Course Notes

CGMA E2
Managing performance
From January 2023
ii Introduction CGMA E2 Course Notes

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CGMA E2 Course Notes Introduction iii

Contents
Page

1: Business models 1

1 The ecosystem of organisations 1

2 Key concepts in the business ecosystem 4
3 Different forms of business organisation (networking/partnership) 9
4 Society and regulation 10
5 Knowledge diagnostic 11

2: Elements of business models: value I 13

1 The CGMA business model 13

2 Defining value 14
3 Creating value 16
4 Delivering value to customers 17
5 Distribution of value to key stakeholders 19
6 Knowledge diagnostic 20

3: Elements of business models: value II 21

1 New business models in digital ecosystems 21

2 Knowledge diagnostic 30

4: Managing people performance 31

1 Managing people performance 31

2 Leadership concepts 32
3 Theories of management 35
4 Approaches to leadership 37
5 Leadership in different contexts 41
6 Knowledge diagnostic 44

5: Managing the workplace environment 45

1 Performance objective setting 45

2 Employee appraisals 47
3 Mentoring and coaching 50
4 Managing work place environment 51
5 Organisational culture and values 54
6 Knowledge diagnostic 56

6: Managing relationships 57

1 Building and leading teams 57

2 Effective communication 64
3 Negotiation 67
4 Managing conflict in organisations 69
5 Knowledge diagnostic 72

7: Managing projects I 73

1 Project objectives 73
iv Introduction CGMA E2 Course Notes

2 The project life cycle 77

3 Project tools 78
4 Risk identification, assessment and management 84
5 Knowledge diagnostic 85

8: Managing projects II 87

1 Managing project problems 87

2 Project documentation 88
3 Project people 89
4 Managing the project team 90
5 Stakeholder marketing 91
6 The role of the Chartered Management Accountant in projects 91
7 Knowledge diagnostic 91

Solution to Lecture example 93

Chapter 7 93
1

Business models

1 The ecosystem of organisations

In this chapter we consider the environment in which organisations exist and operate.
The environment is outside the control of an organisation’s management team. An understanding of
the environment is key to organisational success.

1.1 Traditional environmental appraisal

Traditionally organisations have appraised their environment by using tools such as the PESTEL model
and Porter’s Five Forces. This syllabus is focused on the newer ecosystem concept (discussed in
section 1.2) so this is only a brief outline:

1.1.1 PESTEL
An analysis of the general environment covers key PESTEL factors: Political, Economic, Social,
Technological, Ecological and Legal.
These PESTEL factors provide a framework for analysing or reviewing a situation, a strategy, position,
or direction of an enterprise.
This analysis may be conducted across three levels: Local, National and Global.
2 1: Business models CGMA E2 Course Notes

1.1.2 Porter’s five forces

This is a framework for industry analysis developed by Michael Porter. Five forces determine the
competitive intensity and therefore attractiveness of a market. Porter referred to these forces as the
microenvironment. The forces affect an organisation’s ability to serve its customers and make a profit.
A change in a force normally requires a company to re-assess the marketplace.

Bargaining
power of
suppliers

Threat of Competitive
Threat of
substitute rivalry within
new entrants
products an industry

Bargaining
power of
customers

The threat of substitute products

The existence of close substitute products increases the propensity of customers to switch to
alternatives in response to price increases (high elasticity of demand).

The threat of the entry of new competitors

Profitable markets that yield high returns will draw firms in, unless new entrants can be blocked,
profitability falls.

The bargaining power of customers

The ability of customers to put the firm under pressure and to resist price increases, force price cuts or
insist on improvements in product or service with no price increase.

The bargaining power of suppliers

Suppliers may refuse to work with us, charge higher prices or supply lower quality components.

The intensity of competitive rivalry

This is the major determinant of the competitiveness of the industry.
May involve an assessment of the strengths and weaknesses of current and potential competitors.

The sixth force: Government

Government is sometimes considered to be an extra force as it is often a major supplier, buyer or
substitute provider of services. The government also sets policies on trade barriers, competition,
consumer protection, industry specific regulation, taxation, R&D tax credits and ownership
restrictions; all of which can impact upon the first five forces.
CGMA E2 Course Notes 1: Business models 3

1.1.3 Porter’s generic strategies

Porter argues that organisations should select one of the following three generic strategies.
 Cost leader – aim to have lowest costs
 Differentiation – aim to do things, or appear to do things, differently
 Niche or Focus – concentrate on a segment of the market (and possibly combine with either a
cost leader or differentiation approach)
Cost leader Stuck in middle Differentiator

Profit
Profit
Profit

Costs Costs Costs

If costs rise or selling prices fall the “stuck in the middle” competitor will be squeezed out first.

1.2 The organisation ecosystem concept

The organisation ecosystem is a concept developed in the 1990s by James Moore, and it uses the
natural concept of an ‘ecosystem’ (the ecological system in which human beings exist and interact with
nature) to define the business community. It is widely used in high tech business circles.

KEY TERM
A business ecosystem is an economic community supported by a foundation of interacting
organizations and individuals—the organisms of the business world.
The economic community produces goods and services of value to customers, who are
themselves members of the ecosystem. The member organisms also include suppliers, lead
producers, competitors, and other stakeholders. Over time, they coevolve their capabilities
and roles, and tend to align themselves with the directions set by one or more central
companies. Those companies holding leadership roles may change over time, but the
function of ecosystem leader is valued by the community because it enables members to
move toward shared visions to align their investments, and to find mutually supportive roles.
James F Moore

 Enterprises/organisations exist within the environment which surrounds them, which includes
the actions of other members of the ecosystem (eg suppliers and customers…stakeholders –
more in Chapter 2)
 This environment strongly influences what they do and whether and how they survive and develop
(how they strategize).
The environment is also likely to change over time, as the actions and intentions of members change,
and due to developments in the ecosystem such as technological change. This contributes to the
changes in leadership roles within the ecosystem, as business adapt differently to the changes.
4 1: Business models CGMA E2 Course Notes

2 Key concepts in the business ecosystem

Richard Daft says all organisations have to reinvent themselves every 20 to 30 years or so. (He cites
IBM as an example.) This is a natural process of the evolution of the ecosystem.

EXAMPLE: IBM
If you go to IBM’s website, the first message you will see is this:
‘Business is being digitally reinvented
Digital transformation isn't enough. Since 2000, over half the names on the Fortune 500 list
no longer exist. The case for Digital Reinvention has arrived.’
It then offers three case studies of clients it has worked with to provide digital
transformation services:
Atlanta Falcons
Woodside
Dubai Health Authority
Read the case studies to see how IBM is reinventing itself from selling computers and
computer systems to digital solutions at
/ https://www.ibm.com/services/digital-reinvention

Digitisation has arguably sped up the evolution process, such that 20 to 30 years is no longer
applicable. New business models are emerging, as discussed in Chapter 3, and companies are likely to
need to adapt.

2.1 Drivers of the evolution of ecosystems

You will learn more about the drivers of digitisation in your studies at E3. Here it is important to
recognise the factors which contribute to the changes:
 The extent of the internet and its access (eg using mobile technologies and connected devices,
its global reach and the rise in urbanisation which enables more people to be more connected)
 The wealth of data which is available for companies to analyse and use in decision making (as a
result of the above, and increased user interface with entities through the internet)
 Overall, the resulting customer empowerment. Customers now make greater demands of
organisations and expect a speedy result.
CGMA E2 Course Notes 1: Business models 5

What does the digital customer want?

According to World Economic Forum/Accenture analysis:
 Contextualised interactions: products tailored to the needs of the individual consumer
 Seamless experience between channels
 Anytime, anywhere: in other words, real time information
 Great service: from anyone (there is less loyalty from a digital customer)
 Self service: getting exactly what they want
 Transparency: not just about the product, but about how the consumer’s personal data
is used
 Peer review and advocacy: increased importance on reviews of products from other
users
How can businesses meet these expectations?
How can businesses keep pace with such rapidly evolving demand?
 Design thinking: shift from designing 1 product to designing a series of experiences
 Experiential pilots: monitoring customer response and reaction to new experiences
 Prototyping: bringing models to market prior to perfection and evolving new models
from customer experiences.
 Brand atomisation: design products for wide distribution by themselves and other
providers
© Kaplan 2019

2.2 Impact on business models

2.2.1 What is a business model?
A business model includes:
 The firm structure
 The market it operates in
 Its engagement with its markets
 Its products and services
 Its distribution methods
As seen in the diagram above, these are factors in the journey a firm travels in defining, creating,
delivering and capturing value, which we shall look at in more detail in Chapter 2.

2.2.2 The strategic journey 2020 (Christison and Choo)

Five models providing tools and techniques for businesses to navigate their strategic journeys:
 Mission model: core purpose of an enterprise (pulls followers to its vision)
 Business model: what constitutes and drives the business (grows its value)
 Value model: what constitutes value, how to find opportunities to create it
 Operating model: how the business runs (processes)
 Transformation model: how it executes change to improve business agility to continue value
delivery and growth
6 1: Business models CGMA E2 Course Notes

2.2.3 The growth of the network model

In their book ‘The network imperative’, Libert, Beck and Wind identify four types of business model:
Business model Example Value creation
Asset builder Ford Deliver value by using physical goods
Service provider Accenture Deliver value through skilled people
Technology creator Microsoft Deliver value through ideas
Network orchestrator eBay Deliver value through connectivity
(networking/partnership)

A generalisation would be that traditional companies (legacy companies) tend to be the top types of
business models, with newer companies tending towards the bottom. However, there are examples of
how older companies, who would still fall into the top two categories, have developed networks to
adapt to the modern environment. You will see lots of examples of companies and business models in
Chapter 3.

2.3 Network orchestrators

KEY TERM
Network orchestrators are companies that deliver value through connectivity (mutuality).
They create a platform that participants use to interact or transact with other members of
the network. This may involve selling products, building relationships, sharing advice, giving
reviews, collaboration or more.

These tend to be how modern enterprises, making use of digital technology, operate. A platform is
created through which other members interact.
 Such companies have tended to grow faster and used assets more efficiently
 They have tended to have higher market valuations than traditional enterprises
 They believe that value can continually be added
 They currently represent a minority of companies
All companies should review their own models to see how networks can be orchestrated through the
use of digital technology. There are 10 principles of network orchestration. Such factors will be
considered in more detail in Chapters 2 and 3.
10 principles of network orchestration
 Create digital capabilities
 Invest in intangible assets (sources of assets are changing)
 Actively allocate your capital (what are you doing with your funds, not necessarily the same as
last year…)
 Lead through co-creation (empower team/network members)
 Invite your customers to co-create (from customers to community…)
 Focus on subscriptions, not transactions (also building relationship with customers)
 Embrace the freelance movement (from employees to partners)
 Integrate big data
 Choose leaders who represent your customers (from governance to representation)
 Open your mind to new possibilities (from closed to open)
CGMA E2 Course Notes 1: Business models 7

KEY TERM
Mutuality is the concept of working together, building a community that is fundamental to
the network orchestrator concept.

2.4 Technology enablers in ecosystems

As discussed above, technology has enabled a variety of new platforms with which to interface with
other members of the ecosystem. Various developments have contributed to this, such as:
 Cloud computing
 Social media
 Mobile technology
 Data analytics
Such developments facilitate connectedness and therefore easier interaction between members of the
ecosystem.

2.5 Characteristics of ecosystems

We are familiar with the main characteristics of ecosystems, as they are the same as the traditional
‘market’ at the heart of economics. There are two key factors:
 Participants (essentially buyers and sellers)
 Interactions (essentially the product or service)
In an ecosystem, these basic parties are characterised by the following:
Participants (RRC)
Role (ie what they do buy/sell/support/partner)
Reach (ie how far they extend in the environment)
Capability (ie their key value proposition)

Interactions (RCC)
Rules (define how interactions occur)
Connections (links within the ecosystem)
Course (the speed and direction of interactions)

These concepts are underpinned by the concepts of mutuality and orchestration, which are the factors
which make it an ecosystem rather than a traditional market. In other words, the players have not
changed, rather the way the game is played has.
Remember, orchestration is about the coordination of activities. For example, a company (A) might
have the logistics to get an item a long distance, say from A to B, but it might partner with a smaller
local company at B (let’s call them B) who is more able to get a lot of items delivered to people who
live close to B at their convenience (eg perhaps when they are not at work).

Thus, value is created slightly differently in ecosystems than it was in a traditional market. Here,
customers have had the value of having what they want delivered to them at a convenient time. This
value has been created by A and B working together to achieve that ultimate value. The customers
would not have gained so much value from A working alone (as they would not have got the
8 1: Business models CGMA E2 Course Notes

conveniently timed delivery) and A has been able to focus on what A is best at, ie long distance
delivery, so has obtained value from B in the course of providing value to the customers.
Two questions are relevant in the process of this value creation:
 What can be done in the ecosystem to create value? (value creation likely through innovation)
 How does an organisation capture the value it has created? (value capture)
In an ecosystem, there is not necessarily a linear system where each individual captures value in a
chain from instigator to final recipient. Instead there may be a net of relationships, where one party
produces a good or service, but customers have different ways of obtaining that service through
different connections in the ecosystem.

EXAMPLE OF ORCHESTRATION
Pay as you go services
Pay as you go is an example of how value can be captured through a network of
relationships. Basic service provision is made by a gym. It owns equipment and provides the
service to others of allowing them to use it. This may create value directly (for example
through annual or monthly memberships or one off uses). However, the gym may also have
a relationship with an organisation in the network who is creating value by enabling people
who are more mobile/don’t want to be tied to one geographical location for their gym
services, to use the facilities of that gym (and many others) through their scheme. Value is
created through the network (between the users and the gym, the gym and the pay as you
go supplier, and the pay as you go supplier and the ‘more mobile’ users)(indirect value
capture).

The nature of the ecosystem will determine the complexity of interactions and the level of
orchestration required. The following relationship can be seen:

 Number and diversity of

participants
 Sophistication of
activities
 Range and nature of
relationships

 Strength and extent of influence

 Formality of interactions
 Degree of enforceability
There are some archetypes that can be seen using the diagram above.
CGMA E2 Course Notes 1: Business models 9

 Shark tank: need to innovate to be competitive as low barriers to entry and high competition-
eg retail
 Hornets’ nest: higher barriers to entry but low orchestration – eg media
 Lion’s pride: high barriers to entry and high orchestration, open to be dominated by a powerful
orchestrator – eg healthcare or financial services
 Wolf pack: lower barriers to entry but sophisticated orchestration. Overall less chance of
dominance by one powerful participant – eg utilities (for example, complicated orchestration of
providing energy and buying back energy, say from solar panels).

3 Different forms of business organisation (networking/partnership)

With developments in technology, organisations’ cultures and business types have changed
dramatically. To try and put this into contexts you are accustomed to, ‘networking’ as discussed above
may include any of the following concepts you should be aware of from your E1 studies to a greater or
lesser extent. For example
 Outsourcing
 Offshoring
 Shared Service Centres (SSC)
 Strategic alliance: an arrangement between two or more organisations to share resources to
undertake a mutually beneficial project in a non-permanent way, eg airlines running routes
through strategic alliances.
 Franchising. The franchisee produces or supplies a branded product or service, and pays the
franchiser for use of the brand and ‘system’. The franchiser is responsible for marketing and
retains overall control of the brand.
 Consortia. An association of organisations to deliver a particular project.
 Licensing. The right to produce or supply a product or service in return for a fee.
 Joint venture. A separate shared entity is formed by two or more independent organisations to
pursue an opportunity.
10 1: Business models CGMA E2 Course Notes

3.1 Virtual organisations

New technologies have enabled new ways of structuring work and organisations, which network
orchestrators have taken advantage of.
 Virtual teams are geographically dispersed and utilise tools on the internet to communicate and
collaborate.
 Virtual companies – ‘members’ are also geographically dispersed and utilise tools such as video-
conferencing and cloud based documents to operate as a coherent group – a network of
alliances and subcontracting arrangements.
 Virtual supply chains (e-business enabled, e-commerce).

4 Society and regulation

4.1 Participants and roles
4.1.1 Traditional view
Organisations have internal, connected and external ‘participants’. Internal would tend to be
employees, whereas connected would be suppliers, customers, lenders, owners.

4.1.2 Network orchestrator view

With some of the developments discussed above, the lines between the traditional ‘internal’ and
‘connected’ may become blurred, or ‘internal’ may disappear altogether, as staff, suppliers and
customers begin to be viewed more as partners.
This change of dynamic is part of the shift noted above from organisations being internally focused to
be externally focused.

4.2 Shift to a business ecosystem

The need for all organisations to consider a change in their mindset to continue to grow and flourish in
the digital age was touched on above. There are significant opportunities and risks associated which
we will look at in more detail in Chapter 2.

