer satisfaction and affective commitment are based on the same constructs, but that calculative commitment is influenced by other elements. Calculative commitment is predominantly omitted from customer satisfaction research, despite the fact that it captures the competitive element of customer satisfaction. Trust has also been identified as an important element of retention by research conducted by Ranaweera and Prabhu (2003a; 2003b). The four-stage loyalty model (Oliver, 1999) distinguishes four phases of loyalty: cognitive (based on information), affective (based on liking), conative (based on intention) and action (based on habit). In each stage, the importance of loyalty increases as opposed to rational considerations when considering to buy a product.

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competitive offerings on the basis of brand loyalty and not on the basis of information generated by marketing efforts. Community / social support is based on the extent that the social environment promotes loyalty. As seen in Figure 3-4, four strategies can be distinguished, where product-superiority is the lowest attainable state of loyalty, and immersed self-identity is the highest loyalty state. Product-superiority reflects the classic concept of loyalty: high quality generates a strong sense of brand preference.

Community / social support

Low

High

Low

High

Individual

fortitude

Product

superiority

Village

envelopment

Determined

self-isolation

Immersed

self-identity

Figure 3-4 Strategies of loyalty

Determined self-isolation differs from product superiority. Loyalty in the latter case is based on rational grounds, whereas determined self-isolation is based on allegiance. Village envelopment is when loyalty is primarily motivated because the consumer willingly becomes a member of a group of consumers. Marketers can approximate this idea by using the notion of family or loyalty programs. An investigation into the effects of loyalty programs on retention has already shown positive effects (Stauss et al, 2001). The notion of immersed self-identity goes even further: the products, services and the organization are part of both the consumers‟ self-identity as well as his or hers social identity. According to Oliver (1999) this state is difficult to attain and can only be achieved when five criteria are met. 1) The product must be unique, 2) an attractive segment of customers must find the product desirable, 3) the product must be susceptible to adoration, 4) the product must have the ability to be embedded in a social network and 5) the organization must be willing to invest in this social network.

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switching barriers play an important part in the customer‟s decision to remain loyal or not. In other words, the higher the perceived costs of switching, the higher the level of retention. In a research which studied the nature of customer loyalty and its effect on relationship preferences and decisions, a difference was found between core products, routine products and complex products (O‟Loughlin and Szmigin, 2006). They concluded that for routine products, customers were inclined to search for the most competitive alternative. For complex products, the existing relationship was deemed valuable, but in the long run, functional values were perceived to be more important. When it comes to core products, the emotional values are deemed more important than functional values, and customers tend to remain loyal when it comes to these products.

As previously shown, retention is a greater predictor of organizational success then customer satisfaction. In fact, customer satisfaction is just one attribute of loyalty and retention. Commitment has been identified as another attribute and can in itself be divided in affective commitment and calculative commitment. These variables differ when attributes of customer segments are dissimilar or when the nature of the product varies. To summarise, we‟ve used an adaptation of the model introduced by Gustaffson et al (2005) in order to define the elements that influence retention (Figure 3-5). Before an organization can meet or exceed the expectations of its customers, it is important to actually obtain these customers. Customer acquisition is the topic of the next paragraph.

Customer satisfaction

Calculative

commitment

Affective

commitment

R

e

te

n

ti

o

n

/

lo

ya

lt

y

Figure 3-5 Antecedents of retention and loyalty, adopted from Gustaffson et al. (2005) 3.3.3 Customer oriented measures - customer acquisition

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culture, reference groups and situational factors (Leeflang and van Rooy, 1995:120). Culture has been thoroughly discussed in the previous chapter. Reference groups are divided in a number of groups: 1) primary reference groups with informal contacts such as family and friends, 2) secondary reference groups which are more formal, such as a church communion, a sports club or a labour union 3) aspired reference groups (a group that one does not yet belong to, but one aspires to) and 4) dissociative groups (groups one absolutely does not want to be associated with). Situational factors are concerned with the physical environment, social surroundings, timing of the situation and the consumer‟s state of mind among others. Individual differences are set apart in six categories: needs, commitment, personality, values, lifestyle, knowledge and attitudes (Leeflang and van Rooy, 1995:124). Each individual differs in their needs. Maslow (1943) differentiated needs between five levels, each level superseded by a more complex level, starting with the most basic needs (physiological) and ending with a desire for self-fulfilment or self-actualization (Figure 3-6).

