Management theory and environmental forces

BACKGROUND TO THE CASE STUDY

Akzo Nobel organization is a world leading organization with well established companies that controls its business operations, in the different areas it operates in. the organization is a diversified, multicultural and truly global organization with activities in pharma -products, coatings and chemical.

The Akzo Nobel organization was founded in 1911, and has its headquarters in Arnhem, Netherlands. With its operational divisions, the organization over many decades have operated in four major divisions, these are in human healthcare products, animal healthcare products, coatings and panting, and chemical products. The organization in each of its segmental operations has been a global leader and a household name to be reckoned with.

ccording to Narula & Hoesel, (1999:44), “Among the chemical enterprises AKZO (today AKZO NOBEL) is probably the best known of the Dutch multinationals. AKZO was created in 1969 from a merger between the Algemene Kunstzijde Unie (AKU) and the Koninklijke Zout Organum (KZO) which produced salt, synthetic textiles and nylon and filaments, among other things. In the 1920s the AKU entered into an alliance with Vereinigte Glanzstoff AG in Wuppertal. In 1929 this situation was reversed in a takeover of Glanzstoff.”

The Akzo Nobel organization is made up of 500 companies that are listed on both the Euronext Amsterdam and NASDAQ stock exchanges. It is also listed on the Dow Jones Sustainability Indexes and the FTSE4Good Index (Akzo Nobel, 2006). The organization primarily operates in Europe, North America, Latin America, Asia, the Middle East, and Africa. It has a workforce of around 61,500 people and a subdivision of its business in 13 business units, with operating subsidiaries in more than 80 countries (ibid).

EVOLUTION OF MANAGEMENT THEORIES

Organization exists and operates with a given number of people. The people interact and cooperate in functioning together in order to meet the set objectives of the organization. Thus, it is seen that an organization do not operate in a vacuum; it operates as a network of interrelating individuals, whose functions are synchronised and coordinated and directed towards meeting an immediate objective or a long term gaol of the organization.

Since the commencement of the Industrial revolution era, in the late Eighteenth century, Scholars in the social and management sciences, had carried out diverse research in order to see how members o f an organization can improve its productivity level, and the most feasible way workers can be effectively motivated in order for them to increase their productivity. This search brought about different theories.  Organization theories can be broadly classified into the Classical organization school of thought and the Neo- classical organization school of thought.

Famous theories in the classical school of thought are the Scientific management or Machine school theory propounded by Frederick Winslow Taylor (1856- 1915). Others Administrative theories associated with the Classical school include Henri Fayol 14 principles of management, Max Weber Ideal Bureaucracy theory. On the Neo- classical school, we have the Human Relation School of thought. Elton Mayo led the movement. In addition, there is the Behavioural school, Motivational theories like the Federick Herzberg Two factor theory, Douglas MC Gregory’s X and Y theories, and Abraham Maslow Hierarchy of need theory, among others.

SCIENTIFIC MANAGEMENT THEORY

In the weak of the Industrial revolution era, where steam engine and the creation of factories in the production of textiles and other product in the 18th century, the need to bring about increase in the effective rate of output and productivity led to the introduction of the Scientific management theory by Frederick W. Taylor (1856-1915).

The scientific management theory tend to see the workers of an organization like robotic machines that can be motivated only through the carrot and stick approach, i.e., they should be closely monitored and incentives given to them as form of motivation to make them produce more. This theory submits that the work process should be broken down to its easiest smallest units. In addition, the best approach in carrying out these identified units of tasks should be proffered and related to the workers by their supervisors.

The workers are to be monitored and timed through the stopwatches and shorter days and breaks given as a way of motivation. Thus, the piece rate wage is envisaged by the scientific theory, where the workers earn according to its output; to avoid soldiering where time is wasted as pretence in workers. According to Wertheim (2005), “Taylor attempted to make a science for each element of work and restrict behavioural alternatives facing worker. Taylor looked at interaction of human characteristics, social environment, task and physical environment, capacity, speed, durability, and cost. The overall goal was to remove human variability”.

HUMAN RELATIONS MOVEMENT

After the World War 2, where the social psychological activities is of the increase, Elton Mayo and his associates undertook a study to see what actually motivates workers and increase their productivity level. This experiment began in 1927 at the Hawthorne works of the Western electric company in Cicero, Illinois (1927- 1932). Mayo joined in early 1928. The western electric company, manufacturer of telephone equipment at its Hawthorne works, had a policy of high wages and good working conditions for employees and of using modern placement techniques. For twenty years before the research began, managers considered general morale high among employees and the incidence of industrial conflict infrequent. ( Trahair, 1984 : 225-6)

The Hawthorne experiment came as a criticism to the Scientific School. It opined that there are other factors that actually motivate workers in an organisation, other, than the economical and environmental condition of workplace. “Despite the economic process brought about in part by scientific management, critics were calling attention to the seamy ‘side of progress’, which include severe labour/ management conflict, apathy, boredom, and wasted human resources”. (Wertheim, 2005).