4.2.1 Risks
 Being left behind - disruptive technologies (see Chapter 2) can change a product and/or market
very quickly
 Investing in the wrong technology
 Failing to invest in and harness the potential of big data and losing competitive advantage

4.2.2 Opportunities
 New products/services/markets (digital element)
 New platforms and partnerships

4.3 Regulation
There is an extent to which the rapid development of technologies means that regulation is not
necessarily keeping up. Some traditional rules and laws can be adapted to the digital age, but
development has also been required in respect of the use of personal data (GDPR) and concepts of
privacy and legal ownership (for example, intellectual property).
CGMA E2 Course Notes 1: Business models 11

In addition, digitisation tends to cross national lines, meaning that it challenges the basis of which laws
have traditionally been made. What is legal in the ‘etherworld’?

5 Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check
you are able to confirm you possess the following essential learning from this chapter. If not, you
are advised to revisit the relevant learning from this chapter.
Confirm your learning Yes/No

Do you understand what a business ecosystem is and how it impacts upon

different business models?

Do you understand the principles of network orchestrators and how they work?

Do you understand different ways in which an organisation might network and

partner with other organisations?
12 1: Business models CGMA E2 Course Notes
13

Elements of business models:

value I

1 The CGMA business model

14 2: Elements of business models: value I CGMA E2 Course Notes

2 Defining value
2.1 Factors influencing value (3Ts)
 Financial and non-financial factors. Critically, value does not have to be just monetary. Also
value is distinguished simply from factors such as profit (this is a measure of residual value
rather than inherently being value). If you want to remember 3Ts of value, nickname this one ‘a
tenner’!
 Tangibility. This is important in a digital age, where increasingly value is in intangible factors
rather than ‘bricks and mortar’
 Time. In as much as value might be in the future from factors in the present. Indeed weighing
up short term and long term values might be a critical factor in ongoing success.
Note that accounting is all about values and time – traditionally accountants have reported past value,
budgeted for future values and taken decisions on present values.

2.2 Stakeholders and value

When devising strategy, organisations need to consider the impact the strategy would have on
stakeholders.
In the most general terms, a “stakeholder” is any party who can influence an organisation or be
influenced by it.
There are three traditional groups of stakeholders:
(1) Internal – directors, employees. All employees should take an interest in their company, whether
for reasons of job security or because they are on some form of performance-related pay.
(2) Connected – shareholders, lenders, customers, suppliers (i.e. there is some form of financial
relationship).
(3) External – government (local and central), pressure groups, local community.
The first two groups are primary stakeholders in that they have some sort of relationship with the
organisation which is likely to be contractual. The third group are secondary stakeholders.
The organisation will communicate with all these stakeholders in different ways and at different times
about how they are creating value, for example:
 Customers: advertising/marketing, website
 Shareholders: financial statements and other investor publications
 Lenders/suppliers: payments and remittance advices
 Employees: intranet, email, noticeboards, in person
 Government: returns, financial statements
 Pressure groups: website, press releases
 Community: website, press releases, advertising, community interaction (eg sponsoring)
CGMA E2 Course Notes 2: Elements of business models: value I 15

2.3 Stakeholder analysis

Mendelow created a matrix to classify stakeholders on the basis of their power (or influence) and
degree of interest in the organisation's activities. The matrix suggests the type of relationship the
organisation should seek with its stakeholders, as shown below.
Level of interest
Low High

A B
Power / influence Low
Minimal effort Keep informed

C D
High
Keep satisfied Make acceptable

 Stakeholders in quadrant D are key players. The organisation’s chosen strategy must be
acceptable to these stakeholders. Some key players may be consulted over strategy. An
example would be a major customer.
 Stakeholders in segment C are often passive (low interest). However, if things change they may
move to segment D. They should, therefore be kept satisfied. An example would be a large
institutional shareholder.
 Stakeholders in quadrant B do not have great ability to influence strategy (low influence), but
they may attempt to influence others, for example by lobbying. These stakeholders should
therefore be communicated with (kept informed). An environmental group is an example.
 Stakeholders in quadrant A justify only minimal effort as they have low interest and low power.

2.4 Defining value in stakeholder analysis

The Mendelow model looks at all stakeholders the company is involved with. The company is not
necessarily creating value for all these stakeholders (although potentially any stakeholder is a possible
customer, for whom value could be created), some are stakeholders who are considered because they
could prevent the company from creating value.
Some stakeholders contribute to value creation (eg suppliers, employees, perhaps referred to
collectively as ‘partners’) through services, know-how, loyalty, engagement
Other stakeholders receive value (eg primarily customers, but also shareholders and the government
via company taxes)
Thus the importance of stakeholders can be seen in terms of value creation as well as the fact that
they are influenced by or can influence the organisation. Most companies would rank customers most
important in terms of value creation. However, without a reliable supply chain, value cannot be
created, so ‘partners’ are also important in value creation.

2.4.1 Stakeholder salience

In stakeholder salience theory, stakeholders are considered in terms of
 Their power to influence the organisation
 The legitimacy of their relationship with the organisation
 The urgency of their relationship with the organisation – not just time sensitivity, but
importance
16 2: Elements of business models: value I CGMA E2 Course Notes

These three factors can be mapped in a Venn diagram, giving seven categories of stakeholder, the
most important (very likely to be customers) in the centre where the three circles intersect.

3 Creating value
The organisation creates value through:
 Its output (its product or service or combination of these)
 Its resources, processes and activities (how it creates output in collaboration with its partners)
The organisation exists to create value for its participants:
 Value to customers: the product/service that they want (outputs)
 Value to owners: dividends, capital asset growth
 Value to employees/partners: a good place to work, personal development, opportunities…so
that they create value
 Value to suppliers: prompt payment, convenient systems…to facilitate continued value creation
The management writer Peter Drucker identified five key questions he believes should drive an
organisation’s strategy (the way the organisation intends to create value).
They are:
 What is our mission?
 Who is our customer?
 What does the customer value?
 What are our results?
 What is our plan?
CGMA E2 Course Notes 2: Elements of business models: value I 17

3.1 Co-creation
Co-creation is the network orchestration way. Organisations seeks to involve customers in the creation
of products and services, referred to as co-creation. ‘Customers’ in this context means those receiving
the product or service being delivered, so includes internal ‘customers’. For example, the HR
department might be considered a ‘customer’ of the finance department, which provides fundamental
services to the HR department, such as payroll.

EXAMPLES OF EXTERNAL CO-CREATION

Burberry have used social media to involve customers in their design process
FedEx worked with medical professionals to develop the optimal transport environment for
organs for transplant

4 Delivering value to customers

Delivering value to customers creates value for other stakeholders, particularly shareholders.

4.1 Big data

The rise in capture and analysis of big data has helped add value to customers.
Big data involves capturing and processing data on a vast scale and converting it into information that
is able to be utilised by the organisation. Analysis of big data can uncover unexpected relationships
and provide new insights into business performance.
Big data includes data collected from many previously separate systems. The data includes both
structured and unstructured data, much of which is unstructured.
Three characteristics of big data (3 Vs).
 Volume. More data than ever before is being collected. This is driven by social media and
transactional-based data recorded by large organisations, for example data captured from
point-of-sale systems and loyalty cards. Internal systems also provide large pools of data able to
contribute to big data.
 Velocity refers to the speed at which data is being streamed into the organisation, in real time.
Transactions may be constant, particularly for multi-national organisations and those with
significant ecommerce presence.
 Variety. Big data includes data from many different systems which will be in many different
formats. Structured data will include transaction files. Unstructured data will include social
media posts, which are likely to include images, video and audio recordings. There may also be
email messages, and SMS (text messages). ‘Making sense’ of these many different sources and
formats may require significant investment.

4.1.1 Using big data

 Organisations can build a more complete picture of their competitors gained from multiple
sources including competitor locations, marketing information, strategies, websites,
information relating to competitors gained from their own customers, forecasts of competitor
transaction values and social media posts. This informs segmentation and channel management
(below).
 Big data enables trends in customer behaviour to be compared against an organisation’s own
behaviour, and the behaviour of competitors.
18 2: Elements of business models: value I CGMA E2 Course Notes

 Although big data, by definition, is big and complex, systems need to ensure information can be
made available and acted upon quickly. A system that is slow and cumbersome will likely
present competitors with an opportunity to act first.

4.2 Customer segmentation

KEY TERM
Customer segmentation is dividing a customer base into groups of individuals that are
similar in specific ways relevant to marketing, such as age, gender, interests and spending
habits.

Customer segmentation allows organisations to target particular value to particular individuals, so that
the organisation’s approach to the customer becomes more personal.
Big data gives increased potential for customer segmentation. Predictive analytics are used by most
large retailers to record customers’ shopping and personal habits to target products most effectively.
Not only shopping habits are recorded, but also social network interactions, web searches and other
personal information, stage in life cycle, income etc to generate a complete profile.

4.3 Channel management

The data can be used to carry out
 Targeted marketing (differentiated by segment)
 Customisation of products (including digital/non-digital – for example, books and e-books)
 Targeted delivery (for example, delivery, click and collect, traditional in-store purchase)

KEY TERMS
 Undifferentiated marketing. This is the delivery of a single product to the market place
with very little concern for segment analysis. The entire mix is undifferentiated, hoping
that as many customers as possible will buy the product.
 Differentiated marketing. Here the company makes several products each aimed at a
separate segment. Although more time consuming and costly, the advantage is that
each product should appeal more to each targeted group. It may be possible to charge
a price differential in each segment.
 Concentrated marketing. The company focuses on a single segment for its product
hoping to meet the exact needs of that group better than any other organisation.

Technology then allows the information to be used to enhance the individual customer experience
(through their online platform):
 Prompting customers if they may have forgotten items in their shop
 Pointing customers to products customer who bought the same item also bought
 Enabling online shopping lists so that shopping can be repeated
 Choosing a method of delivery to the customer
CGMA E2 Course Notes 2: Elements of business models: value I 19

5 Distribution of value to key stakeholders

The creation of value ‘costs’: ‘you have to spend money to make money’.
Business strategy is all about what to do (and therefore what to spend) to create the appropriate level
of value for all participants.
The needs of stakeholders may be in conflict here, eg
 employees might want to be paid a premium, whereas shareholders might want payroll costs
minimised
 customers may want a quality product at a low price whereas suppliers may want a high price
for quality goods/fast delivery etc

5.1 Cost model

One way of determining what to spend is to use a cost method, ie to calculate all the associated costs
of making/distributing a product or service and then factor that into pricing considerations.
A cost model is likely to be used by organisations which are creating social value rather than monetary
value, ie not-for-profit organisations.
It will also be used by all business in their planning and budgeting.

5.2 Revenue model

A revenue model is more about
 Which revenue source to pursue
 What value to offer
 How to price the value
 Who pays for the value.
It identifies what product or service will be created to generate revenues and the ways in which the
product or service will be sold.

5.3 Sharing of residual value

At a basic level the ‘surplus’ value created by a company in its operations, ie profit, has been used in
two ways:
 Distribution to shareholders in the form of dividends
 Investment in the organisation as a form of finance to fund new strategies/projects
These are the key ways in which shareholders receive value, as dividends increase their wealth and
investment increases the value of their capital asset. This is likely to continue in new models, however,
there may be increased focus on reinvesting into future customer value creation to maintain
competitive advantage.
The ‘surplus’ may also be used to reward other partners, particularly employees, for example in the
form of profit-related pay (where employees are given a bonus associated with the level of profit
achieved) and simple bonuses. The extent of this may depend on their power as partners in creating
value.
In addition, the surplus is also used to benefit society in terms of creating value for governments in the
form of taxes.
20 2: Elements of business models: value I CGMA E2 Course Notes

Depending on the nature of the organisation, it might be creating value for governments in other
ways, for instance, providing services the government needs its citizens to obtain. The government
might therefore reciprocate in terms of value creation, for example creating value for the company in
terms of tax breaks or other savings such as reducing ‘red tape’ (enabling efficiency and therefore cost
saving).

6 Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you understand the factors influencing value creation and stakeholder

expectations?

Can you explain how an organisation can create value?

Can you demonstrate the advantages of customer segmentation for both the
organisation and the customer?

Can you explain how value is distributed back to the company's stakeholders?
21

Elements of business models:

value II

1 New business models in digital ecosystems

As seen in Chapter 1 there are various options open to a company in terms of collaborative working,
outsourcing and shared services. Companies can develop imaginative solutions in terms of how best to
structure their business. Innovation in IT can support some of these options.

1.1 Digital disruption (disruptive technology)

KEY TERMS
Digital disruption is when new technologies/services/capabilities/business models affect
and change the value of the industry’s existing services and goods.
‘Disruptive technology’ replaces an existing technology and transforms how businesses are
run.

Examples
 Cloud computing (the use of the Internet to carry out processes that were traditionally done on
localised hardware)
 Mobile technologies (allowing access anywhere, anytime from a range of devices, enabling
computing to be carried out where people want it rather than being tied to a physical location)
 Blockchain (a continuously growing data record which builds on itself and cannot be amended
without this being intrinsically obvious – such records are being used to create permanent
records, for example, in national voting systems)
 Digital wallets (electronic devices that allow individuals to make electronic payments, eg using a
smartphone to buy something at a store)
22 3: Elements of business models: value II CGMA E2 Course Notes

 Data analysis (big data use)

 Fintech

EXAMPLE
Fintech is an example of such disruptive technology. It is dramatically changing the way
financial services are delivered to consumers. It is now commonplace for people to use
banking software to bank using home computers and mobile phones. As a result, bank
branches are becoming surplus to requirements.

Technological change can be fast-paced and can present strategic threats when the impact on business
model is significant. A critical issue for established companies is to work with disruption to survive.
Famously some established companies have not survived.

EXAMPLE
Blockbuster – a model where customers rented movies – did not survive the disruptive
offerings of competitors offering ‘streaming’ models, for example Netflix and Amazon.

1.2 Benefits of digital disruption

 It can contribute to improving customer experience
 It can help a business grow
 It can help to evolve and improve the workplace
In other words, digital disruption can be seen as an opportunity for a business.

1.3 Surviving digital disruption

Digital disruption can be (and often is) also seen as a threat. However:
 While some new digital companies have built huge bases rapidly, traditional companies have a
lot of assets and know-how and customer loyalty, so should be able to compete if they are
prepared to change.
 This is not just a cost-cutting efficiency exercise but a reinvestment in a new way.
 As discussed later, this is more than superficial changes (eg just appointing a Chief Digital
Officer) – this needs to be a whole company, whole board focus.
Accenture’s Technology Vision report from 2015 identifies five technology trends for companies to be
aware of:
 The Internet of me: Through personalised apps, the digital experience is very individualised for
consumers (see customer-centric model below)
 Outcome economy: Entities don’t just provide a service but are able to measure the outcome of
the service they deliver (ie customers know whether it works or not)
 The platform (R)evolution: The importance of the ‘platform’ was discussed in Chapter 1. How
customers are reached digitally has changed significantly.
 The intelligent enterprise: Advances in artificial intelligence and data capture enables
companies to turn big data into smart data.
 The workforce reimagined: Machines and humans working together. This is discussed more
later in the chapter.
These are themes for companies (and you) to consider when building strategies for disruptive business
models.
CGMA E2 Course Notes 3: Elements of business models: value II 23

1.4 Strategies to build disruptive business models

To survive in the digital age, traditional companies need to accept disruption to remain competitive.
The term ‘innovator’s dilemma’ has been coined to describe this issue, as many companies do not
want to stop doing what makes them successful, but equally do not want to be left behind.
The report by the World Economic Forum in collaboration with Accenture in 2015 addresses this issue.
It recommends:
 Innovation at the ‘edge’ of your company so as not to mess with the core
 ‘Black ops’: the idea that a team is working covertly to help transform the business
 Copy Google: learn from the best – by focusing on big ideas and partnering to achieve objectives
Companies will need to consider how to create a disruptive business model.

Examples to think about:

 Airbnb owns no hotel rooms or beds
 Uber owns no taxis
 Amazon has no physical stores

As noted above, intangible assets may be considered more valuable than traditional assets, and
certainly data should be monetised to become a driving business asset.

EXAMPLE: 5 strategic dynamics behind Amazon’s success

1. The business platform (Amazon incorporates commerce, reviews, apps, a marketplace,
vendors through Amazon, self-publishers through Amazon, digital rights management,
cloud computing)
2. The Amazon ecosystem (merchants, writers, reviewers, publishers, information market)
3. Leadership values (Bezos retains and grows the respect of participants)
4. Universal connectors (partners/ultra low cost contractual arrangements)
5. The cloud (flexibility re infrastructure)

1.4.1 Build
The disruptive model can be built from within. This is more likely if:
 Time allows (things are not moving too quickly in the industry)
 The disruption is closely associated with the core business
 The company can hire the right people to build the new model

1.4.2 Buy
An alternative is to buy someone else who is doing what you want to do. This may be necessary if:
 Time is an issue
 Disruption is critical to survival
 The core model will have to change substantially for success
24 3: Elements of business models: value II CGMA E2 Course Notes

1.4.3 Partner
This tends to be a way that modern businesses have acted (see Amazon above), as it gives flexibility
and speed. It is likely to be relevant if:
 It is not strategically important to ‘own’ the disruptive factor
 There is opportunity to learn from the partner and long term strategic benefit to partnership

EXAMPLE
Adidas and Spotify have partnered in an app which instantly matches a runner’s music
choice to his/her running pace. Clearly streaming music is well outside Adidas’ comfort zone,
but this is likely to be something their customers are very pleased with.

