Chapter 2: Business processes Flashcards
Michael Porter sees business as having two options when deciding on a strategy:
(1) cost leadership, or
(2) differentiation.
Discuss the difference and the relationship between these two options.
A cost leadership strategy allows organisations to carry out their activities cheaper than their competitors through either:
- economies of scale
- technology
- low overhead costs, or
- efficient links with suppliers
A differentiation strategy involves a business offering unique products and services that target customers’ needs.
The higher degree of customer attention and personalisation meets customer demands and allows the organisation to charge more.
Therefore, cost leadership focuses on cutting costs, whereas differentiation targets unique, novel, or customisable products or experiences that organisations can sell for a higher price.
What are the benefits and problems of the functional perspective of the organisation?
One substantial benefit of the functional perspective is that it provides a great deal of organisational control.
Due to the high volume of reporting relationships that exist, there is a robust monitoring network.
Another benefit is task specificity.
Tasks within the functionally based organisation are highly defined and specified.
Therefore, employees and managers are clear on what their tasks and responsibilities are.
The functional structure also provides a delineation of tasks across different departments of the organisation.
Delineation of tasks can be a useful tool for an organisation wishing to gain clarity and specificity of employee roles and responsibilities.
The functional perspective of the organisation, however, does not reflect today’s reality because it creates an overly hierarchical and bureaucratic organisation.
A common consequence of the functionally based organisation is that ‘staff create overheads and bureaucracies that far exceed their value’.
The hierarchical and bureaucratic nature of the functional organisation also means it can be slow to react to changes in both the internal organisational environment and the external operating environment.
Furthermore, it takes time for information to filter up and down the organisation.
Finally, the bureaucratic functional organisation can lead to an ignorance of customer requirements and the organisation focusing on the wrong things.
Compare and contrast a business process with a business function.
A business process is a series of interlocking activities that work together across the organisation to achieve some predetermined organisational goal to satisfy customer needs.
A business function is a specific subset of the organisation that performs a particular role to help the organisation achieve its objectives.
An example of a business function is when an organisation performs a specific task or role, such as accounting, sales or marketing.
A business process shifts the performance of individual functions to how these functions interact with one another to deliver a good or service to the customer.
The business process, therefore, is a combination of business functions operating together to achieve a goal.
What are the reasons for adopting a business process perspective within an organisation?
The process perspective offers an organisation a more coordinated and integrated approach, reducing wasted time due to rework, bureaucracy and administration.
Moreover, the process perspective can also lead to better use of resources.
Business processes eliminate duplication of data and wastage in storage and can also restructure ineffective interdepartmental communication networks.
This horizontal structure can lead to better information flows through the organisation, potentially leading to more effective decision-making by management.
Furthermore, the business process perspective can yield benefits for an organisation through improved customer service and customer relations, a value-adding emphasis and, potentially, a competitive advantage.
Since target products and customer’s needs drive business processes, customer satisfaction, attention and service are potentially higher in a process-focused organisation.
Business processes can also provide an organisation with a competitive advantage because organisations can focus on a unique business process design to distinguish themselves from industry competitors.
The design philosophy of ERP systems is centred on the idea of best practice.
Discuss the disadvantages of this approach.
Software engineers create ERP systems to support business processes by programming a system based on best practice.
These standards of best practice are one of the reasons why organisations adopt unmodified ERP systems, rather than changing the software.
However, any organisation aims to gain a distinct competitive advantage by doing something uniquely, for example, through the configuration of its business processes.
Therefore, for organisations designing business processes and considering an ERP system, they need to consider:
- their existing business practices
- how they provide a competitive advantage
- how the business processes represented in an ERP system will fit or conflict with them
The homogeneity of ERP packages means that best practices and procedures are available to every organisation willing to pay for the software.
If all organisations adopt software with the same underlying processes, then they cannot distinguish themselves and gain a competitive advantage.
Briefly explain the management issues and the people issue when an organisation is moving to a business process-based environment.
The first stage in adopting a business process perspective is its representation in the organisation’s design.
Next, support needs to come from the top; therefore, management must accept changes for the rest of the organisation to agree to shift to a business process perspective.
But the reality for some organisations is that change from the top is difficult.