Among its findings, the Human relations school find out that workers operate as a team and there exist a social interaction among them, that is, an informal social interaction, other than the everyday formal working process. This informal connectivity among the workers is a source of which they are being motivated. According to Mayo (1945; 112) “… the eager human desire for cooperative activity still persists in the ordinary person and can be utilized by intelligent and straightforward management. The best vehicle to its achieving was informal groups (rather than formal work teams), as they provided their members with the basic needs for communication and cooperation.”

The results of the research led researchers to feel that they were not explained by classic theory, which stressed the formal organizational and formal leadership. The Hawthorne studies helped us to see that an organization is more than a formal arrangement of functions but is also a social system” (Wertheim, 2005). Thus, job satisfaction interdependent and informal social interaction in working place is discovered as among the multi- dimensional factors that spur the workers of an organization into putting his/ her best in increasing their productivity level.

MANAGEMENT STRUCTURES AND STRATEGIES UTILIZED IN AKZO NOBEL COMPANY

The Akzo Novel businesses have enjoyed in many years great monopoly as being a world leading organization in the coatings and paint industry. In order to maintain this status, the organization needs to embark on an effective strategy management and adopt a competitive strategy that its rivals cannot easily imitate. However, the monopoly enjoyed by the Akzo Nobel organization has given way due to the entrants of new competitors to the industry where it operates. This turn of event for the Akzo Nobel Coatings business is for the organization to change its corporate culture and strategize differently in order to maintain its leadership status amidst the stiff competition in the industry.

According to Horst et al (2002:15), “Akzo Nobel held a monopoly position for a long time, but saw this position disappear. Moreover, prices lowered and client demands changed. As a result, quality management and cost reductions became the main business targets. Continuous improvement is a prerequisite. In order to realize this, the company wanted to change its culture”. Over the past five ears the Akzo Nobel organization has adopted several strategies to make the organization remain the global leader in the industries where it businesses span.

Among the adopted strategies of the organization include: the adoption of a strong corporate culture and corporate identity; the strategy of cost effectiveness to gain competitive advantage; utilization of its economies of scale benefits to expand its business growth; adopting business expansion and competitive advantage through acquisitions and strategic alliances; extensive investments in Research and Development (R&D), flexible financial operation system; streamlining of the organization’s business portfolio; restructuring the corporate culture  effective human resource training and development  to adapt with changes in the contemporary environment in which its operates; adequate communication and workers participation; and total quality management.

Possession of a Strong Corporate Culture

An organization with a strong corporate culture tends to maintain its corporate identity even during times of persistence changes in the environment where the business operates. An organization’s corporate culture goes a long way in determining how the organization’s strategies are structured. According to Ulijn et al (2000), “since innovation strategy often involves management of change, mergers, strategic alliances, joint ventures, and acquisitions, unexpected culture differences might lead to serious failure”.

The compatibility of an organization corporate culture with its business strategies is germane for the successful achievement of the organization’s objectives. For Akzo Nobel, it has operates a strong corporate culture in regards to qualitative product and the creation of a more endearing relationship between the organization and its customers. Through the organization’s network of partnership with other organizations, it has adequately operated in different countries with varied national cultures.

Thus, the organization is able to respect the national cultural differences in the different countries it operates through its vast network of partners who are based in these countries and know their way around and the nitty-gritty for a successful operation of business in accordance with the cultural acumen needed. In addition, the adoption of a strong corporate culture in Akzo Nobel is a way of making workers and members of the organization to demonstrate commitment to the affairs of the organization.

In this view Scott (1987), cited in Balmer & Wilson (1998), argues that organizations are concerned about corporate culture because it helps to sustain the commitment of individual members to the good of the organization. There is the perception that individuals who have genuinely internalized the values of the organization are likely to engage in cooperative and spontaneous behavior in their services to the organization. Then as a way of understanding the extent of workers commitment, this requires that the organization take an exploring of the different perspectives of its corporate culture.

Gaining Advantages through Economies of Scales

Another strategy adopted in Akzo Nobel business is the utilization of its economies of scale advantage to the expansion of the growth of its businesses. Akzo Nobel is a multinational organization with huge and well-established network of organizations. To this end, it enjoys massive economies of scale. With its financial and resource size, the organization is positioned to embark on extensive research and development exercises, engage in the utilization of modern base technologies gargets and invest in an effective IT programming for the organization.