1.4.4 Invest
This could be viewed as a more formal or controlling way of partnering. An established company can
invest in a start up which is doing what it thinks it will need to do in the future. This may benefit the
start up (as experience can be useful) but is less operationally difficult than build (above).

1.4.5 Incubate and accelerate models

These are somewhat linked to the concept of ‘invest’ above. Certainly there is an aspect of venture
capitalism here, where small companies are benefited by a relationship with a sponsoring or investing
party.
Start-ups can get external assistance in relation to developing business models, particularly in the
context of disruptive technology.

KEY TERMS
Accelerators "accelerate" growth of an existing company.
Incubators "incubate" disruptive ideas with the hope of building out a business model and
company, focusing on innovation.

A company applies to an ‘accelerator’ company, and if accepted, that company is given a small amount
of investment, and access to a network of mentors to help develop the company. Typically there is a
timeframe set for acceleration. Statistics suggest that approximately 1-2% of companies applying to an
accelerator are accepted.
Incubation is distinguished from this. Incubation may be a service offered by a traditional venture
capitalist or even a large established company. Companies are sponsored onto incubation
programmes through trusted sources. The company may relocate geographically to network with
other companies in a professional incubator, sharing space in a co-working environment, with
additional mentoring within the incubator.
Alternatively, if the partnership is with a different established company (rather than a ‘professional’
incubator), this may involve secondments from the established company into the start up and
mentoring assistance that way.

Example of an accelerator:
 Y Combinator (ycombinator.com)
Example of an incubator:
 Idealab (idealab.com)
CGMA E2 Course Notes 3: Elements of business models: value II 25

1.5 Digital operating models

As already noted, technological developments have forced companies to adapt how they operate.
Each of the factors noted below may be relevant considerations for any organisation, and
organisations may adopt elements of each (either across the whole organisation or in specific arms of
the organisation). Examples are given to help you understand the concepts. You may find it useful to
research more about the companies given as illustrations to bring these concepts to life.

1.5.1 Customer centric

KEY TERM
A customer-centric model focuses on customer value both at point of sale and in terms of
after care.

A customer centric organisation will focus on delivering value to customers, such that customers will
choose their product/service in preference to others, even if there are cheaper alternatives available.

Empower
front line

Tailored Relevant
experience metrics

Customer

Feedback
Understand drives
customers continous
improvement

Leaders focus
on customer

EXAMPLE
Amazon’s mission is to be ‘the most customer-centric company on earth’.

1.5.2 EXtra frugal

A frugal approach is one where resource constraints are seen as an opportunity, not a liability. It
makes an asset of agility. The phrase ‘less is more’ is a useful one to consider in connection with extra
frugal organisations.
EXtra frugal organisations aim to provide good quality solutions to customers at a low price. This may
have particular impact in developing countries as it makes new technologies affordable, but certainly
not exclusively. EXtra frugal companies want to have extra lean processes to prevent unnecessary cost
build up which must be passed to the customer.
In terms of costs, this may involve businesses outsourcing rather than employing to achieve cost
flexibility, or using cloud-based computing rather than investing in significant IT infrastructure.
26 3: Elements of business models: value II CGMA E2 Course Notes

EXAMPLE
The Dacia range of vehicles created by the Renault-Nissan Alliance was aimed at the
developing world. It has also sold extremely well in Western Europe. It combines quality and
low cost (no frills).

1.5.3 Data powered

The data powered organisation is one that uses data to drive its strategy.
 Collecting data well
 Interpreting it well
 Allowing that interpretation to drive decision-making
The data powered organisation will invest in big data collection and analytics systems and use the
outputs of those systems to drive decision-making.

EXAMPLE
Google’s mission statement is ‘to organise the world’s information and make it universally
accessible and useful’.
This is true of their business practices too. Google’s ‘People Operations’ (HR) is driven by
data – ‘better people analytics’. People analytics is much more common now – Google
pioneered it.

1.5.4 Skynet
The Skynet model is consciously named after the terminator films. It is a model which uses machines
intensively to increase productivity and flexibility in production. It is obviously suited to manufacturing
enterprises, but not exclusively.

EXAMPLE
Amazon is a Skynet company – it has extensively automated in its warehouses to contribute
to the speed to customer which it is famous for.

1.5.5 Open and liquid

KEY TERM
Open organisations are those committed to openness as a defining element in how they
create value.

This involves concepts such as:

 Sharing and open collaboration – ‘a constant flow of dialogue’
 Open participation (in a community framework)
 Individual rights but community focus
 Institution free
 Open knowledge
 Open member details
 Open financials
CGMA E2 Course Notes 3: Elements of business models: value II 27

This type of company or strategy is really focusing on the co-creation idea discussed above.

EXAMPLES
 Facebook – there is an extent to which the nature of Facebook means that users are
constantly telling Facebook what they want.
 Quirky (quirky.com)
 GE genius link (ge-geniuslink.com)

Liquid

KEY TERM
Liquid business models are those that fit their circumstances, ie focused on adaptability to
the environment.

There are two key characteristics of liquid business models:

 An environment/culture that embraces new ideas
 Staff that add value to the organisation (largely through flexibility and willingness to adapt)
This type of flexibility could be created by using outsourcing, alliances and freelancing.

1.6 Digital leadership

There has been a recent trend of companies employing Chief Digital Officers (CDOs) to drive this
phenomenon. However, this appears have been a short-lived trend as companies discover that this
must be holistic to the organisation, and not viewed as an element or section of the business. The
onus is on existing management to foster a digital culture. For some, this may be aided by partnering
and is likely to need commitment to new ways:
 Inspirational leadership to facilitate rapid change
 Competitive edge – encourage out of the box thinking
 Establish strategic direction differently from before, eg timescale
 Influence external parties, for instance providers of finance
 Collaboration – making wise choices about partnering
 Business judgement – as it is likely the business model will change
 Execution - how to execute, how to measure success
 Building talent – recruiting appropriately and managing internal talent

1.7 Digital talent and skills

Companies will need to build a digital workforce to meet the needs of the digital age. Digital skills are
in high demand and many companies now have roles which would not have existed even a few years
ago, for example, data scientists, data protection officers, chief digital officers…
As required skills are developing rapidly, companies may need to rethink how they attract them, for
example, by working with universities to ensure the right skills are being taught. Talent management
within the organisation is also important, as existing employees may have digital skills that were
previously not needed for jobs within the organisation.
28 3: Elements of business models: value II CGMA E2 Course Notes

1.7.1 Culture and leadership

Digitisation is a cultural issue for the organisation. It must be driven by top management.
Culturally, employees are likely to respond best to companies which:
 Consider their social responsibilities to existing employees (ie seek to retrain rather than
replace)
 Invite collaboration and buy in (open cultures, welcome feedback and innovation)

1.7.2 Obtain talent

A feature of digitisation is increased openness, and candidates have a wealth of information available
to them about potential employers.

EXAMPLE
Glassdoor is a fast-growing recruitment site which contains peer to peer information about
companies.

In light of the growth of such information availability, companies need to ensure that they are an
‘employer of choice’ and that they can be attractive to new talent and retain existing talent. This may
mean a need to review:
 Reputation (what the marketplace perception is)
 Rewards (what is offered to human resources in remuneration, and more widely than this)
 Respect (seeing and treating human resources as partners, a movement to collaboration)

1.7.3 Collaborate
In keeping with the concepts of partnership and collaboration that are hallmarks of the digital age,
companies may need to partner with human resources such that they can create more of an
‘on-demand’ workforce than retain the fixed costs of permanent staff.
It is also increasingly important for companies to create environments where humans and robots can
work together. With experts estimating that for 60% of professions, 30% of tasks undertaken could be
automated, bringing efficiency and cost reduction, it is likely that many individuals will be expected to
work with robots as organisations develop their digital models.

Robots
The use of process automation was covered in the E1 syllabus. Here is a quick reminder:

KEY TERM
Process automation is the use of software to carry out low level tasks.

This is where software, effectively robots, is used to perform repetitive, rules-based tasks, meaning
that cost is saved on staff performing similar functions, who can also be repurposed to more
sophisticated value-added tasks.
Process automation can have a negative impact on staff morale (‘robots taking our jobs’)
 Must be managed sensitively
 May cause redundancies
 Can empower and motivate staff as they are used in less routine ways
CGMA E2 Course Notes 3: Elements of business models: value II 29

KEY TERM
Artificial intelligence is technology that can be used to make decisions.

Artificial intelligence is intelligent systems that have been developing over the last half decade, but
with increasing rapidity and success in recent years.
Artificial intelligence is not designed to replace or even replicate human intelligence but is in effect ‘a
learning machine’. Such systems have been shown to make effective decisions that can be more
effective than human decision-making systems.

Benefits of machine-learning
 Machines can process considerably more data in determining a decision than humans can –
hence there is a link with big data and how it can be used effectively
 Machines may be able to identify patterns that humans would not (either due to volume of data
– as noted above – or due to the degree of consistency within the pattern)
 Machines do not suffer from human characteristics such as bias, tiredness or boredom!

Limitations
 Ultimately the machine can only work with input data, which is generated from humans and
may contain bias – but the machine cannot identify/edit that out
 On the same basis, the machine may not have access to the appropriate data to make the
decision required

On-demand workforce
An ‘on-demand workforce’ is a workforce that can work for the organisation flexibly. This is likely to be
as a result of sub-contracting arrangements (ie self-employment rather than employment by the
company). Such arrangements allow companies to obtain value from partners when required rather
than be burdened by the requirements (and cost) associated with employing human resources.
It might also mean zero hours contracts which can have less positive connotations.

KEY TERM
Zero hours contracts are employment contracts where an employer is not required to
provide work and the employee is not required to accept work if it is offered.

Zero hours contracts can be controversial as they can be a way for employers to take advantage of
poorly paid workers.

EXAMPLE
Amazon hit the headlines in 2013 with stories of misuse of staff on zero hours contracts.

How the organisation manages the concept of an ‘on-demand’ workforce so that it is fair to both
parties, mutually beneficial, and foster the partner/membership concepts in the ecosystem is an
ethical question for companies which must be considered as part of their corporate social
responsibility and which will feed back into how the company is viewed by the human market as
discussed above.
30 3: Elements of business models: value II CGMA E2 Course Notes

2 Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you demonstrate how technology can be used to disrupt industries and how
this impacts upon value?

Can you explain how an organisation could approach disrupting its own industry
and why would it do this?

Can you explain different digital operating models and how these compare to
more traditional models?
31

Managing people
performance

1 Managing people performance

In chapter 3 we discussed the importance of leaders in the context of digitisation and the impact it is
having on how people work, eg collaboratively and in partnership.
Managing the performance of people in achieving the overall needs of the organisation is an important
area, and one which continues to develop. Historically there may have been autocratic bosses but
increasingly in modern times, terms such as collaboration and employee empowerment have become
more important.
Effective HRM brings benefits that can be difficult to quantify, for example by producing employees
that are motivated and committed – and therefore prepared to ‘go the extra mile’ for the
organisation.

1.1 The psychological contract

This type of relationship can be described as a “psychological contract” between employer and
employee.
The Chartered Institute of Personnel and Development (2008) have identified employee / employer
commitments under a psychological contract.
32 4: Managing people performance CGMA E2 Course Notes

Employees promise to Employers promise to provide

Be honest. Respectful treatment.
Work hard. Reasonable job security.
Show loyalty to the organisation. A pleasant safe working environment.
Uphold company reputation. Feedback on performance.
Work extra hours when required. Interesting tasks.
Be flexible. An attractive benefits package.
Develop new skills. Opportunities for promotion.
Be courteous. Opportunities for training and development.
Come up with new ideas.

Employers may take disciplinary action where an employee does not uphold their side of the contract
(particularly the basic elements, ‘be honest’, ‘work hard’), and employees will be more likely to move
on if they feel employers are not keeping their side of the contract.
Maintaining the psychological contract can be an important consideration in motivation (see below).
In this and the next chapter we learn about concepts related to leadership and management, and how
organisations can engage and motivate people to achieve objectives.

2 Leadership concepts
2.1 Power

KEY TERM
A simple definition of power is ‘the ability to get things done’.

Power is usually exercised over others. For example, an employer usually wields considerable power
over employees because the employer has control over wages, working conditions, hiring and firing.
The employees, however, hold some reciprocal power: they may leave, work more or less diligently,
group together to form a union, and so on. In ecosystems, partners may have power because they
have the skill or network another member of the ecosystem wants to use to their advantage.
French and Raven identified 5 categories of power.

2.1.1 Legitimate power

 Derives from the relative position and duties attached to a post within an organisation.
 The formal authority that belongs to the holder of the position.

2.1.2 Referent power

 The power or ability of individuals to persuade and influence others.
 Based on the charisma and interpersonal skills of the power holder.

2.1.3 Expert power

 Derives from the skills or expertise of the person and the organisation's needs for those skills
and expertise.
 Usually highly specific and limited to the particular area in which the expert is trained and
qualified.
CGMA E2 Course Notes 4: Managing people performance 33

2.1.4 Reward power

 Reward power depends upon the ability of the holder to give rewards, for example a bonus,
time off, gifts, a promotion, a pay rise, increased responsibility or another benefit.

2.1.5 Coercive power

 The power to penalise or punish.
 It might refer to the ability to demote or to withhold other rewards. It is the desire for valued
rewards or the fear of having them withheld that ensures the obedience of those under power.
 Coercive power tends to be the least effective form of power as it builds resentment and
resistance.

2.2 Authority

KEY TERM
Authority may be defined as the right to do something, or to ask someone else to do it and
expect it to be done. Authority is therefore a type of legitimate power (based on the
definition above).

Weber divided authority into three types:

2.2.1 Traditional authority

 Derives from long-established customs, habits and social structures.
 Accepted and agreed by society.

2.2.2 Rational-legal authority

 Based on formal rules.
 Attached to the position rather than to the individual.

2.2.3 Charismatic authority

 Secured by the personality or acts of an inspirational person.

EXAMPLE
The views of Nelson Mandela carried significant weight both before and after he held any
official position.

2.3 Delegation

KEY TERM
Delegation involves the passing of authority from one party to another. Although authority
may be passed, responsibility remains with the original holder of authority.

2.3.1 Types of delegation

 Consultation: manager seeks views and input from others.
 Explanation: manager provides instruction and guidance.
34 4: Managing people performance CGMA E2 Course Notes

 Abdication: manager leaves the task to others.

 Custom and practice: although authority remains with the manager the norm is that the task is
performed by others.
Koontz and O’Donnell set out a number of conditions that are required for delegation to be effective:
 Clear definition of subordinate’s authority
 Evidence that subordinate has sufficient competence to be able to exercise authority
 Allowing subordinate to exercise authority without constant checking and intervention
Managers must ensure that subordinates are not overloaded and that delegation does not just take
place for the sake of it. Although monitoring should not be excessive, managers should be able to
monitor easily and there should also be time for coaching the subordinate.

2.4 Responsibility and accountability

KEY TERMS
Responsibility refers to the obligation an individual has to fulfil a task that they have been
given.
Accountability refers to the holding of an individual to account for the completion of tasks
allocated to them.

Limited responsibility (with the appropriate authority) can be delegated but ultimate responsibility
cannot.

2.5 Empowerment

KEY TERM
Empowerment involves transferring power to those actually involved in completing a task. It
usually involves giving employees and work teams the freedom to make decisions about
how work should be done.

Empowerment is usually part of a wider approach that includes:

 Flexibility and quicker decision making
 Reduced emphasis on hierarchy
 Fewer middle managers (delayering)
 Reduced bureaucracy
 A willingness to embrace increased trust, less control

2.6 Bureaucracy
Under a bureaucracy, power is defined very precisely with rules governing every action.
An organisation typified by formal processes, standardisation, hierarchic procedures, and written
communication. Weber stated that bureaucratisation was inevitable as organisations grow.
IBM had an official joke book. Any executive attending a social function could only tell jokes taken
from the official book.
BT’s “Friday dress down” guide ran to 72 pages.
CGMA E2 Course Notes 4: Managing people performance 35

3 Theories of management
3.1 Fayol (1849-1926) classical theory of management
Fayol was historically one of the most influential contributors to concepts of management.
He proposed five primary functions of management:
(1) Planning,
(2) Organising,
(3) Commanding,
(4) Co-ordinating,
(5) Controlling.
(POCCC)

3.2 Frederick Taylor (1856 – 1915) Scientific management

3.2.1 Taylor’s beliefs
 Industrial management of his day was amateurish
 Management could be formulated as an academic discipline
 Best results would come from the partnership between a trained and qualified management
and a co-operative and innovative workforce
 Each side needed the other, and there was no need for trade unions

3.2.2 Taylor's principles

 Replace rule-of-thumb work methods with methods based on a scientific study of the tasks.
 Scientifically select, train, and develop each employee rather than passively leaving them to
train themselves.
 "Detailed instruction and supervision of each worker in the performance of that worker's
discrete task".
 Divide work nearly equally between managers and workers, so that the managers apply scientific
management principles to planning the work and the workers actually perform the tasks.