Shifting to a process perspective also breaks down previous functional barriers and divisions, and can result in significant changes in the way people perform their duties.
At the same time, decision-making rights are pushed further down the organisation’s hierarchy.
As a result, there can be a power shift in the organisation.
For example, a traditional, narrowly defined specialist job can suddenly become a generalist and diverse role.
While lower-ranked employees gain increased authority and a more stimulating work environment, the middle layers of management might resist losing their responsibilities and power.
In other words, adopting a process focus can mean shedding a layer of middle management as the organisation looks for value-adding activities and the removal of non-value-adding activities and functions.
The philosophy of TQM is geared around four main concepts.
Explain.
The TQM philosophy focuses on four main concepts: quality, people, organisations and the role of management.
The quality concept claims that the costs associated with low quality, through rework and product returns, are higher than the costs associated with generating high-quality output through the development and refinement of business processes.
The people concept refers to how we value people within the organisation for their contributions towards improving the process.
In particular, people from the lower levels of the organisation should be encouraged to provide feedback about the process design because they often have the best understanding of the daily operational process.
The organisational aspect refers to the business processes and the process-based organisation.
It emphasises that the organisation does not operate as a series of independent departments but rather, the functions interact to provide a good or deliver a service.
Organisations looking to improve their processes, therefore, require the involvement of representatives from all the business functions.
Since top management designs the business structure and processes, change and improvement can only occur with their support and endorsement.
Therefore, TQM requires management to focus on processes, rather than on individual functions, and to provide strong guidance and support for successful change.
There are four key components of the BPR definition.
Explain.
Business process re-engineering (BPR) is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in new critical measures of performance, such as cost, quality, service and speed.
The four critical components of this definition are:
- fundamental
- radical
- dramatic
- process
The fundamental aspect forces an organisation to question what process activities it currently performs and whether they are needed.
The radical component practically compels organisations to start again, to discard what already exists and redesign from scratch.
Also known as the clean slate approach, it aims to encourage thoughts about new ways to perform a process, rather than adjusting existing methods.
Organisations undergoing a BPR effort are looking for a dramatic return or improvement, especially when they consider the risk and cost of a BPR project.
Therefore, BPR aims to achieve considerable improvements in the key performance indicators that an organisation uses.
The process aspect is central to BPR.
Organisations must forget about functional perspectives and the associated hierarchies and bureaucracies and focus on the processes.
Business processes are the mechanism to provide customer value, and BPR is about improving processes to provide more value to the customer.
Identify and briefly explain the seven steps that should be followed to manage successfully the transformation of an organisation to a process perspective.
1) Establish a sense of urgency.
The first challenge of a BPR project is to convince other organisational members that the re-engineering effort is required.
2) Form a leadership team.
BPR is a time-consuming and challenging process that involves authoritative representatives from across the entire organisation, and it is essential to establish a leadership team to guide the project.
The team may also include some influential external stakeholders.
3) Create and communicate a vision.
Organisations need a map outlining where the business will be after the changes take place, the projected improvements, the effects on both internal and external stakeholders and an outline of how to achieve the vision.
4) Empower others to meet the vision.
Organisations should formulate a strategy to encourage the adoption of the BPR changes, including employee retraining.
5) Plan for and create short-term wins.
As a long-term project, the shift to a process-based organisation requires regular positive feedback to retain employee motivation and drive. The leadership team should landmark events and deliverables into the re-engineering effort to signal the project’s progression.
6) Consolidate improvements and encourage further change.
The organisation faces the significant risk that employees will gradually revert to the ‘old way of doing things’, rendering the re-engineering effort unsuccessful.
7) Institutionalise the new approaches.
BPR is not only about changing a process, but it can also be about changing the organisation’s culture and attitude.
Therefore, the challenge is to institute the newly established process as the new convention of the organisation’s culture.
Identify some risks associated with BPR.
Critics of BPR claim that because organisations primarily consist of people, leadership teams cannot re-engineer them as they can a machine.
Critics also argue that starting from scratch introduces unnecessary risk.
Furthermore, the risks involved in the clean slate approach are significant because if the re-engineered process fails, there may be nothing to fall back on.
Therefore, many advocate a more conservative, small-step approach to change, rather than the revolutionary BPR approach.