It also stands to have the best hands and professionals to operate its business operations, and having operational cost advantages and lowered priced of raw materials. These economies of scale advantages have been utilized by the Akzo Nobel organization in the expansion of its business growth. Through the accumulation of huge financial resource base, the organization is able to expand on its business and hence, carry out the production of innovative products and improved ways of rendering its services on coatings and paints. This has made the organization to continue occupying the market leadership in the industry where it operates.

Creating Innovative Products through Research and Development

Another vibrant strategy the Akzo Nobel organization had adopted for many years now is the extensive investments in Research and Development (R&D). The organization through R&D has being able to com out with innovative products. “Research and development plays a vital role, underlined by the company’s continued success in adding ground-breaking products to its technology-driven portfolio of global brands” (Akzo Nobel, 2006).

The priority placed on R&D by the organization has led to its allocation of huge sums in carrying out the activity. In 2005, Akzo Nobel’s R&D expenses were EUR 834 million that is equivalent to 6.4% of revenues. For 2004, this was EUR 816 million and 6.4% respectively (Akzo Nobel Report, 2005).

The percentage spent on R&D on Coatings and Chemical business remained at 3% for 2004 and 2005(ibid). In 2004 the Akzo Nobel Coatings business invested 4 million pounds in developing a purpose-built research and development laboratory at its Felling site near Gateshead. “The facility will be used to develop products for Akzo’s worldwide marine and yacht coatings business and will form a vital part of future plans” (Walker, 2004). Work in the R&D facility is focused on formulating new anti-fouling technologies, new-building coatings and maintenance and repair coatings (ibid).

The R&D has helped the organization in improving its organization’s income from the sales of quality products. According to Walker (2005), “The Company, which invested pounds 4m in a new research and development unit…saw full year net income rose by 42pc to e856m (Pounds 588m), boosted by the paints division, cost-cutting and sales of other units”. R&D, alongside with other internal interfaces such as manufacturing and marketing, has helped Akzo Nobel to embark on its global sourcing for materials.

Thus, the organization is able to meet the challenges associated with procurement of raw materials and how to manage global supply. Research and development has greatly being a supportive strategic approach for the creation of divers of innovative products associated with the Akzo Nobel business. According to Albronda & Geldarman (2005), the R&D department of Akzo Nobel carries out product improvement and guides the organization in distinguishing position in comparison with competing manufacturers.

Gaining Competitive Advantage through Cost Effectiveness

In recent years the cost reduction strategy has underline the way Akzo Nobel business strategize towards maintaining its competitive advantage. Cost effectiveness is adopted as a way of making sure the organization cost of production is within an efficient level that would reduce in the overhead cost and price passed to customers, to make the organization compete favorably.

The utilization of adequate supply of raw material plays a significant role in the Coatings business. Moreover, the raise in cost of these materials tends to affect the level of sales and operation. For instance, in the last quarter of 2004 and the first half of 2005 Akzo Nobel business experienced a tough year due to steeply rising raw material prices. This has prompted the organization to tighten its cost control. Cost reduction is an effective strategy used in effecting revenue growth in Akzo Nobel business.

The changes witnessed in the global coatings and paint industry, where the level of competition is high and the monopoly enjoyed by the Akzo Nobel business is give n way, this has prompted the organization to result in quality management and cost reductions strategy as its main business targets (Horst et al, 2002:115). Cost effectiveness entails that the organization would operate as a low-cost producer thereby gaining the advantage of producing goods at low cost prices and gaining more customers.

Purchasing Strategy through the Portfolio Approach

Furthermore, the purchasing strategy adopted by the Akzo Nobel, this is analyzed here through the portfolio strategic approach. The adoption of a portfolio analysis for the organization is significant here because the organization form its vast area of operations would know products or product  groups that portends a bottleneck or cause problems and risk of dependence on its strategic plans. “The portfolio analysis is considered as an indispensable tool for the development of purchasing strategies, differentiated to products and supplies.

The portfolio analysis is being used to indicate the importance of a raw material and its suppliers and to order the purchasing value. Hence, this result in a clear picture of their own strength and weakness in purchasing markets” (ibid). The portfolio analysis adopted in Akzo Nobel is one that is in line with Kraljic portfolio approach. Here, the organization categorized its raw materials into four cells based on the number of suppliers and the value of purchases.