Physiological needs

Water, food, air

Safety

Safe from physical and psychological harm

Love

Desire to be loved and love

Esteem

Need for reputation, status, prestige, recognition, self-confidence and strength

Self-actualization

Desire for self-fulfillment, to become the best one is able of

becoming

Figure 3-6 Hierarchy of needs (Maslow, 1943)

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involvement on the other hand deals with the importance of making a right choice in brand and type when purchasing a product, which can be either low (simple and superficial selection) or high (elaborate and careful selection).

Personality, attitudes and personal values differentiate consumers from another. Lifestyle is another factor that differentiates consumers. Three elements are usually distinguished: 1) activities (how and where one spends his time or money), 2) personal interests and priorities (e.g. housing, fashion, eating habits) and 3) opinions on public issues (e.g. politics, economics, environmental issues, education) (Leeflang and van Rooy, 1995:127). Knowledge is another aspect which can be used to differentiate between consumers. Set apart, consumers can have knowledge of the product (e.g. specifications, brands, prices), on purchasing (e.g. where, how and when a product is for sale), on usage (e.g. utilities, attributes, used materials, options) and on discarding (e.g. resell value, environmental issues, other usages). All these above mentioned points affect the consumer decision process in some way, whether in creating needs and desires, the amount of information available, the evaluation of alternatives, the purchasing decision and the evaluation of the purchase (Engel et al, 1993). Figure 3-7 shows the phases of the consumer decision process.

External influences

Individual

differences

Psychological

processes

Needs and desires

Information processing

Evaluation of alternatives

Purchase

Evaluation of purchase

Figure 3-7 Phases of the consumer decision process (Engel et al, 1993)

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Equity increases through several factors. The customer adds cash flow, secondly, the customer may generate new acquisitions through word of mouth, these new acquisitions then generate new cash flows and acquisitions and so on (Villanueva et al, 2008).

The effectiveness of customer acquisition remains a topic of interest for scholars and practitioners in the field of marketing. There are many marketing activities an organization can take to acquire new customers. Mass media (e.g. television, radio, internet and newspaper advertising) or personalized contacts (e.g. direct mail, promotion calls, soliciting) are a few of the many ways a company can market its products and services. With each method, the trade-off between cost and effectiveness is different (e.g. Leeflang and van Rooy, 1995; Villanueva et al, 2008). All the above mentioned methods of acquiring customers are more or less costly. On the other hand, word of mouth is a relatively costless way for organizations to increase customer acquisition and retention. Traditionally, word of mouth could be considered in the most literal sense. With the advent of media such as the internet, the denotation of word of mouth changed, as consumer websites and online forums enable consumers to share the experiences they have with an organization and its products and services with other consumers worldwide. A study by Villanueva et al (2008) found that customers acquired through expensive marketing investments add more short term value, but in the long-term, customers acquired through cheaper word-of-mouth methods add almost twice as much long-term value to a firm.

Each method also has different effects on retention possibilities (Thomas, 2001). It is suggested that word of mouth marketing methods are more convincing than conventional advertising because of greater (perceived) credibility, because customers realize that conventional marketing influences their beliefs and behaviour and because word of mouth can spread with less support from the firm‟s marketing resources (e.g. Herr et al, 1991; Villanueva et al, 2008). Again, the trade-off between the cost of the market activity and its effects on for example the scope, its extent, its time-span and the percentage of converted customers is of particular concern to practitioners and scholars (Leeflang and van Rooy, 1995:438). Conventional marketing, especially the use of mass media, can be particularly costly. Its effect is only strong in the short-term and considerable marketing investments are still necessary to retain customers. Acquiring customers through word of mouth marketing may be slow, but leads to better long-term customer profitability (Villanueva et al 2008). As stated before, acquiring customers is not about acquiring just any customer, but about acquiring the right customer, as some customers that might be profitable to some organizations, can be as equally costly to other organizations (Reichheld, 1993; Blattberg et al, 2001; Epstein et al, 2008). The next paragraph discusses customer profitability.

3.3.4 Customer oriented measures - customer profitability