3.3 Trist and Bamforth

Trist and Bamforth’s work on business systems showed up problems with the scientific approach. It
was based on the introduction of a new approach to coal-cutting in mines, which resulted in a large fall
in worker morale and increased absenteeism. Although there were scientific reasons for the new
approach, it had resulted in workers no longer working in the same teams, communication becoming
more difficult and workers disliking the amount of specialisation within their jobs. The introduction of
new reward schemes led to bad feeling. Management ignored the needs of individuals and groups,
which were particularly important in close mining communities.

3.4 Mayo – The human relations school

Elton Mayo was the founder of the Human Relations Movement and of Industrial Sociology, which
carried out research at the Hawthorne Works of the Western Electric Company in Chicago. They took a
group of six women and segregated them. They then altered conditions of work in a number of ways
over a five-year period, and observed the effects on production and the morale of the group.
36 4: Managing people performance CGMA E2 Course Notes

Over the period, changes such as new payment systems, rest breaks of different sorts and lengths,
varying the length of the working day, and offering food and refreshments were tried.
In almost all cases, productivity improved.
At the end of the experiment, Mayo felt that he had proven his point and closed it down, returning the
women to their original conditions; a six-day week with long hours and no rest breaks or refreshments.
Surprisingly, productivity in the group rose to the highest levels yet.

3.4.1 Mayo’s findings: ‘The Hawthorne effect’

 The women felt important because they had been singled out.
 They had developed good relationships with each other and had been allowed to set their own
work patterns.
 Relationships made for a more pleasant working environment.
 Work satisfaction depends to a large extent on:
– The informal social relationships between workers in a group and,
– The social relationships between workers and their bosses.
 The effects of the group should never be underestimated.
The “Hawthorne effect” refers to the change in behaviour or performance which is thought to occur
when people are faced with new or increased attention.

3.5 Contingency theory

Contingency theory rejects a general view of what is best for organisations or management. Instead
the effectiveness of management practices will be determined by the circumstances in which they
operate.

3.5.1 Burns and Stalker

Burns and Stalker draw a distinction between mechanistic and organic organisations, although most
organisations contain features of both.
 Mechanistic – clear definition of responsibilities and specialisation. All managers are
responsible for communication and subordinates may only be given information selectively.
There is a strong culture of loyalty and obedience to the hierarchy. This is particularly
appropriate in environments where change happens only gradually, if at all.
 Organic – greater emphasis on importance of individuals and skills and attributes they bring.
Employees are involved in problem-solving and communication takes place in all directions, not
just top-down. There is less emphasis on loyalty and obedience and more to a commitment to
get tasks done and achieve growth. Individuals may be recruited widely. This is likely to be a
better form if rapid change is expected in the business environment.

3.6 Mintzberg – The roles of a manager

Role Tasks Detail
Interpersonal Figurehead Representing organisation at functions, conferences etc
Leader Hiring, firing, training, motivating staff, aligning individual
and organisational goals
Liaison With peers, as well as subordinates
CGMA E2 Course Notes 4: Managing people performance 37

Role Tasks Detail

Informational Monitoring environment Gathering formal and informal information
Spokesperson To internal and external audiences
Disseminator Pass on relevant information to subordinates
Decisional Entrepreneur Initiate projects
Disturbance handler Take decisions when there is a deviation from the plan.
Resource allocator Distribute limited resources to achieve objectives
Negotiator Internally and externally

4 Approaches to leadership
4.1 Trait theories
Early studies of leadership focused on the personality traits or qualities of different leaders. Various
studies identified different traits possessed by individuals recognised as effective leaders.
As more studies were performed the list of traits identified became very large, and the results of some
studies contradicted the results of others.
A sample of the traits often identified included:
Initiative Judgement Drive Energy Empathy
Decisiveness Dependability Fairness Emotional stability
Ambition Dedication Objectivity Co-operation
As well as the large number of different traits identified, another criticism of trait theory is that there
are always examples of effective leaders lacking in one or more of the supposedly ‘essential’ traits.
As a result, the general consensus reached was that leadership is too complex, and too dependent
upon the situation, the characteristics of leader and the characteristics of those being led, to be
reduced to a simple list of traits.

4.2 Adair– Action-centered leadership

Group

Task
Individual

Adair is a “contingency (it depends) theorist”. He states that the most important task of a manager will
depend on the situation the manager faces. For example, in the short term, the need to complete a
task may take priority while at other times the needs of the group or an individual may come to the
fore.
Effective leadership depends on identifying the priority at a particular time and taking action to deal
with the priority.
38 4: Managing people performance CGMA E2 Course Notes

4.3 Fred Fiedler – The Fiedler contingency model

Fiedler’s contingency model suggests that the leader’s effectiveness is based on ‘situational
contingency’, that is a result of interaction of two factors, known as 'leadership style' and 'situational
control'.
Fiedler’s “least preferred co-worker (LPC)” test
The LPC scale asks a leader to think of all the persons with whom he or she has ever worked, and then
to describe the one person with whom he or she worked the least well with. From a scale of 1 through
8, the leader is asked to describe this person on a series of bipolar scales such as those shown below:
Unfriendly 12345678 Friendly
Uncooperative 12345678 Cooperative
Hostile 12345678 Supportive
Guarded 12345678 Open

The responses to these scales are summed and averaged:

A high LPC score suggests that the leader has a human relations orientation.
A low LPC score indicates a task orientation.
Fiedler assumes that everybody's least preferred co-worker in fact is on average about equally
unpleasant.
People who are relationship motivated, tend to describe their least preferred co-workers in a more
positive manner, therefore, they receive higher LPC scores.
People who are task motivated, on the other hand, tend to rate their least preferred co-workers in a
more negative manner.
According to Fiedler, there is no ideal leader. Both low-LPC (task-oriented) and high-LPC (relationship-
oriented) leaders can be effective if their leadership orientation fits the situation.
Task-oriented leadership would be advisable in a crisis. In an uncertain situation the leader-member
relations are usually poor, the task is unstructured, and the position power is weak. The task-oriented
leader who gets things accomplished proves to be the most successful.
If the leader is considerate (relationship-oriented), he or she may waste time in the crisis worrying
about people’s feelings.
The considerate style of leadership can be appropriate in a professional environment.
For example, when
 Leader-member relations are good,
 The task is unstructured, and
 Position power is weak.
Situations like this exist with research scientists, or surgeons, who do not like superiors to structure
the task for them. They prefer to follow their own creative leads in order to solve problems. In a
situation like this a considerate style of leadership is preferred over the task-oriented.

4.4 Hersey and Blanchard

Hersey and Blanchard see the manager-subordinate relationship as based on three main issues:
 Task behaviour – the extent of direction given by the leader
 Relationship behaviour – the amount of two-way communication
 Level of maturity – the willingness of the subordinate to take responsibility for his or her own
behaviour
CGMA E2 Course Notes 4: Managing people performance 39

The leadership style will depend on the level of maturity. Hersey and Blanchard identified four levels:
 M1 – lack the skills for the job and are unwilling and unable to take responsibility
 M2 – lack the abilities to take responsibility effectively but are willing to try
 M3 – willing to complete the task and have the experience to be able to do it well, but lack the
confidence to take on responsibility
 M4 – willing and able to do the task and have the confidence to take on responsibility
The higher the level of the subordinate’s maturity, the less the manager should focus on direction
(task). Hersey and Blanchard identified four levels of maturity and four leadership styles:
Leadership style Maturity Task Relationship
level behaviour behaviour
Telling M1 High Low
Selling M2 High High
Participating M3 Low High
Delegating M4 Low Low

4.5 Warren Bennis

Warren Bennis specialises in the area of leading “knowledge workers”.
He believes the key to competitive advantage is the organisation's capacity to create an environment
capable of generating intellectual capital. He is sympathetic to the view that "organisations ensure
that employees use only 5 to 10 per cent of their abilities at work. Outside of work they engage the
other 90 to 95 per cent."
He quotes:
 A UK survey in which only 16% of employees said they use more than half their talents at work.
 A US study of 3,200 US companies, showing that a 10 per cent increase in spending for
workforce training and development leads to an 8.5 per cent increase in productivity; a similar
increase in capital expenditure led to just a 3.8 per cent increase in productivity.
 Jack Welch, former CEO of General Electric, who says he had only three jobs as CEO:
 Selecting the right people
 Allocating capital resources
 Spreading ideas quickly

4.5.1 Bennis’ seven qualities of a Leader

 Technical competence: business literacy and grasp of one's field
 Conceptual skill: a facility for abstract or strategic thinking
 Track record: a history of achieving results
 People skills: an ability to communicate, motivate, and delegate
 Taste: an ability to identify and cultivate talent
 Judgement: making difficult decisions in a short time frame with imperfect data
 Character: the qualities that define who we are
40 4: Managing people performance CGMA E2 Course Notes

Bennis believes the best leaders are distinguished by their mastery of the softer side: people skills,
taste, judgement, and, above all, character.
Research at Harvard University indicates that 85 per cent of a leader's performance depends on
personal character.
Bennis states that the leader’s followers need four things that stem from a leader’s character:
(1) Meaning or direction (passion, bordering on love, or conviction/ “strong point of view”,
perspective “it ain’t where the puck is, it’s where the puck’s gonna be”, Wayne Gretsky (the ice
hockey player), or “what happens next and what happens after that?” and significance, “what
difference are we making?”)
(2) Trust in and from the leader (candour, openness, communication, a willingness to listen… and
to act, consistent behaviour)
(3) A sense of hope and optimism (“we can do this”, or a “Nobel complex”, i.e. “if I had been a
scientist I would have won a Nobel prize”)
(4) Results (But, from Wayne Gretsky, “you miss 100% of the shots you don’t take”, so good leaders
have to take shots and have to encourage others to do the same, even though some will miss)

4.6 Blake and Mouton’s Managerial Grid

Two variables:
 Concern for task
 Concern for people.
Balance between the two is required.

Country club
team

9 1.9 9.9
High

8
7 middle of
the road
Concern for people

6
5 5.5
4
3
task
impoverished
2 manager

1 1.1 9.1
Low

1 2 3 4 5 6 7 8 9
Low Concern for task High

1.1 Impoverished–- Manager is lazy, no interest in staff or work

1.9 Country club – Manager enjoys good relationship with staff and attends to their needs but has
little concern for the task.
9.1 Task manager / authoritarian – Total focus on achieving the task. Little or no concern for staff
5.5 Middle of road (sometimes called “dampened pendulum”) – Adequate performance.
9.9 Team – High work achievement, through working with committed people who have their personal
goals aligned with those of the organisation.
CGMA E2 Course Notes 4: Managing people performance 41

Issues
 High concern for staff is not necessarily ideal
 Difficult to place managers accurately on the grid
 There are other environmental influences on managers, e.g. industry, organisation culture, state
of economy, nature of task and character of the staff
 Behaviour may be difficult to change
 May be useful to assign managers with different and complementary strengths to a team.

4.7 Transactional leaders

Burns stated that transactional leaders view the manager - subordinate relationship as a transaction.
 Managers provide their staff with a package of rewards
 Staff provide their manger / employer with service, loyalty and compliance.

4.8 Transformational leaders

Transformational leaders believe managers should inspire and motivate subordinates to provide more
than basic service and compliance.
Boyd believes that transformational leadership is required if significant change is to be introduced
successfully to an organisation.
Transformational leadership is required to change organisational culture and to achieve
transformation of the organisation.
Skills required of transformational leaders:
 Vision, forward looking
 Empathy
 Prepared to empower employees

4.9 Distributed (or distributive) leadership

Distributed leadership advocates leadership at all levels in the organisation, not just at the top.
Organisational leadership relies upon interactions between many leaders, rather than the actions of a
small group of leaders at the top.
Distributed leadership is inclusive, and has similarities with empowerment in that it reflects the view
that those closest to the work are best place to make decisions and lead it.
Leadership is seen as a by-product of shared activity and collaboration, rather than the routine
handing out of authority and tasks.

5 Leadership in different contexts

How does one choose a style of leadership that is appropriate for the particular context? The overall
answer is that leadership should be responsive to the conditions it finds. For example, as noted,
leadership style is partly a response to what the people being led need.
Context will have an impact on leadership style as well.
42 4: Managing people performance CGMA E2 Course Notes

5.1 Traditional ‘present’ model

Traditionally, leaders have been present with their teams, perhaps at an office, or, if part of the team
has been at a different location, it might have been expected that the leader would visit regularly for
meetings and updates.
In such situations, leaders can use personal contact and use factors such as body language to direct
their actions/behaviour/leadership styles.

5.2 Leading virtual teams

Increasingly, due to the rise in digital technology, ‘virtual’ teams are being created. There are two
relevant factors here:
 Leaders may have no physical contact with team-members although visual contact may be
possible via internet-link up
 Team members may view themselves more as ‘partners’ than ‘subordinates’, which will be a
team dynamic a leader must consider
In such a context, communication is vital to ensure that the team works well.

5.2.1 Communication tools

 Email
 File sharing and Cloud tools (eg Google-docs)
 Video-conferencing (eg Skype)
 Virtual networks (eg LinkedIn)

5.2.2 Skyrme’s principles

Skyrme (1997) set out some principles relating to virtual companies.
 Culture issues, such as the need for a high level of trust and mutual support in such entities
 Practical matters, such as remembering, when communicating by email, to ensure different
topics are covered in different emails (especially if they relate to different groups of people).
Another practical factor to remember about communication is that emails tend to be less formal than
traditional methods of communication. It will be important to ensure that lack of formality does not
imply lack of respect.

5.3 Ethical implications of leadership

A leader is in a position of trust, in that people being led will trust them to lead them well, do the right
thing and not abuse their position.
As a result, leaders should behave ethically towards those that they are leading. The following ethical
qualities should be considered in respect of leadership.
Some, eg respect, may be easy to associate with leadership, others less so, but all may be relevant at
some stage of the relationship. For example, leaders may be told personal information in confidence,
should be honest with people, not be biased towards some of the group…
CGMA E2 Course Notes 4: Managing people performance 43

5.3.1 Fundamental Principles of the IFAC code (CIPOP)

Confidentiality – Respect the confidentiality of information. Do not disclose such information to third
parties, either in a business or social situation, unless there is a legal or professional right or duty to
disclose. (Disclosure is called whistle blowing.) Confidential information should not be used for the
personal advantage of the accountant or third parties. The duty of confidentiality extends to staff
working for the accountant.
Integrity – Involves being straightforward and honest in all professional and business relationships.
Professional behaviour – Comply with laws and regulations and avoid any action that discredits the
profession e.g. making unsubstantiated claims of competence or disparaging remarks about other
members of the profession.
Objectivity – Not allowing bias, conflict of interest, or undue influence of others to override
professional or business judgements.
Professional competence and due care – Continuing duty to maintain professional knowledge and
skill.

5.3.2 Personal qualities required of an accountant: (CTR3)

Courtesy – Accountants should conduct themselves with courtesy and consideration towards all they
come into contact with during the course of performing their work.
Timeliness – Produce work on time. Arrive on time for work and for meetings.
Reliability – Work meets professional standards.
Responsibility – Take ownership of work.
Respect – Develop constructive relationships. Respect other people’s perspectives.

5.3.3 Professional qualities required: (SASI)

Scepticism – Accountants should question information supplied to them. Where is it from? Is there
supporting evidence? Who supplied it? Why was it supplied?
Accountability – The accountant is accountable for his own actions and decisions. He should not pass
the buck.
Social responsibility – Be aware that work may affect the public. For example, accounting profits may
be used by a range of users, including investors, employees, suppliers, customers, HMRC, prospective
investors.
Independence – Have an independent mind. Produce work that is free from bias and prejudice. Be
seen to be independent. (For example, think carefully before accepting hospitality from clients or
suppliers.)
44 4: Managing people performance CGMA E2 Course Notes

6 Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you understand why people are such key assets in organisations in generating
value?

Can you demonstrate the different types of power and how this can impact on
authority within an organisation?

Can you understand key management theories and be able to apply them to
modern business environments?

Can you understand key leadership theories and be able to apply them to modern
business environments?
45

Managing the workplace

environment

1 Performance objective setting

1.1 Employee alignment and empowerment

KEY TERM
Employee alignment is a process of linking organisational goals to employees’ personal goals
in order to reach higher employee engagement and satisfaction.

Empowerment was discussed in the previous chapter in the context of leadership.

This will be achieved through the target setting and appraisal process.
The management of staff to ensure employee alignment and employee empowerment will be
influenced by management style (as previously discussed) and organisational culture (which we shall
look at soon).