The number of suppliers entails the actual number of suppliers used for the year for the same product item. These suppliers are separated and classified as ‘large’ and ‘small’, and then assessed against the level of the organization’s dependence on their supplies. On the other hand, the value of purchases is measured in money, reflecting the price and the volume of raw material used. Then a demarcation between ‘high’ and ‘low’ value is made. These approach enables, the organization to deter mine which product constitute high  risk dependence on suppliers and those with any problem that tends to hinder free supply.

Financial Flexibility Strategy

Flexible financial operation system has be en widely utilized in the Akzo Nobel businesses. Here, financial allocations across the different units of the organization is made flexible amidst flexible investments in deals that cut a cross the Akzo Nobel organization. Areas where pressing financial requirement is identified, the system has made provision for the easy diversification of funds to them, as long as the financial commitment is seen as a means of enabling the organization achieve its objectives effectively. According to Akzo Nobel Shareholder’s Circular (2006), “The increased strategic and financial flexibility should give us room to deliver on our strategic focus of growth.

Strategy of Empowering Human Resource through Effective Workers Participation

The Mayo Human Relations principles are adequately adopted in Akzo Nobel organization. Human resource plays a significant role in the success of any organization. Thus, the development and adequate training of workers would empower them to competently lead the organization in the attainment of is objectives and long term-goals. For Akzo Nobel businesses, the organization has engaged in development and training of its workers and practiced workers participation through an effective and adequate communication mechanism in place.

According to Horst et al (2002:115), Akzo Nobel started a process of on-going change, in order to adapt to new situations but also to show employees that making changes is very important for organizational development and that employee development is crucial. The company has formulated mission and targets set out for different levels of managers and employees to devise departments or team targets.

The improvement of communication within the company also received attention, as much information is made available for everyone. Thus, it is seen that Akzo Nobel organization practices a strategic human resource management (SHRM), whereby the organization’s human resource are made to partake in the strategic making and implementation of the organization’s strategies. For Akzo Nobel this is carried out through effective workers participation and improving on the teamwork of workers.

Self-directed work teams are introduced by the organization, where managers partake in training employees. In addition, the employees are trained through multi-skilling, as well as social and communication skills (ibid). This goes a long way in making workers have a sense of belonging in the organization.

According to Jones & George (1998), “Emotions are intense affective states tied to particular events or circumstances that interrupt on- going cognitive processes and behaviors, while moods are less intense, generalized affective states that are not explicitly linked to particular events or circumstances. People experience emotional responses to trust relationship when have a sense of confidence in such relationship”.

STRATEGIES NOT ADOPTED IN AKZO NOBEL ORGANIZATION

BACKWARD LINKAGE STRATEGY

Akzo Nobel in its operation does not source its raw material from a backward linkage as it is practiced in other organization. Backward linkage strategy entails that the organization will operate a source from which it derives its raw materials for its operational production. For instance, Day Chocolate organization that produces fruit drink, has its farm where cocoa seedlings are grown and animal husbandry, where are used in making the fruit drinks and for milk production. Backward linkage strategy reduces the cost incurred by organization in sourcing for raw materials from other organizations.

CENTRALIZED ORGANIZATIONAL STRUCTURE

Akzo Nobel organization does not operate a centralized organization, given the number of business units it has. Thus, each business units operate separately from other units. Since, the products of all the business units are not the same, it is justifiable that the organization do not adopt a centralize organization structure.

ENVIRONMENTAL FORCES THAT INFLUENCES A FIRM’S STRATEGIC MANAGEMENT

The environment in which a firm operates determines the type of decision to be made on the firm’s strategic management. According to Peter (2005:51), the general environment is composed of segments, also the individual elements that are peculiar to the eternal environment of a firm.

The external environmental variables that influences the operations and strategic management a firm includes the business opportunities available, threats to the firm’s effective operation, the level of competition within  the industry the firm operates in, and the mode of competitor analysis. To a significant extent, the ability of an organization to adapt adequately to the environment in which it operates would determine its success level. There are different levels of impact these environmental segments would have on each industry and firms.

Thus, the challenge is for a firm to scan, monitor, forecast and assess those elements in each segment that are of the greatest importance to it.  These segments of environment external to the firm include the Demographic segment, Economic segment, Political/ legal segment, Socio-cultural segment, Technological segment, and Global segment. These segments are different parts that have different impact on how an organization operates and strategies.

TWO DIRECT ENVIRONMENTAL FORCES THAT INFLUENCES AKZO NOBEL ORGANIZATION’S PROGRESS

TECHNOLOGY FORCE

Information Technology pays a vital role in the effective operation of Akzo Nobel Coatings business. The different units in the Coatings business require specific IT base software solution for them to operate with effectively. What was in place in the organization was a central solution that is not adequate for the operation on the diverse segments of the Coatings business. For example, the Industrial Finishes business created a database applicable formula, to support its track health safety and environmental information, while this database application proved useful to Industrial Finishes; it did not integrate easily with Akzo Nobel’s global Information Technology (IT) infrastructure (Logue, 2006).