What is meant by the term ‘operational effectiveness’?
Operational effectiveness is the ability to do things better than your competitors, including an organisation’s chain of activities.
Generally, effectiveness refers to how well something can meet its purpose.
For example, we can design an automated mail system to place a stamp in the top-right corner of an envelope.
If it malfunctions and places stamps in the lower-left corner of the envelope, it is ineffective because it is not achieving its purpose.
We can consider operational effectiveness as working towards achieving business activities for their intended purpose and doing this better than our competitors.
Describe the relationship between the mission statement, strategy and business processes.
The relationship between the mission statement, business strategy and business processes is a cascading one.
The mission statement sets out the overall purpose or objective that the organisation aims to achieve.
From these objectives and through the selection of a strategy, we need to decide how to enact the mission statement.
The choice of strategy informs the decisions about the type of activities performed in the organisation and about the business process design and operation.
Describe the difference between functional-based and process-based organisations.
How do these differences affect how the organisation operates?
We design the functional-based organisation around the concepts of:
- a clear division of tasks
- the specialisation of labour
- tight vertical control and coordination
The functional-based organisation tends to focus more on what gets done.
For example, each functional division specialises and does a specific task.
Such an organisational structure is hierarchically based.
The process-based organisation focuses more on how to do things by:
- looking at how to deliver value to the end customer
- emphasising the interaction between the different business functions
- taking a horizontal view of the organisation
Identify some management issues that may emerge from process redesign.
Discuss their cause, likely consequences and how the organisation may manage these issues effectively.
Some management issues that may emerge from process redesign include:
Employee resistance –
Process redesign usually involves changes of epic proportions.
For employees, any suggestion of change can create wariness and uncertainty about their position.
Using the term ‘process redesign’ as a metaphor for downsizing amplifies this resistance.
For process redesign to work, the employees must be onside.
Damage to organisational culture/atmosphere –
Damage can occur as a result of perceptions about the change and how it fits with the organisation’s culture.
Significantly, the loss of jobs or forced redundancies and reskilling programs can affect employee attitudes, and also the organisation’s morale.
Risk of failure –
Process redesign does not guarantee success.
Consequently, management needs to recognise and appropriately handle the dangers of failure.
Adopting IT for the sake of adopting IT –
While we see IT as an enabler, we should remember that IT must still fit with the organisation’s requirements and strategy.
Adopting IT just for the sake of it might not necessarily help the organisation.
Furthermore, it can lead to conflict between IT and processes, which can ultimately damage the organisation.
Leadership –
Management leadership is critical for process redesign to have any chance of success.
Leadership includes administration from the top of the organisation, with a crucial top management representative championing for the project and pushing for its progress.
Leadership also requires:
- organisation-wide demonstration of the project’s worth
- keeping the project on track through progress milestones
- ensuring that the organisation does not slip back into the old way of doing things
James McFarlane is the manager of a medium-sized manufacturing company. His company is looking at improving the design of its purchasing process and one employee has suggested that it consider adopting an ERP system. The employee said something about the benefit of best practice in ERP systems. James is not sure which way to go. He believes that the organisation’s current ordering and inventory management processes are basically sound, unique in the industry and that, with a little modification, they could be even more of a differentiating factor for the business. He has reservations about ERP systems and was contemplating using a TQM approach to redesign the process instead of investing in new software.
Advise James on the risks and benefits an organisation faces in adopting the processes in an ERP system. Should his company go ahead with the ERP system?
Do you think, based on the few facts available, that James should be considering TQM? If so, which do you think is appropriate for his business? Explain your reasoning.
An organisation needs to consider several factors before adopting an ERP system since management will need to adjust the business processes to correspond with the best practice processes inherent in the ERP software.
For an organisation, the adoption of best practice can have both advantages and disadvantages.
For example, if a company modifies its processes to meet with an ERP system, it risks losing its uniqueness and competitive advantage.
Therefore, if the company’s unique processes provide a real competitive advantage, then James should not sacrifice them for the generic best practice of an ERP system.
One alternative is to customise the ERP system; however, the costs might outweigh the benefits in a medium-sized firm.
TQM methods, on the other hand, focus on small incremental changes and would seem like a more appropriate choice for James because it would allow enhancement of the company’s unique existing processes.