1.2 Peter Drucker – (MBO)

Management by objectives (MBO) is a control strategy developed by Peter Drucker back in the 1950s.
Drucker advocated the setting of objectives or targets in four areas.
 Profitability
 Management performance
 Worker performance
 Public responsibility
46 5: Managing the workplace environment CGMA E2 Course Notes

The general approach to MBO is:

 Set objectives, quantify targets (SMART)
 Communicate objectives and targets
 Organise the work into manageable activities
 Allocate tasks
 Ensure adequate resources
 Communicate clearly
 Measure performance against target
 Communicate results (this would be in an appraisal)
 Review objectives

1.3 Kaplan and Norton’s Balanced Scorecard

Kaplan and Norton developed the Balanced Scorecard to ensure that a wide view was taken towards
objective setting and to control. The scorecard promotes the idea that financial success is not the only
important measurement of an organisation’s performance.
The four key measurement areas are:
 Financial: “How do we look to shareholders?” (Encourages looking at a few KPIs)
 Customer: “How do customers see us?” (Encourages getting customer feedback measuring
complaints etc.)
 Internal processes: “What must we excel at?” (Encourages improvement of internal operations
to ensure competitive advantage)
 Innovation and learning: “Can we continue to improve and create value?” (Encourages
development of new productions, acquisition of new skills for the workforce).
A difficulty is how to measure and track the non-financial aspects.

1.4 Steps in managing people performance

STEPS
Step 1: Identify assessment criteria
Identify the criteria against which employees will be assessed.
Step 2: Agree performance levels
Managers agree performance levels / objectives with their subordinates and put into place a
development plan to reach them. The objectives set should be SMART (specific, measurable,
achievable, relevant and time bound).
Step 3: Monitor and control
The performance of subordinates is monitored against their objectives with regular feedback and
counselling given as and when necessary.
Step 4: Periodic performance reviews (appraisals)
Staff appraisals are performed with appropriate training and development agreed with the employee.
It is important that the appraisal takes place in a neutral environment and away from office
disturbances.
CGMA E2 Course Notes 5: Managing the workplace environment 47

2 Employee appraisals

KEY TERM
An appraisal could be defined as a “systematic review and assessment of an employee’s
performance, potential and training needs”.

A good appraisal forms an important part of the management and motivation of individuals and teams
within an organisation, helping to identify training needs and expectations and allowing the employee
to express their honest views of the company.

2.1 The purpose of appraisals / reviews

 Reward review: determine whether the employee deserves a bonus or pay increase – clearly an
important motivating factor for any employee.
 Performance review: for planning and following up training programmes.
 Potential review: to determine an individual’s likely career path and help them to achieve their
progression through the company.

2.2 Different forms of appraisal

 Management-led – the traditional approach to appraisals, the employee is assessed by a
manager.
 Self-appraisal – the employee assesses their own performance, identifying any problems and
identifying ways of resolving them.
 Multi-source (or 360 degree) feedback: appraisal considers feedback from a variety of sources
including customers and fellow workers.
Feedback is critical to the success of any appraisal, informing the appraisee of the results of the
appraisal and helping them to achieve their future objectives.

2.3 Ineffective appraisals

Appraisals are sometimes seen as a waste of time by employees. Typical reasons for this include:
 Confrontation – between the parties involved
 Judgement – appraiser takes a biased approach
 Informal chat – lacking purpose
 Bureaucracy – a form filling exercise – no real worth
 Annual event – annual targets may be irrelevant after 3-6 months so rendered meaningless
 Focus on recent events – as opposed to the whole period under review.

2.4 Rewarding good performance

There is usually a clear link between an employee’s appraisal and any rewards earned by that
employee. The purpose of a reward system is to provide a transparent, fair and consistent system for
motivating and rewarding employees.
48 5: Managing the workplace environment CGMA E2 Course Notes

These rewards can be financial or non-financial in nature. They may also be intrinsic (such as the
contentment achieved by a job well done, or management praise) or extrinsic (such as
pay/bonuses/time off).

2.4.1 Performance-related pay (PRP)

Where payments can be linked directly to an employee’s individual performance. Financial rewards
might be the payment of a fixed amount per unit produced or a salesman earning a commission for
each sale made.
Performance-related pay may be applied on a wider scale, for example a bonus paid as payment for
meeting stated objectives. The objectives used in the context of PRP should be SMART (specific,
measurable, achievable, realistic and time-bound).
To be effective, any objective tied to PRP must be within the employee’s control. There is also a
danger that employees will focus on the objective(s) tied to PRP, and neglect their contribution to
other objectives that may actually be more important to the organisation.

2.4.2 Profit-based approaches

Here, the reward is dependent on the profits of the firm or division and can again be financial or non-
financial in nature. A common example is a year-end bonus equivalent to a percentage of an
employee’s basic salary.
A common problem of such schemes is those individuals who feel too “distant” to influence profits.
Also, care must be taken to avoid short-term decisions being made to the detriment of the long-term
profits e.g. cutting back on marketing expenditure.

2.4.3 Equity-based approaches

Here, staff are given direct interest in the company’s financial performance via shares or share option
schemes. These schemes normally tie the employee into the company for a number of years before
the reward can be earned, thus promoting an interest in the long-term growth of the company’s
profits and share price.

2.4.4 Non-financial rewards

Non-financial rewards might include:
 Flexible working (for example homeworking, flexitime - role must suit)
 Car parking space
 Additional holiday
 Bigger office
 Improved job title
 Pat on the back from Chairman!

2.5 Managing poor performance

When employee performance is poor, it will be necessary to manage this with a view to:
 Improved performance by the employee
 Termination of contract by the employer
The employee has some legal protection against simply being ‘let go’, so the employer is required to
follow management processes to allow the possibility of improved performance prior to dismissal.
There are some exceptions to this, for example, an employee may be dismissed for gross misconduct.
CGMA E2 Course Notes 5: Managing the workplace environment 49

2.6 Disciplinary procedures

A disciplinary process could be started in relation to an employee for various reasons:
 Breach of regulations (e.g. health and safety)
 Absenteeism
 Poor timekeeping
 Improper conduct (e.g. swearing, bullying, aggressive behaviour)
 Refusing to carry out a legal and reasonable order
 Inappropriate behaviour away from work that has an adverse impact on the workplace
In the UK, the Advisory, Conciliation and Arbitration Service (ACAS) promotes and facilitates best
practice in employer – employee relations.
 Conciliation - Parties meet for informal discussion to resolve dispute
 Mediation - Provide a mediator to hear dispute and make recommendations
 Arbitration - Help appoint an arbitrator who will make a binding ruling

2.6.1 Disciplinary procedures (ACAS code)

 In writing
 Non-discriminatory
 Avoid undue delay
 Respect confidentiality
 Investigate allegations before taking action
 Provide all evidence to employee before hearing
 Set out possible outcomes
 Allow employee to present their case
 Allow employee to be accompanied by a colleague or union representatives
 Explain consequences of outcome
 Summary dismissal only allowed for gross misconduct
 Allow, and provide procedure for, appeal

2.6.2 Statutory obligations, based on ACAS code

Applicable if employer is considering serious action
 Write to employee, explaining why action being taken, inviting employee, who may be
accompanied, to a meeting,
 At meeting, explain problem, invite employee to respond,
 After meeting, explain decision, offer right to appeal,
 Appeal is to different manager, employee has right to be accompanied at appeal hearing.

An example: a six-stage escalating process

(1) Informal talk, including coaching, advice, counselling (not recorded)
(2) Informal oral warning (not recorded)
(3) Formal warning, written or oral
Stays on employee record for reasonable period, e.g. 6 to 12 months
Explain consequences of failure to improve
(4) Final written warning
(5) Suspension without pay/Demotion (available only if provided for in contract)
(6) Dismissal
50 5: Managing the workplace environment CGMA E2 Course Notes

2.6.3 Disciplinary process: best practice for managers

 Ensure all staff are familiar with disciplinary procedures which should be contained in staff handbook
 Act quickly, decisively and without emotion
 Be consistent
 Remain impersonal
 Respect privacy

2.7 Grievance procedures

Organisations should have a process in place that enables an employee who feels they are being
treated unfairly to raise and have their concerns heard.
As with disciplinary process, less formal routes should be tried before the formal route is used.
A typical grievance procedure could involve:
 The individual sounding out a colleague or an employee representative
 The individual raising the issue with their line manager (unless the issue involves the line
manager, in which case likely raising with the line manager’s manager or a member of the
Human Resources department)
 If unresolved, referring the matter to a higher manager and the human resources department
 Following the organisation’s internal grievance procedure that would likely involve meetings
including both parties and their representatives, and HR staff
 If unresolved, investigating alternative dispute resolution processes (arbitration, conciliation)
 As a last resort, going to an industrial tribunal.

3 Mentoring and coaching

KEY TERM
Mentoring is the long term passing on of support, guidance and advice where a more
experienced colleague uses their greater knowledge and understanding of the work or
workplace to support the development of a more junior or inexperienced member of staff.

Benefits to the organisation:

 Improves motivation among employees
 Faster career progress
 Fewer and more quickly resolved disputes
 Accelerated learning on the job
 Helps to reinforce organisational culture
 Significant impact upon recruitment and retention
 More effective succession planning
 Increased productivity through better engagement and job satisfaction
Benefits to the mentored person:
 Knowledge, technical and behavioural improvements
 Better management of career goals
 Developing wider network of influence
 Increased confidence and self-awareness which helps build performance and contribution
CGMA E2 Course Notes 5: Managing the workplace environment 51

KEY TERM
Coaching involves the passing on of skills and knowledge in a supportive and collaborative
environment. It is, therefore, similar to mentoring, although mentoring usually involves a
closer, longer-term relationship.

4 Managing work place environment

4.1 Health and safety
In the UK Health and safety is governed by the Health and Safety at Work Act 1974 and by European
Directives.

4.1.1 Employer responsibilities

Employers have a responsibility to provide a safe working environment including addressing any health
and safety problems are ensuring rules and safety regulations are enforced.
More specifically, the employer's responsibilities include:
 The work environment and work practices are safe.
 Providing safe plant and machinery, safe premises, and safe systems of work. This will involve
the selection of competent staff and proper supervision.
 Providing safe working conditions to employees of a third party who are working on the
company’s premises.
 Making sure the company's health and safety policy has been communicated to all staff.
 Ensuring all employees have received training on safe working practices and undergo periodic
fire evacuation training.
 Performing risk assessments of all work hazards and the risk to anyone else affected by the
company's work activities. These should be carried out continuously, not just as a one off
exercise.
 Establishing an accident reporting system, which includes monitoring trends to reveal areas
where accidents are reoccurring and how the company follows up any accident to prevent
reoccurrence.
Health and safety is also important from a business perspective as accidents and illness cost the
organisation money. Ensuring the safety of employees is part of being a good corporate citizen.

4.1.2 Employee responsibilities

Employees also have health and safety responsibilities which include:
 Taking reasonable care of themselves and others,
 Using equipment properly,
 Informing the employer of any situation which may be of danger,
 To keep their work areas tidy and safe,
 To avoid creating hazards,
 To co-operate with the employer as far as possible.
52 5: Managing the workplace environment CGMA E2 Course Notes

4.2 Employing staff: legal considerations

Any specific legal points made below relate to English Law. For your examination, general legal
principles are more important than specific legislation.
The main terms of employment must be supplied to employee within two months of commencing
employment.
Terms should contain the following:
 Names of employee and employer
 Date of commencement
 Job title
 Notice period
 Hours of work, including normal working hours
 Holidays and holiday pay
 Arrangements for sick leave, sick pay
 Disciplinary and grievance procedures or reference to where they can be found
(a) Duties of employee and employer established through common law
Employer Employee
Overriding duty of mutual trust and confidence, Fundamental duty of faithful service
including taking reasonable care of employees
and provide a safe system of working. No duty to
protect employee’s property or provide
references.
For example For example
 Pay employees  Not to compete with employer
 Indemnify employee against expenses and  Competence to do job
losses incurred in course of employment  Obedience
 Take care of health and safety  Account for money and property received
 Select fit and competent fellow workers during course of employment
 To provide work where employee is paid by  Exercise reasonable skill and care
reference to work done.  Not to delegate duties without permission

(b) Statutory duties of the employer

(i) Pay
 Minimum wage
 Itemised payslip
 Statutory sick pay, but not sick pay from employer’s own funds
 Statutory maternity and paternity pay.
(ii) Hours of work
 Working time regulations, 48-hour maximum over a 17-week average, employee
can opt out in writing.
 Right to request flexible working arrangements, not to be unreasonably refused.
(iii) Discrimination
 Equality focuses on ensuring individuals and groups are treated fairly and equally.
In the UK, it is unlawful to discriminate on grounds of age, sex, sexual orientation,
marital status, nationality, race, religion, or disability unless a genuine
occupational qualification exists under the Equality Act 2010.
CGMA E2 Course Notes 5: Managing the workplace environment 53

 Employers must make reasonable adjustments to accommodate disabled

employees taking into account practicality and cost.
 Direct discrimination is the legal term that applies if a person treats someone less
favourably than they would another because of protected characteristic they have
(e.g. race, religion, age and sex).
 Indirect discrimination occurs when an organisation makes a decision, or puts in
place a particular policy or practice, which, on the face of it appears to treat
everyone equally, but which in practice leads to people from a protected group
being treated less favourably than other people.
For example, an employer who requires staff to commit to working from 8pm to
11pm every evening indirectly discriminates against parents, who may need to be
home to care for children.
(c) Termination of the employment contract
(i) Wrongful dismissal
 If employer breaches contract, e.g. by dismissing employee without giving
sufficient notice, employee can claim damages for breach.
 Damages usually calculated by reference to difference between actual and
contractual notice period.
 No minimum period of employment required.
(ii) Constructive dismissal
 Constructive dismissal arises when an employer breaches the terms of the
contract such that the employee is forced to resign
(iii) Unfair dismissal
 To avoid a claim for unfair dismissal the employer must act “reasonably”.
 Reasonableness includes giving reasons for dismissal in writing.
 What constitutes fairness will depend on the size and resources of the employer.
 To dismiss on grounds of poor performance, employer must show gave warnings,
attempted remedial action
 24 months before eligible
Fair reasons for dismissal include:
 Lack of capability or qualifications e.g. the loss of a driving licence.
 Misconduct, e.g. assault, immorality, habitual drunkenness.
 Redundancy, provided reasons for selection are fair.
 Following fairly applied grievance or disciplinary procedure.
 Failing to carry out a reasonable order from the employer.
Unacceptable reasons for dismissal
 If related to trade union activities  automatically unfair.
 Pregnancy  automatically unfair.
 Unfair selection for redundancy.
(d) Redundancy
 Redundancy amounts to fair dismissal if employer (genuinely) ceases or intends to cease
trading at that location or needs fewer workers at that location.
 Minimum two years’ service since reaching 18 years of age.
 Redundancy option not available if employee unreasonably refuses alternative employment
54 5: Managing the workplace environment CGMA E2 Course Notes

4.3 Diversity
Many organisations have diversity policies that aim to ensure the people employed by the
organisation are representative, as a group, of society as a whole.
Diversity also aims to ensure that all employees have the opportunity to develop and maximise their
potential (equal opportunities).
As well as being ethical, many organisations believe that by reflecting the society and markets that
they operate in, diversity enables the organisation to better understand the market.

5 Organisational culture and values

We now consider the role organisational culture plays in helping an organisation achieve its objectives,
including the role of culture in maintaining control.

KEY TERM
Organisational culture may be defined as the specific collection of values and norms that are
shared by people and groups in an organisation and that control the way they interact with
each other and with stakeholders outside the organisation.

A simpler, often quoted definition of culture is: “The way we do things round here”.

KEY TERM
Organisational values are beliefs relating to the goals an organisation should pursue, and
the way in which organisational members should behave when pursuing these goals.

As noted in the previous chapter, culture will influence whether employees feel empowered and
whether there is alignment between company objectives and individual employees’ objectives.

5.1 Why is culture important?

Culture ties together a community. As seen in Chapter 1, that is at the heart of ecosystems. As noted
above, it is easier to manage people to do what you want if they are ‘bought in’ to the things that
matter to the organisation.

5.1.1 Advantages of a strong culture

 Facilitates communication
 Encourages belonging and ‘buy in’
 May be a distinctive factor which makes an organisation an employer of choice (as discussed in
Chapter 3)

5.1.2 Disadvantages of a strong culture

 Can be difficult to change
 Could restrict innovation
 Could reduce flexibility/partnering
CGMA E2 Course Notes 5: Managing the workplace environment 55

5.1.3 What influences culture?

Many things may influence culture of an organisation. Consider how the following might:
 Age/history
 Size
 Diversity
 Technology
 Ownership

5.2 Levels of culture (Schein)

In the 1990s, Edgar Schein proposed four levels of culture:
 Artefacts: Obvious, visible symbols of an organisation’s culture
 Values: What is important in the organisation
 Assumptions: The deepest level of cultural awareness that determines behaviour
 Norms: Unwritten guidance on how people should behave in a given situation

5.3 Organisational iceberg

Another way of viewing organizational culture and why people behave as they do is the organisational
iceberg. The iceberg refers to two levels of culture, Formal (visible) and Behavioral (hidden).
Formal, visible aspects of culture (above the water) include:
 Structure
 Mission
 Goals
 Technology
 Procedures
Behavioral, hidden aspects of culture (below the water) include:
 Values
 Attitudes
 Style
 Feelings
 Beliefs
 Communication patterns
56 5: Managing the workplace environment CGMA E2 Course Notes

6 Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you explain key approaches to the effective management of people?