The Optiva software solution from Formation Systems is now introduced into the IT system of Akzo Nobel Coatings. Formation systems’ Optiva is an enterprise wide software solution designed specifically to support collaborative product development for manufacturer of chemical, paints, and coatings” (ibid). Currently, the Optiva is manually entered into the global IT system at Akzo Nobel.

Thus, there is the move to automate it, and in addition create a workflow and optimization modules that would enable the organization to standardize and globalize critical business processes while ensuring data integrity, both at the source and during translation to other systems. The Optiva is being created with accelerating development activities that enhance top-line growth by enabling extensive formula manipulation, calculation and adjustment, which enables Akzo Nobel to share information and leverage research and formulas across its businesses (ibid).

MARKET DEMAND FORCE

Since no organization is an island of itself, there are interactions and cross-transnational transactions. This is more germane for multinational corporations. Globally there is the practice among business organization to give their client qualitative services and products. Many have adopted Total quality Management as a strategy to meet this requirement.

Akzo Nobel organization has the strategy of giving standard quality to all its products. Total Quality Management (TQM) entails that customers of Akzo Nobel get the best satisfaction from the utilization of any of its product. According to Horst et al (2002:115), Akzo Nobel attention was also paid to ‘managing total quality’ this is aligned to the introduction of quality improvement teams. The regards the organization place on quality product has made it resulted into getting the best raw materials and the best workforce to see that its total quality strategic plans are attained. According to Albronda & Gelderman (2005), “In a niche market, Akzo Nobel Coatings operates with relatively high margins.

The delivery times and high quality are important selling points. As a result, these are important criteria for suppliers too. High product quality in end markets requires high quality ingredients. In returns, high margins in end markets allow for expensive raw materials” .TQM is a modern management tool used by organizations to deliver quality services and quality products to its customers in order to curve a niche for themselves. It entails that all aspects and functions of the organization are aligned with quality service delivery.

TWO INDIRECT FORCES THAT INFLUENCES AKZO NOBEL ORGANIZATION SUCCESSES

POLITICAL FORCE

Akzo Nobel operates in many countries. Every government of a state has regulations on how business operations are to be conducted. Akzo Nobel has successfully partner with governments of different countries. It has won contracts from government agencies and public organizations that have created a cordial relationship between the organization and the political authorities where it operates. Furthermore, the corporate social responsibilities in the different places it operates give it a conducive environment to operate.

SOCIO-CULTURAL FORCE

Akzo Nobel has numerous staff from different cultural background. In addition, societal influences tend to have a great play on its operations. The social and cultural practices of the organization  include social issues that has  to do with  women in the workforce, workforce diversity, attitudes about the quality of work life, concerns about the environment, shift in work and career preferences regarding product and  services characteristics. All these   social and cultural practices sometimes have the organization has successfully handled to enable it prevent any negative effects in its business environment

VALUE DRIVEN MANAGEMENT IN AKZO NOBEL

As a way to control effectively the diverse spread of the organization’s business in its business unit, Akzo Nobel has adopted the strategy of streamlining its business into a more manageable size. Streamlining the organization’s portfolio; i.e. its diverse business dealings, becomes expedient to align it to a manageable size that will expedite rapid growth. According to Akzo Nobel Report (2005), the Akzo Nobel successful implementation of a strategy to streamline its portfolio is to make the organization to realign competitively the business for sustainable growth, profitability, and leadership positions in selected markets.

Currently, the Akzo Nobel organization is engaging on a general restructuring of its business. This is directed towards separating the organization into two independent entities; where Chemical and Coatings units of the organization would be collapse together as an independent organization from the pharmaceutical business that would comprise the Organon and Intervet business units, which would be renamed Organon Biosciences N. V. (OBS).

The separation of the organization is aimed at making the Akzo Nobel organization achieve its long-term objectives in the most effective way and to best enhance shareholders value in the organization. Adopting a strategy to streamline an organization’s portfolio would make the organization to be prudent in its investment bids and only invest in that business that would be more lucrative in line with the organization’s vision, stated objectives and long term-goals. This practice in the organization has constituted a value adder, in terms of well-structured organization that enables the proper coordination and allocation of resources for effective operations.

Value destroyers are those impediments that obstruct effective operations within an organization. Thus in order to manage and handled causative variables of value destroyer the adoption of this value management practice of streamlining the organization business into business units that operates similarly is very significant for the Akzo Nobel organization to operate effectively.

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