Can you explain the advantages and disadvantages of using an appraisal system?

Do you understand formal and informal approaches for dealing with poor
performance and the employer's legal responsibility?

Can you explain the importance of mentoring and coaching in the workplace?

Can you explain why culture is so important to organisations and what the key
components are
57

Managing relationships

1 Building and leading teams

KEY TERM
A team can be defined as “a collection of individuals who perceive themselves to be a
group”

Also could be defined as: “A social unit of individuals interacting with each other with respect to:
 Common motives and goals
 A sense of identity
 Loyalty to group
 Accepted roles
 Established (social rank, dominance) relationships
 Accepted norms and values
 Accepted sanctions if norms were violated”
 Voluntary membership

KEY TERM
A team comprises people linked in a common purpose.

Teams are especially appropriate for conducting tasks that are high in complexity and have many
interdependent subtasks.
A group in itself does not necessarily constitute a team. A team is a group that has a common purpose
or goal and allocated membership. Teams are a more defined and restricted collection of people than
‘non-team’ groups.
58 6: Managing relationships CGMA E2 Course Notes

Teams normally have members with complementary skills and generate synergy through a co-
ordinated effort which allows each member to maximise his or her strengths and minimise his or her
weaknesses.

1.1 Building teams (Tuckman)

Bruce Wayne Tuckman proposed that all teams go through four necessary phases in order to grow and
be able to deliver results. (Forming, Storming, Norming, Performing)

1.1.1 Forming
The team meets and learns about the opportunity, challenges, agrees goals and begins to tackle the
tasks.
Team members tend to behave quite independently.
They may be motivated but are usually relatively uninformed of the issues and objectives of the team.
Team members are usually on their best behaviour but very focused on self. Mature team members
begin to model appropriate behaviour even at this early phase.
Sharing the knowledge of the concept of "Teams ─ Forming, Storming, Norming, Performing" is
extremely helpful to the team.
Supervisors of the team during this phase tend to need to be directive.

1.1.2 Storming
Different ideas compete for consideration.
The team addresses issues such as:
 What problems they are really supposed to solve,
 How they will function independently and together, and
 What leadership model they will accept.
Team members open out to each other and confront each other's ideas and perspectives.
In some cases storming can be resolved quickly but sometimes the team never leaves this stage.
The maturity of some team members usually determines whether the team will ever move out of this
stage.
Immature team members will begin to demonstrate how much they know and convince others that
their ideas are correct.
Some team members will focus on minutiae to evade real issues.
The storming stage can be contentious, unpleasant and even painful to members of the team who are
averse to conflict.
Tolerance of each team member and their differences needs to be emphasised.
Supervisors of the team during this phase may be more accessible but tend to still need to be directive
in their guidance of decision-making and professional behaviour.

1.1.3 Norming
Members adjust behaviour to each other as they develop work habits that make teamwork seem more
natural and fluid.
They agree rules, values, professional behaviour, shared methods, working tools and even taboos.
Team members begin to trust each other.
Motivation increases as the team gets more acquainted with the project.
CGMA E2 Course Notes 6: Managing relationships 59

Creativity may be lost if the norming behaviours become too strong and begin to stifle healthy dissent
and the team begins to exhibit groupthink (known as the Abilene paradox, team members become
reluctant to ‘rock the boat’).
Members are expected to take more responsibility for making decisions and for their professional
behaviour.
Supervisors of the team during this phase tend to be participative more than in the earlier stages.

1.1.4 Performing
High-performing teams are able to function as a unit as they find ways to get the job done smoothly
and effectively without inappropriate conflict or the need for external supervision.
 Team members become interdependent.
 They are motivated and knowledgeable.
 Team members are now competent, autonomous and able to handle the decision-making
process without supervision.
 Dissent is expected and allowed as long as it is channelled through means acceptable to the
team.
 The team will make most of the necessary decisions.
 Supervisors of the team during this phase are almost always participative.

1.1.5 Adjourning
A fifth factor has been added to the model, arising from a risk associated with the performing stage.
There is a risk that it will turn into ‘adjourning’ if the stage lasts too long. This is characterised by a
group starting to act on ‘automatic pilot’, and running the risk of groupthink, as discussed above.

1.2 High performing teams

A high performing team is a group of skilled individuals that work closely together to achieve
outstanding performance towards a common objective.

1.2.1 Vaill - high-performing systems

Vaill wrote in terms of human teams being like systems, which needed to have a number of
characteristics to perform well:
 Clear broad aims
 Clear short-term objectives
 Commitment to purpose
 Task focus by all individuals involved
 Strong and clear leadership
 Development of new methodologies and inventions
1.2.2 Peters and Waterman identified a number of characteristics of successful teams:
 Small size
 Together for a limited time
 Focused on a single task
 Voluntary membership
 Informal communication mechanisms, no concern about status
 Focused on action with clear plan to achieve goals
60 6: Managing relationships CGMA E2 Course Notes

1.3 Role theory

Developing a group or team requires identifying each member’s roles, which will determine how they
act towards other people. Role theory discusses various considerations that influence how individuals
carry out their roles and hence how effective the teams are.
 Behaviour – the actions associated with a particular role
 Signs – visible signifiers of a role, for example a uniform
 Set – the team that supports someone in a senior role
 Ambiguity – individuals are not sure of their own roles or others are not sure about what the
individuals are doing
 Conflict – clash between different roles that an individual has
 Incompatibility – individuals’ expectations about their roles differing from other people’s

1.3.1 Belbin’s eight (later nine) roles in an effective team

An effective team has members that cover eight (later nine) key roles in managing the team and how it
carries out its work.
Plant - A creative, imaginative, unorthodox team-member who solves difficult problems. Although
they sometimes situate themselves far from the other team members, they always come back to
present their 'brilliant' idea.
Resource Investigator - Networker for the group. Whatever the team needs, the Resource Investigator
is likely to have someone in their address book who can either provide it or know someone else who
can provide it.
Chairman (1981) / Co-ordinator (1988) - Ensures all members of the team are able to contribute to
discussions and decisions of the team. Concern is for fairness and equity among team members.
Shaper - Dynamic team-member who loves challenges and thrives on pressure. Possesses the drive
and courage required to overcome obstacles.
Monitor-Evaluator - Sober, strategic and discerning member, tries to see all options and judge
accurately.
Team Worker - Ensures interpersonal relationships are maintained. Sensitive to atmospheres and may
be the first to approach another team member who feels excluded.
Company Worker (1981) / Implementer (1988) - Practical thinker who creates systems and processes
that will produce what the team wants. Takes a problem and works out how it can be practically
addressed.
Completer Finisher - Detail person. Spot flaws and gaps and know where the team is in relation to its
schedule. Ensures the quality and timeliness of the output of the team.
Specialist (1988) - Brings 'specialist' knowledge to the team.

1.3.2 Practical implications

Individuals can perform more than one role, therefore team need not be as many as nine people, but
perhaps should be at least three or four.

1.3.3 Criticisms of the model

The research was conducted on established executives studying at a business school.
They were selected for the prestigious course by their firms who had identified them as high-fliers
expected to go on to senior management.
CGMA E2 Course Notes 6: Managing relationships 61

The sample was therefore already highly selective.

While Belbin draws on examples from real organisations, the development of the model is based on
the behaviour of subjects in the artificial environment of the business school exercise.
Some people teach that all eight/nine roles must be present for a team to function well. Belbin himself
acknowledges that some teams consisting of one Shaper and a group of "yes" men perform well,
especially where predictability was high.
Belbin’s book identifies a number of combinations that performed well in the exercises, especially
where the teams were aware of "missing" roles within their ranks.

1.4 Motivation

KEY TERM
Motivation is the urge to take action to achieve something or to avoid something.

There are many theorists on motivation. You should be familiar with all of them for this exam.

1.4.1 Taylor
Early writers including FW Taylor suggested that workers are rational economic beings motivated by
obtaining the highest possible remuneration.
Taylor established four principles of scientific management:
 The need to develop a true science of work whereby a “fair day’s pay” could be determined
 The scientific selection and training of workers
 Encouraging the workforce to develop themselves and reach their full potential
 Co-operation between management and workers.

1.4.2 Schein
Schein, on the other hand, suggested people don’t just work for money:
 Rational-economic man – motivated by money
 Social man – motivated by the need to be with friends and colleagues
 Self-actualising man – the need to reach one’s potential
 Complex man – needs driven by a combination of factors.

1.4.3 Douglas McGregor X-Y Theory

Theory X ('authoritarian management' style)

The Theory X manager believes:
 The average person dislikes work and will avoid it if he/she can.
 Most people must be forced, with the threat of punishment, to work towards organisational
objectives.
Characteristics of the Theory X manager:
 Results-driven and deadline-driven, to the exclusion of everything else
 Intolerant
 Issues deadlines and ultimatums
 Distant and detached
 Aloof and arrogant
 Shouts
62 6: Managing relationships CGMA E2 Course Notes

 Issues threats to make people follow instructions

 Demands, never asks
 Does not participate
 Unconcerned about staff welfare, or morale
 One-way communicator, poor listener
 Does not thank or praise
 Withholds rewards, and suppresses pay and remunerations levels
 Seeks culprits for failures or shortfalls
 Seeks to apportion blame
 Takes criticism badly and likely to retaliate if from below or peer group
 Poor at proper delegating – but believes they delegate well

Theory Y ('participative management' style)

The Theory Y manager believes:
 Effort in work is as natural as rest and play.
 People will apply self-control and self-direction in the pursuit of organisational objectives,
without external control or the threat of punishment.
 Commitment to objectives is a function of rewards associated with their achievement.
 People usually accept and often seek responsibility.
McGregor thought that managers who tend towards theory X generally get poor results.
Enlightened managers use theory Y that produces better performance, results and allows people to
grow and develop.

1.4.4 Maslow (a content theorist): The hierarchy of needs

Abraham Maslow argued that we have a set of needs that can be arranged in a hierarchy:

Self-actualisation

This diagram shows Maslow's

Esteem needs hierarchy of needs, represented as
a pyramid with the more primitive
needs at the bottom.
Social needs Maslow’s theory is a simplistic
“content” theory. It assumes we all
have similar needs and all react in a
Safety needs similar way.

Physiological needs

As each need is satisfied, the individual moves up the hierarchy. Maslow discussed needs in general
and hence it is likely that individuals may seek to satisfy some or all of a particular need outside work.
 Physiological needs – the most basic needs for human existence e.g. food and shelter
 Safety needs – more job security, safe and comfortable working conditions
CGMA E2 Course Notes 6: Managing relationships 63

 Social needs – a sense of belonging to a team. A chance to meet and socialise with like-minded
people
 Esteem needs – an opportunity to gain social status and feel self-worth
 Self-actualisation – fulfilling one’s potential.
Maslow’s theory is based on the notion that an individual is ‘a perpetually wanting animal’ and only
relatively unsatisfied needs are capable of motivating behaviour.

1.4.5 Herzberg: Motivation-hygiene theory

Frederick Herzberg identified those factors that led to job satisfaction (motivators) and those that
might lead to dissatisfaction (hygiene factors).
 Hygiene factors. Those factors which do not give satisfaction or provide motivation when
present. Their absence, however, causes dissatisfaction e.g. adequate salary and working
conditions.
 Motivating factors. Those factors which produce satisfaction when present and are capable of
motivating the individual. They are similar factors to Maslow’s “higher needs” (e.g.
achievement, recognition, responsibility and the work itself). Motivators relate to the content of
the job rather than the conditions of work.
Herzberg recommends that:
 Attention should be given to the hygiene factors to avoid the symptoms of job dissatisfaction.
 In order to increase the motivation of individuals, jobs should be redesigned to provide a
greater sense of achievement or people’s responsibility should be increased.
Three approaches to job redesign are:
 Job rotation – swap jobs periodically to break monotony. This will also allow individuals to
develop extra skills in different areas.
 Job enlargement – increase the number of tasks at the same level under the control of the
individual.
 Job enrichment – developing the depth of duties through delegation, giving the individual
greater variety and responsibility in their tasks.
It is worth noting that “job redesign” runs contrary to the principles of the “division of labour” in that
repetition in the same task leads to efficiencies. These efficiencies would be eliminated if jobs were
regularly changed.
Also, some employees are happy with routine and don’t desire additional responsibilities.

1.4.6 Motivating potential score (MPS)

Hackman and Oldham’s motivating potential score (MPS) is an attempt to measure the extent to
which a job exhibits five characteristics:
(1) Skill variety – the degree to which a job requires the exercise of a number of different skills,
abilities, or talents
(2) Task identity – the extent to which a job requires completion of a whole and identifiable piece
of work
(3) Task significance – the importance of the job
(4) Autonomy – degree of autonomy allowed
(5) Feedback – the degree to which the individual doing a job obtains information about the
effectiveness of the performance.
64 6: Managing relationships CGMA E2 Course Notes

1.4.7 Equity theory

Equity theory relates to the idea that people will be more motivated if they believe they are being
treated fairly.

1.4.8 Feedback as a motivator

Feedback on an individual’s performance is an important part of motivation. Feedback can take
different forms:
 Intrinsic – from within the organisation e.g. remuneration levels or feedback from a manager
 Extrinsic – from the environment e.g. from a customer
 Concurrent – during the act
 Delayed – after the task e.g. at a performance appraisal.
Feedback should be clear, frequent and unbiased.

2 Effective communication
People in organisations typically spend over 75% of their time in interpersonal situations.
Effective communication is an essential component of organisational success whether it is at the
interpersonal, intergroup, intragroup, organisational, or external levels.

2.1 The communication process

The process of transmitting information from an individual (or group) to another is a very complex
process with many sources of potential error.
Some of the "meaning" is lost in simple transmission of a message from the sender to the receiver.
This is most obvious in cross-cultural situations where language is an issue. But it is also common
among people of the same culture.
Distortion Distortion

Noise
Sender Receiver
Has idea of Communication Hears mostly what
what to say medium they want to hear
and how to e.g. face to face,
say it writing, phone

Psychologists have estimated that there is usually a 40-60% loss of meaning in the transmission of
messages from sender to receiver.
Accountants should understand and be aware of the potential sources of error and constantly
counteract these tendencies by making a conscientious effort to ensure a minimal loss of meaning in
conversations.
It is important to understand that a major part of communication is non-verbal. The non-verbal part
includes such things as body language and tone.
CGMA E2 Course Notes 6: Managing relationships 65

2.2 Barriers to effective communication

Many sources of noise or interference can enter into the communication process, even when people
know each other well and should understand the sources of error, e.g.:
 Language: The choice of words or language in which a sender encodes a message will influence
the quality of communication.
 Misreading body language, tone and other non-verbal forms of communication
 Noisy transmission (unreliable messages, inconsistency)
 Receiver distortion: selective hearing, ignoring non-verbal cues
 Power struggles
 Managers hesitate to be open (concealment)
 Assumptions (e.g. assuming others see situations as you do or have the same feelings as you)
 Distrusted source, erroneous translation, value judgment, state of mind of two people
 Interpersonal relationships: How we perceive communication is affected by the past
experience with the individual.
 Organisational relationship (e.g. communication from a superior may be perceived differently
than that from a subordinate or peer)
 Cultural differences: Effective communication requires deciphering the basic values, motives,
aspirations, and assumptions that operate across geographical lines.

2.3 Reading non-verbal communication cues

A large percentage (studies suggest over 90%) of the meaning we derive from communication, comes
from the non-verbal cues that the other person gives.
Often a person says one thing but communicates something totally different through vocal intonation
and body language.
These mixed signals force the receiver to choose between the verbal and nonverbal parts of the
message.
Most often, the receiver chooses the nonverbal aspects.
Mixed messages create tension and distrust because the receiver senses that the communicator is
hiding something.

2.3.1 Types of non-verbal communication cue

 Visual
 Tactile
 Vocal
 Use of time, space, and image
Good communicators understand the importance of nonverbal communication and use it to increase
their effectiveness, as well as use it to understand more clearly what someone else is really saying.
66 6: Managing relationships CGMA E2 Course Notes

2.4 Developing communication skills: Listening skills

Situations where good communications skills exist include interviewing candidates, solving work
problems, seeking to help an employee on work performance, and finding out reasons for
performance discrepancies.
 Listen openly and with empathy to the other person.
 Judge content, not messenger or delivery; comprehend before you judge.
 Use multiple techniques to fully comprehend (ask, repeat, rephrase, etc.)
 Active body state; fight distractions.
 Ask the other person for as much detail as he/she can provide; paraphrase what the other is
saying to make sure you understand it and check for understanding.
 Respond in an interested way that shows you understand the problem and the employee's
concern.
 Attend to non-verbal cues, body language, not just words; listen between the lines.
 Ask the other for views or suggestions.
 State your position openly; be specific, not global.
 Don't totally control conversation; acknowledge what was said.
 Decide on specific follow-up actions and specific follow up dates.

2.5 Meetings
Meetings are a traditional method of business communication. They have usually taken place ‘face-to-
face’.
Depending on the formality of the meeting, it might be minuted. If a meeting has been minuted, there
will usually be ‘matters arising’ from previous meetings on the agenda of the next meeting. Agreeing
that the minutes are a fair representation of the previous meeting will be an item on the agenda of the
next one.
Meetings may also be less formal. Managers may ‘catch up’ with employees or team members, just to
be kept up to date with what is going on in the department, or as part of their human resources
management.

2.6 Digital communication

Increasingly individuals use digital communication tools such as:
 Email
 Video-conferencing (for virtual meetings)
 Social media
 Joint work on files held in the cloud
As noted in the context of leading virtual teams, some of these methods will reduce personal contact
and eliminate visual elements from communication. They may also be less formal than traditional
communication methods, such as letters.

2.6.1 Benefits of digital communication

 Most digital communication methods are or can be recorded so that there is a record of the
communication (eg email replies are attached to the original email so that a whole conversation
can be read through at a later date, video-conferences can be saved to be revisited later)
CGMA E2 Course Notes 6: Managing relationships 67

 Most digital communication methods can be shared widely so that many people can participate
in the conversation
 Lack of formality may improve communication

2.6.2 Drawbacks
 As noted, there is likely to be reduced physical contact in relation to digital communication and
therefore a reduction in ‘visual’ clues in communication
 The record of a conversation is permanent, so mistakes or unintended messages might be
retained
 The record of a conversation is comprehensive, so may take unnecessary time to review, or to
trace a particular issue
 Lack of formality may increase chance of misunderstanding or offence.

3 Negotiation

KEY TERM
Negotiation refers to the process of communicating with the aim of reaching a mutual
agreement.

3.1 A four-phase approach to negotiation

Phase I: Preparation phase
(1) Information: Learn as much as you can about the problem. What information do you need from
the other side?
(2) Leverage evaluation: Evaluate your leverage and the other party's leverage at the outset. This is
important because there may be a number of things you can do to improve your leverage or
diminish the leverage of the other side.
(3) Analysis: What are the issues?
(4) Rapport: Establish rapport with your opponent(s).
(5) Goals and expectations: Goals are one thing, expectations something else.
(6) Type of negotiation: What type of negotiation do you expect? Will this be highly competitive,
co-operative, or something unusual? Face to face, email, e-auction, or some other manner?
(7) Budget: Every negotiation has its costs.
(8) Plan: Have a negotiation plan
Phase II: Opening phase
(1) Logistics: When, where, and how will you negotiate?
(2) Opening offers: What is the best offer you can justify? Should you make it, or wait to let another
party go first?
68 6: Managing relationships CGMA E2 Course Notes

Phase III: Bargaining phase

(1) Subsequent offers: How should you adjust your negotiating plan when responding to
unanticipated moves by your opponent?
(2) Tactics: What sort of tactics will you employ? What sort of tactics is your opponent using on
you?
(3) Concessions: What concessions will you make? How will you make them?
(4) Resolution: What is the best way to resolve the problem? Is there an elegant solution? Be on
constant lookout for compromise and creative solutions.
Phase IV: Closure phase
(1) Logistics: How and when will you close? Who will prepare the final agreement?
(2) Documentation: Prepare a closing checklist.
(3) Emotional closure: It's one thing to end a negotiation; it's another to address the underlying
interests and needs of the parties. If you neglect the latter, the agreement will probably not
sustain.

3.2 Qualities and skills of an effective negotiator

 Well prepared
 Ask well thought out questions
 Understands the other party’s position
 Understands the relative bargaining positions
 Willing to compromise if necessary (almost always)
 High expectations, asks for more than they will get
 Able to justify position at all times
 Knows that “fair” is subjective and may be within a range of outcomes
 Patience to listen
 Avoids direct confrontation
 Avoids an impasse
 Keeps lines of communication open
 Builds rapport
 Flexible
 Commitment to personal integrity
 Seek the opponent’s advice on how to resolve an impasse
 Summarises the position regularly to ensure understanding

3.3 Persuasion and compromise

Gennard and Judge recognised the importance of persuasion and compromise in negotiation.

3.3.1 Persuasion
Purposeful persuasion involves each party attempting to influence the other to accept its point-of-
view by explaining their case including the use of factual information and analysis.

3.3.2 Compromise
Persuasion may lead to a compromise under which both parties accept the need to move closer
toward each other's position. Concessions are made, while still meeting the needs of both parties.
CGMA E2 Course Notes 6: Managing relationships 69

3.4 Influence
Cialdini identified six weapons of influence.
(1) Reciprocity. People tend to return favours and treat others as they treat us.
(2) Commitment and Consistency. Cialdini believes people have a desire to behave consistently.
(3) Social Proof. People are influenced by peer pressure and “safety in numbers”.
(4) Liking. Cialdini believes people are more likely to be influenced by people they like.
(5) Authority. People feel a sense of duty or obligation to those in positions of authority.
(6) Scarcity. Under this principle, people tend to be more attracted to things with limited
availability, or when the opportunity to acquire them on favourable terms is limited.

4 Managing conflict in organisations

4.1 Conflict
Organisations are “arenas for conflict”. The competing needs of stakeholders were discussed in
Chapter 2.
Conflict is inevitable because
 Individuals and groups battle for status, resources and rewards.
 Individuals have their own agenda which may not fit with the agenda of others or the organisation.

4.1.1 Constructive or destructive conflict

Constructive view (i.e. conflict is a good thing and must be encouraged)
 Conflict generates ideas to solve problems
 Helps define power relationships
 Acts as a release valve for emotions
Destructive view
 Clouds judgement
 Leads to dysfunctional behaviour
 Distracts attention from organisational objectives
 Energy diverted from task at hand
 Losers may withdraw from the group

4.1.2 Symptoms of conflict

 Friction between individuals and/or groups
 Inadequate communication
 Withholding information
 Distorting information
 Tale-telling
 Excessive use of ‘work arounds rather than following organisation procedures’

4.1.3 Sources and causes of conflict

 Previous history
 Lack of goal congruence between the individual and the organisation (incompatibility of goals)
or between different individuals
 Fighting for inadequate resources
70 6: Managing relationships CGMA E2 Course Notes

 I win you lose situations

 Different ideologies, for example between senior management and trade unions
 Uncertainty over roles or relationships
 Lack of genuine, clear communication
 Misunderstandings
 Unfair rewards
 Stress
 Cultural differences
 Results of change

4.1.4 Three levels of conflict

 Intrapersonal: The conflict is primarily within an individual
 Interpersonal: The conflict is primarily between two or more individuals (i.e. at a team level)
 Systemic: The conflict is a symptom of a wider organisational issue that needs to be addressed

4.1.5 Horizontal conflict

 Horizontal conflict is the type of conflict that occurs between people/groups at the same level in
an organisation
 It might arise over, say, allocation of a scarce resource between departments or projects

4.1.6 Vertical conflict

 Vertical conflict is the type of conflict that occurs between people/groups at different levels in
an organisation, for example, staff and managers, or managers and the board.
 This could be caused by issues of status or ideology. It could also be caused by scarce resources
(for example, if there is not enough in a budget to allow pay rises, but the bosses still get very
well paid…)
Review the list of sources of conflict at paragraph 4.1.3 and consider whether they might be
horizontal, vertical or both.

4.2 Thomas-Kilmann framework

The Thomas-Kilmann framework is useful in identifying some of the different strategies for handling
disputes and conflict.
THE DEGREE OF ASSERTIVENESS IN
Low PURSUIT OF ONE’S OWN INTERESTS High

Low Avoidance Competition

LEVEL OF COOPERATION IN Compromise

ATTEMPTING TO SATISFY
OTHERS’ INTERESTS

High Accommodation Collaboration

CGMA E2 Course Notes 6: Managing relationships 71

Avoiding style – Withdraw from conflict or deny its existence. The goal could be delay, so it may be
successful if it allows tempers to cool and protagonists to reflect on their position. However ignoring
the conflict may not be possible indefinitely.
Competing style – The goal of individuals is to ‘win’ by promoting their own interests and not co-
operating. This often results in a situation where some people win, others lose and the organisation is
damaged. It may be necessary in a crisis, where the issue is critical or assertiveness is required, e.g.
where a new manager is setting out his or her stall.
Accommodating style – The goal is to put the other party’s interests first. However, communication
issues may mean that both parties are unhappy with the outcome. It may be necessary if the
relationship or task is critical and/or the accommodating party has low power.
Collaborative style – The aim is to find solutions that benefit both parties, a win-win situation. It works
best if sufficient time is available and the protagonists are open, honest and want to work together.
Compromising style – The objective is to locate the middle ground with each party giving up
something. What is given up may be valuable however. It works when the relationship is more
important than the issue.
Mainwaring suggested four strategies for managing conflict:
 Stimulation and orchestration –encouraging conflict as a means of promoting change or
stimulating new ideas. This avoids organisations getting stuck, but the risk is that conflict will
escalate negatively
 Suppression – ignoring conflicts, smoothing things over or suppression by force. Short-term
tactic
 Reduction – building on areas of agreement and common objectives and involving compromises
 Resolution – establishment of consensus to remove source of conflict, using win-win situations
and requiring attitude changes

4.3 Other methods of managing conflict

4.3.1 Counselling
A one-to-one, confidential series of individual sessions between employee and counsellor. May be
provided through an employee-assistance programme. Not limited to work issues.

4.3.2 Coaching
A one-to-one, confidential series of individual sessions between employee and coach. Will generally be
focused on work issues.

4.3.3 Mediation
An informal, confidential process in which an impartial person facilitates discussion and negotiation
between the individuals who are in conflict, with a view to helping them reach agreement on a
mutually acceptable outcome.

4.3.4 Team building

Working with a team to improve relationships and performance. It can be part of an organisational
development programme or be triggered by a specific conflict.

4.3.5 Physical separation

Keep warring factions away from each other.
72 6: Managing relationships CGMA E2 Course Notes

4.4 Charles Handy’s strategies to deal with conflict

Environmental strategies
 Agree objectives
 Strengthen team culture
 Improve communication
 Improve information flow
 Clear roles/responsibilities

Regulation strategies
 Rules and procedures
 Conflict resolution manager or arbitrator
 Arena for conflict resolution – meetings etc
 Separate the protagonists
 Ignore the problem

4.5 Cyert and March: resolving stakeholder conflict

Cyert and March focussed on a specific type of conflict resolution, the resolution of conflict between
key stakeholder groups or of conflicting stakeholder objectives.
 Satisficing involves negotiations between key stakeholders to arrive at an acceptable
compromise.
 Under sequential attention, management focus on stakeholder needs in turn. For example, a
group of staff may receive a bonus with the clear implication that it will not be their ‘turn’ again
for a few years.
 Side payments involve compensating a stakeholder group because their objective(s) cannot be
met. For example, a local community may object to a new landfill site being built close to them.
The local authority may allow the site, but try to appease the community by restricting what
may be deposited and perhaps suggesting the upgrading of a local leisure centre.
 Exercise of power involves enforcing a resolution by a senior figure utilising their power to
implement a decision.

5 Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Do you understand the difference between a group and a team and explain how to
build an effective team?

Do you understand and be able to apply key motivational models to modern

organisations?

Can you explain effective communication methods and what are the factors that
can prevent this happening?

Do you understand how to manage conflict in an organisation?

73

Managing projects I

1 Project objectives

KEY TERM
A project is a one-off endeavour to achieve a specific objective.

It should acknowledge:
 The project stakeholders
 The resources necessary to complete the project
 A timescale agreed for completion
 Quality requirements
 The risk attached to the project
It is useful to distinguish a project from “repetitive operations” which is the normal day-to-day
business of an entity.
Distinguishing features include:
 A project is normally geared towards a one-off event and follows a plan towards that event
 Defined start and end time (i.e. a temporary process)
 A project may include non-routine/specialist work
 A project will normally have cost/budget constraints
 Staff from different functions
However, a project may be the means which an organisation implements strategic decisions, so there
may be a sense in which a project is implemented to achieve the specific objective of change to
repetitive operations.
Projects also ensure cross-functional collaboration.
74 7: Managing projects I CGMA E2 Course Notes

KEY TERM
“Project management” is the term given to the process undertaken to ensure that a project
is completed on time, to budget and to the agreed quality standard.

A project will be deemed successful if it is completed at

 the specified level of quality
 on time, and
 within budget (ie at the right cost).
This is known as the project triangle.
TIME

QUALITY COST
There are many models related to project management for example:
 4-D
 The nine key process areas of the Project Management Institute (PMI)

1.1 4-D
The 4-D model describes the four stages of a project:
 Define the project and its goals
 Design the project to address the goals
 Deliver the project with adequate resources
 Develop the process

1.2 The Project Management Body of Knowledge (PMBOK) guide

The Project Management Institute (PMI) published this guide in an attempt to document and
standardise generally accepted project management information and practices.
PMBOK recognises five basic process groups and nine knowledge areas typical of almost all projects.
CGMA E2 Course Notes 7: Managing projects I 75

1.2.1 The five basic process groups

Initiating Planning

Controlling Executing

Closing

This model is sometimes referred to as “IPECC”.

The five steps above are essentially the same to the project life cycle stages which we will see in
section 2:
Project life cycle PMI five basic process groups
Identify a need Initiation
Develop a proposed solution Planning
Perform the project Executing & Controlling
Completion Closing

1.2.2 The nine “knowledge areas”

(1) Project Integration Management – processes for ensuring that the elements of the project are
properly co-ordinated.
(2) Project Scope Management – processes for ensuring that the project only includes the work
required to complete the project successfully.
(3) Project Time Management – processes for ensuring completion of the project on time.
(4) Project Cost Management – processes for ensuring that the project is completed within the
approved budget.
(5) Project Quality Management – processes for ensuring that the project will satisfy the necessary
quality standards.
(6) Project Human Resource Management – processes to ensure that staff are appropriately
trained and motivated.
(7) Project Communications Management – processes to ensure that information is distributed in
a timely and structured way.
(8) Project Risk Management – processes concerned with the identification and management of
risk.
(9) Project Procurement Management – processes for acquiring goods and services.
PRINCE2, or PRojects IN Controlled Environments, is a project management methodology covering the
management, control and organisation of a project.
76 7: Managing projects I CGMA E2 Course Notes

1.3 PRINCE2
PRINCE2 was derived from an earlier PRINCE technique, which was initially developed in 1989 by a UK
Government Agency as a standard for information systems (IT) project management. However, it soon
became regularly applied outside the purely IT environment.
PRINCE2 was released in 1996 as a generic project management method and is now the standard
approach for project management in the UK.
Individuals can take a PRINCE2 course to learn project management skills and obtain a certification
that they have done so.

Starting up a project – creates and evaluates the business case for a project.
Directing a project – the project manager will generally oversee the project, ensuring there is good
communication between the stakeholders at all stages of the project.
Initiating a project – this stage will identify how the project will be managed, with the Project
Initiation Document (PID) forming the contract and terms of reference for the project as a whole.
Planning – plans relating to project deliverables are continuously produced throughout the project to
ensure a consistent approach. Project deliverables are the quantifiable goods and / or services that will
be provided upon the completion of the project.
Controlling a stage – creation of documents which help to manage the day-to-day operations.
Managing product delivery – controls the work done by specialist teams.
Managing stage boundaries – the project manager obtains feedback throughout the project and takes
action as necessary. To formally complete or close a stage, the manager may need to obtain
authorisation or sign-off from the Project Board. The end stage process is sometimes formalised
through use of an ‘End Stage Assessment’.
Closing a project – the final sign off by the customer, stating that the project objectives have been met.
CGMA E2 Course Notes 7: Managing projects I 77

2 The project life cycle

A project will normally pass through several phases in its life.

2.1 Stages in the project life cycle

Gido and Clements identified four phases of large projects.
Phase 1 – Identify a need –a feasibility study should be undertaken to decide whether or not to go
ahead with the project. There are three basic types of feasibility study that can be undertaken:
(1) Technical or Quality feasibility study
(2) Social or Ecological feasibility study
(3) Financial (Cost/ Benefit) or Economic feasibility study
If the project does go ahead, a Project Initiation Document (PID) will be produced, forming the
contract between the relevant parties.
Phase 2 – Develop a proposed solution – given the needs above. This will include setting targets for
costs and timings. The project may be subdivided into different activities, which can then be arranged
in an appropriate sequence.
Phase 3 – Perform the project/Implementation – Actual performance can then be measured against
any budgets/standards set, with appropriate remedial action taken.
Phase 4 – Completion/project closure – Including a thorough evaluation and documentation of the
project’s performance. This will allow future projects to benefit from any mistakes made this time
around.
78 7: Managing projects I CGMA E2 Course Notes

3 Project tools
3.1 Workstreams

KEY TERM
A workstream is the progressive completion of tasks completed by different groups within a
company which are required to finish a single project.

Workstreams are particularly associated with a matrix structure of a project team.

This is because in a matrix structure, the team may be structured across different departments so that
team members are working horizontally with different departments and vertically with leaders (in the
department and the project).
Workstreams list the work that has to be done by each ‘stream’ within the matrix in order to bring
together the whole project. Different ‘streams’ will be allocated owners, who must manage that
stream under project leader.

3.2 Work Breakdown Schedule (WBS)

Psychologists say our brains can normally comprehend around eight items simultaneously. A project
with hundreds of tasks goes way over our ability to grasp them all at once. The solution is to divide
and conquer. A $1,000,000 project is simply a lot of $50,000 projects joined together.
The WBS provides a visual summary of the project and its key tasks, allowing the total cost to be seen
and allowing jobs to be allocated to appropriate staff (in work packages WP and statements of work
SOW).
A WBS is often portrayed graphically as a hierarchical tree. You would not be required to draw one,
but an illustration will help understanding:

Wedding

1. Planning 2. Venue 3. Guests

1.1 Church/vicar 2.1 Pay deposit 3.1 Guest List

1.2 Invites / guests 2.2 Menu/Bar 3.2 RSVPs
1.3 Reception 2.3 Purchase of wine 3.3 Reminder letters
1.4 Honeymoon 2.4 Caterers 3.4 Wedding list
2.5 Flowers
The benefits of using a WBS include:
 Summarising all the activities comprising the project, including support and other tasks.
 Establishing the authority and responsibility for each part of the project.
 Estimating the project cost, split into its components.
 Can also help identify which part, or which activities in the project carry the highest risks.
 Allows an entity to arrange for work to be carried out in a sequence that ensures that jobs that
must be completed first, are in fact done prior to less critical jobs.
 The WBS assists in the overall monitoring and control of the project because it provides a
checklist of all the tasks to be carried out and the materials needed for each.
 There may be other breakdown schedules, such as ‘product breakdown schedule’ or ‘cost
breakdown schedule’
CGMA E2 Course Notes 7: Managing projects I 79

3.3 Gantt charts

A Gantt chart is a graphical representation of the duration of tasks against the progression of time,
providing a useful tool for planning and scheduling projects.
A Gantt chart normally uses two bars, one showing the planned duration and the second showing the
actual duration.
To create a Gantt chart:
 List the activities on the left side of the page.
 Estimate the time required for each step
 Using an appropriate horizontal timescale, draw a time bar for each activity.
 Add a key to distinguish planned and actual times

Activity Months
1 2 3 4 5 6 7 8 9 10 11

1 Draw up plan of extension

2 Arrange financing

3 Order materials

4 Prepare site

5 Take delivery of materials

6 Build extension

7 Architect inspection

8 Obtain building compliance

Certificate

Key: Planned
Actual

3.4 Network diagrams

A network diagram (or critical path analysis) is a commonly used technique for planning and
controlling projects. It involves breaking down the project into a sequence of tasks, estimating the
duration of those tasks and arranging the tasks into a logical sequence.
Activities start and finish with a numbered circle/node or event. The activity itself is represented by an
arrow. The name of the activity is written above the arrow and the duration below the arrow.
80 7: Managing projects I CGMA E2 Course Notes

Accountant
changes a
light bulb
1 2

17 minutes
Start End

The project should have one overall starting event and one finishing event.
Notation:
Earliest Event Time (EET) = earliest time
an activity can be completed by

NODE 2
NUMBER
3
6 Latest Event Time (LET) (The latest time
any preceding activity must be
completed by if the project is to be
finished by its required completion date)

The EET is calculated by looking at the diagram from left to right (i.e. from start to finish). Calculate the
EETs by determining the longest path up to that event. The EET shows the earliest time the next event
can start and therefore determines the minimum project completion time.
Then return from the terminal to the start event, to calculate LET. Calculate the LETs by considering
the latest times that we can allow each event to occur if the project is to be completed by the target
finish date (the smallest number going backward through the diagram).
We can then identify the critical path, i.e. the activities where any delay will lead to a delay in the
overall project. These are the activities for which EET = LET.
‘Floats’ are where there is more time available within the project structure than is required to
complete the project. This builds in some mitigation for delays.
The critical path is the longest path through the network and the shortest time to complete the
project. There is no float time for critical path activities.
Two activities cannot share the same start and end event and so a dummy activity needs to be drawn
(from the event with the lowest EET to the highest EET).
Activity Preceded by
A –
B –
C A,B
CGMA E2 Course Notes 7: Managing projects I 81

A
Dummy activity
Time = 0

B
C

A dummy activity is also used to maintain the logic of the network as follows:
Extract from network diagram:
Activity Preceded by
A –
B –
C A
D B
E D
F C,D

Drawn as:

A C F

E
B

LECTURE EXAMPLE 7.1

Required:
Construct a network diagram from the information provided. Identify the critical path, the estimated
project duration and any float on any activity.
Activity Duration Preceded by
A 1 –
B 2 –
C 3 A
D 4 B
E 6 C,D
82 7: Managing projects I CGMA E2 Course Notes

SOLUTION

Note: you will not be asked to produce a network diagram as part of the E2 assessment, or the
management level case study but network diagrams are examinable therefore it is important to be
able to draw the network so that you can understand and be able to answer questions about them.
The solution to this Lecture example can be found at the end of these Course Notes.

3.5 Project evaluation and review technique (PERT)

The PERT was developed in the 1950s as a “deluxe” version of network diagrams, used where the
project is complex and where there is uncertainty surrounding the activities and duration of activities
needed to complete the project.
For each task, a best possible time, worst possible time and most probable time is used to determine
an expected completion time. Expected time = (o + 4m + p)/6 where ‘o’ is the optimistic estimate,
‘m’ is the probable estimate, and ‘p’ is the pessimistic estimate.
These expected times are then used to establish the critical path and the standard deviation of
completion times for the entire project. CGMA have advised candidates will not be required to
calculate a detailed PERT analysis in the exam, but your understanding of PERT may be tested.

3.6 Data visualisation

Increased use of computerised data (big data) has increased the ability of users to manipulate
information to display it in visually appealing ways. This may help users understand data better and
therefore improve decision-making and control. An example of data visualisation in project
management is a resource histogram.
CGMA E2 Course Notes 7: Managing projects I 83

3.6.1 Resource histogram

This is a graphical aid that shows the amount and timing of the requirement for a resource during a
project. By showing those periods where the resource is heavily in demand, it will be easy to
determine where that resource can be reallocated from quieter time periods.

ILLUSTRATION: RESOURCE HISTOGRAM

The following resource histogram identifies the fact that the IT supervisors are in heavy demand in the
week commencing 24 January but is less in demand in the week commencing 14 February

Some diagrams show another bar representing resource availability. In the above diagram, this would
illustrate how much of a constraint the week commencing 24 January is. If the total available
IT supervisor time is 600 hours in that week, then there is no cause for concern.
However, if the available resource is only 400 hours, then the company should make plans to either
obtain further resource for that week or to re-schedule the work plan.

3.7 Project quality plan

This would set out the standards that should be adhered to in order to deliver the project at the
standard required.

3.8 Project management software

Many of the techniques described in this chapter would benefit from specialised software which could,
for example, calculate the critical path and resource deficiencies quickly, with automatic recalculations
should any of the parameters change.
Advantages:
 Time saved performing routine operations
 Quick and easy to change data/parameters and see how the changes affect the end result
 Improved control over resources
 Improved communication.
84 7: Managing projects I CGMA E2 Course Notes

3.9 Buffering
Buffering involves the inclusion of defined quantities of time within a project schedule to ensure the
overall delivery date is met.
 A feeding buffer may be added to non-critical tasks that feed to critical tasks.
 A capacity buffer may be used in a multi-project programme to reduce the likelihood of a
project being adversely affected by resource usage by another project.
 A resource buffer may be added to key resources to ensure they are available when required.
Buffering should not be confused with ‘padding’. Padding is simply the adding of additional time to
estimates to provide slack or as a safety net against poor performance (think about when trains have
to go really slow on arrival at a station so they don’t arrive early – the timetable has been padded!).
Padding should be discouraged as it distorts plans and can lead to inefficient allocation of resources.

4 Risk identification, assessment and management

The identification of risks during the planning stages of the project helps to establish the impact of
likely problems.

4.1 Sources of risk

This can be linked back to the overall objectives in projects (quality, time, cost). Risks might arise
through:
 Delays (for example, material/labour/transport issues?)
 Price rises (for example, basic price rises or movements in exchange rates if importing materials)
 Quality issues (for example, actual products not matching samples)

4.2 Risk management

Risk management can be thought of as a five-stage process:
(1) Identify the risk
(2) Assess their likelihood
(3) Plan and respond to the risk
(4) Take measures to manage the risk (TARA), including:
 Transference: by passing on the risk to another party e.g. insurance
 Avoidance: removal of the factors which give rise to the risk
 Reduction: of the risk
 Absorption: accept the risk
(5) Review the approach taken for future reference

4.3 Scenario planning

Scenario planning enables allowances to be made for the risks associated with a project. It involves
considering different sets of circumstances that may occur, and devising a plan to deal with each.
CGMA E2 Course Notes 7: Managing projects I 85

5 Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you explain what a project is and the key factors of good project
management?

Can you explain the key phases in a project life cycle?

Do you understand good project management techniques and approaches?

86 7: Managing projects I CGMA E2 Course Notes
87

Managing projects II

1 Managing project problems

1.1 Slippage
When a project has slipped behind schedule there is a range of options open to the project manager.
Action Comment
Do nothing After considering all options it may be decided that things should be allowed to
continue as they are.
Add resources If capable staff are available and it is practicable to add more people to certain
tasks it may be possible to recover some lost ground. It may be possible to
subcontract some of the work.
Work smarter Consider whether the methods currently being used are the most suitable. It
may be possible to use prototyping.
Re-plan If the assumptions that the original plan was based on have been proved
invalid, a more realistic plan should be devised.
Reschedule It may be possible to recover some of the lost time by changing the phasing of
certain deliverables.
Introduce incentives If the main problem is team performance, incentives such as bonus payments
could be linked to work deadlines and quality.
Change the specification If the original objectives of the project are unrealistic given the time and money
available, it may be necessary to negotiate a change in the specification.
88 8: Managing projects II CGMA E2 Course Notes

1.2 Continuous improvement

The Project Management Maturity Model (PMMM) aims to identify opportunities for continuous
improvement by learning from past mistakes.
Level 1 – Emphasises the importance of staff having basic project management knowledge throughout
the organisation
Level 2 – Common standards and processes should be developed, so that the benefits can be repeated
in future projects.
Level 3 – Use of a singular methodology throughout the organisation
Level 4 – Recognises the importance of benchmarking as an aid to improvement
Level 5 – Continuous improvement and feedback

2 Project documentation
Part of the project process is the documentation of the significant matters that occurred during the
project. There are a number of documents produced during the project:

2.1 PID (Project Initiation Document) and Project Management Plan:

At the beginning of a project, the project manager should produce a document that:
 Defines the project
 Records the project justification and objectives
 Sets out the expenditure and time-table budgets
 Documents the organisation and responsibilities of the project team
 Outlines the quality control standards being used

2.2 Progress reports

The project progress report is intended as an opportunity for the stakeholders of the project to get
feedback on the project while there is still time to improve it. The progress report should mention:
 What has been accomplished on the project to date?
 What is still left to do?
 Status against plan in terms of cost, timetable, and scope.
 Status and progress of resolving issues identified to date.
 New issues that have arisen since the last report.
 Corrective action plan.
 Expected achievement of milestones before next report.
 Next report date.

2.3 Completion report

At the end of the project, the project manager will write up his completion report.
The purpose of this is to:
 Ensure that the project is completed and has met its original objectives.
 Obtain feedback from the client and staff on project performance with a view to improving
future performance.
 Meet with the project team and customer to report on project successes and failures.
 Obtain customer sign-off.
CGMA E2 Course Notes 8: Managing projects II 89

2.4 Post-completion audit report

The post-completion audit is a more formal audit of the project as a whole, produced after the
completion of the project. This focuses on whether the stakeholders’ expectations were met and a
more detailed analysis of the costs and time spent. The findings should be formalised in a report,
covering the following:
 An executive summary, giving a brief overview of the project
 Any areas of unsatisfactory performance
 Degree to which the original objective was achieved
 A breakdown of actual costs and time taken versus budget
 Any difference from company or client expectations should be reviewed and analysed to
prevent re-occurrences in the future
 Client feedback
 Recommendations as to any improvements which could be made to future projects.

3 Project people
3.1 Building an effective project team
Projects are worked on by teams containing people from different backgrounds and disciplines, drawn
from different parts of the organisation. A successful project requires an effective project team and an
effective project manager.
The material covered in Chapter 6 relating to the building of teams is particularly relevant here. How a
project is led is a critical success factor for a project, as poor leadership may lead to delays or lack of
quality.

3.2 Project stakeholders

Stakeholders are all the people who have an interest in the process and/or end results of the project.

3.3 Project owner

The project owner is the person for whom the project is being carried out and as such he/she is
interested in the end result being achieved and his/her needs being met.

3.4 Project sponsor

The project sponsor is the person or organisation who provides the resources for a project. They have
the authorisation to give the project the go-ahead and appointing the project manager. They also
approve the original project plans and any changes to those plans, including the project budget.
Part of the project sponsor’s role may include the establishment of a steering committee, who would
oversee the entire project through to its implementation.

3.5 Project manager

The project manager is the leader of the project team, taking the ultimate responsibility for ensuring
that the project meets its objective.
The project manager has responsibilities for:
 Managing the expectations of the different stakeholders
 Delivering the project on time and within budget
90 8: Managing projects II CGMA E2 Course Notes

 Defining, planning and co-ordinating the project

 Allocating and securing resource commitment
 Monitoring and tracking project progress, controlling costs

3.6 Project team

The members of the project team will be given individual responsibility for parts of the project. Project
success depends to a large extent on the team members selected.
The skills needed in a project team obviously depend on the project in hand, but almost all project
teams require a mix of skills and personalities.
The project manager should choose a balanced team, including some existing staff, and possibly some
external specialists, if needed.

3.7 Project customers/users

The end user. This may or may not be the same party as the project owner.

3.8 Project champion

Projects may have a project champion, an informal role, but someone who ‘champions’ the project
and ‘campaigns’ for it within the organisation.

4 Managing the project team

Group cohesiveness is an important factor for project success. It is hoped that team members will
develop and learn from each other, and solve problems by drawing on different resources and
expertise.
The performance of the project team will be enhanced by the following (6Cs)
 Collaboration among team members
 Communication
 Clearly understood purpose, roles and responsibilities
 Camaraderie
 Commitment
 Creativity and Innovation
Collaboration and interaction between team members will help ensure the skills of all team members
are utilised, and should result in 'synergistic' solutions. Formal (e.g. meetings) and informal channels
(e.g. e-mail links, a bulletin board, online chat) of communication should be set up to ensure this
interaction takes place.
Team members should be responsible and accountable. The project manager should provide regular
updates on project progress and timely feedback on team and individual performance.

4.1 Project team structure

A project team may take on different structures, similar to the organisational structures you learnt
about in E1. It may be a team that meets in reality or virtually.
In practice, a matrix structure may make best use of the skills of all the participants, with individuals
working together to bring their individual skills to the project.
CGMA E2 Course Notes 8: Managing projects II 91

5 Stakeholder marketing
As discussed, project stakeholders include:
 Project Owner
 Project Sponsor
 Project Manager
 Project Team
 Project Customers/Users
Given their importance, any review of a project’s success must acknowledge the impact on these
stakeholders before, during and after the project’s completion.
This would include keeping them informed of key decisions, particularly those with a direct impact on them.

6 The role of the Chartered Management Accountant in projects

The role of the management accountant increasingly includes involvement in cross-functional project
teams.
The management accountant can contribute to project team in a number of ways, including:
 Analysing and interpreting information to facilitate project decision making (this is of increasing
importance with the rise of big data use)
 Liaising with the project sponsor to justify additional project resource requirements
 Cost-benefit analysis of the project proposal as part of the feasibility study
 Budget and forecasts
 Ensuring accurate recording of project costs (and revenues if applicable)
 Monitoring against budget and investigating variances

7 Knowledge diagnostic
Before you move on to the next chapter, complete the following knowledge diagnostic and check you
are able to confirm you possess the following essential learning from this chapter. If not, you are
advised to revisit the relevant learning from this chapter.

Confirm your learning Yes/No

Can you explain alternative approaches for how to manage project problems?

Can you set out the key roles and people needed on a project team to give it the
best chance for success?
92 8: Managing projects II CGMA E2 Course Notes
93

Solution to
Lecture example

Chapter 7
Lecture example 7.1

1
2
3 C
A
1 3
0
1
0
B 12
2 D 6 E
2 3 4 5
2 4 6 6 12

 The critical path is BDE

 The estimated project duration is 12 units
 There is a float on A or C of 2.