Corporate Social Responsibility – an Overview

Corporate social responsibility (CSR, also called corporate responsibility, corporate citizenship, and responsible business) is a concept whereby organizations consider the interests of society by taking responsibility for the impact of their activities on customers, suppliers, employees, shareholders, communities and other stakeholders, as well as the environment. This obligation is seen to extend beyond the statutory obligation to comply with legislation and sees organizations voluntarily taking further steps to improve the quality of life for employees and their families as well as for the local community and society at large.

The practice of CSR is subject to much debate and criticism. Proponents argue that there is a strong business case for CSR, in that corporations benefit in multiple ways by operating with a perspective broader and longer than their own immediate, short-term profits. Critics argue that CSR distracts from the fundamental economic role of businesses; others argue that it is nothing more than superficial window-dressing; still others argue that it is an attempt to pre-empt the role of governments as a watchdog over powerful multinational corporations.

Development
Business ethics is a form of the art of applied ethics that examines ethical principles and moral or ethical problems that can arise in a business environment. In the increasingly conscience-focused marketplaces of the 21st century, the demand for more ethical business processes and actions (known as ethicism) is increasing. Simultaneously, pressure is applied on industry to improve business ethics through new public initiatives and laws (e.g. higher UK road tax for higher-emission vehicles).

Business ethics can be both a normative and a descriptive discipline. As a corporate practice and a career specialization, the field is primarily normative. In academia, descriptive approaches are also taken. The range and quantity of business ethical issues reflects the degree to which business is perceived to be at odds with non-economic social values. Historically, interest in business ethics accelerated dramatically during the 1980s and 1990s, both within major corporations and within academia. For example, today most major corporate websites lay emphasis on commitment to promoting non-economic social values under a variety of headings (e.g. ethics codes, social responsibility charters). In some cases, corporations have redefined their core values in the light of business ethical considerations (e.g. BP’s “beyond petroleum” environmental tilt).

The term CSR itself came in to common use in the early 1970s although it was seldom abbreviated. The term Stakeholder, meaning those impacted by an organization’s activities, was used to describe corporate owners beyond shareholders from around 1989.

Approaches
Some commentators have identified a difference between the Continental Europe an and the Anglo-Saxon approaches to CSR. An approach for CSR that is becoming more widely accepted is community-based development projects, such as the Shell Foundation’s involvement in the Flower Valley, South Africa. Here they have set up an Early Learning Centre to help educate the community’s children, as well as develop new skills for the adults. Marks and Spencer is also active in this community through the building of a trade network with the community – guaranteeing regular fair-trade purchases. Often alternative approaches to this is the establishment of education facilities for adults, as well as HIV/AIDS education programmes. The majority of these CSR projects are established in Africa. A more common approach of CSR is through the giving of aid to local organizations and impoverished communities in developing countries. Some organizations do not like this approach as it does not help build on the skills of the local people, whereas community-based development generally leads to more Sustainable Development.

Auditing and reporting
To demonstrate good business citizenship, firms can report in accordance with a number of CSR reporting guidelines or standards, including:

  • AccountAbility’s AA1000 standard, based on John Elkington’s triple bottom line (3BL) reporting
  • Global Reporting Initiative]]’s Sustainability Reporting Guidelines
  • Verite]]’s Monitoring Guidelines
  • Social Accountability International’s SA8000 standard
  • Green Globe Certification / Standard
  • The ISO 14000 environmental management standard
  • The United Nations Global Compact promotes companies reporting in the format of a Communication on Progress (COP). A COP report describes the company’s implementation of the Compact’s ten universal principles.
  • The United Nations Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) provides voluntary technical guidance on eco-efficiency indicators, corporate responsibility reporting and corporate governance disclosure.

The FTSE Group publishes the FTSE4Good Index, an evaluation of CSR performance of companies. Some nations require CSR reporting, though agreement on meaningful measurements of social and environmental performance is difficult. Many companies now produce externally audited annual reports that cover Sustainable Development and CSR issues (“Triple Bottom Line Reports”), but the reports vary widely in format, style, and evaluation methodology (even within the same industry). Critics dismiss these reports as lip service, citing examples such as Enron’s yearly “Corporate Responsibility Annual Report” and tobacco corporations’ social reports.

Business benefits
The scale and nature of the benefits of CSR for an organization can vary depending on the nature of the enterprise, and are difficult to quantify, though there is a large body of literature exhorting business to adopt measures beyond financial ones (e.g., Deming’s Fourteen Points, Balanced Scorecards). Orlizty, Schmidt, and Rynes found a correlation between social/environmental performance and financial performance. However, businesses may not be looking at short-run financial returns when developing their CSR strategy.

The definition of CSR used within an organisation can vary from the strict “stakeholder impacts” definition used by many CSR advocates and will often include charitable efforts and volunteering. CSR may be based within the Human Resources, Business Development or Public Relations departments of an organisation, or may be given a separate unit reporting to the CEO or in some cases directly to the board. Some companies may implement CSR-type values without a clearly defined team or programme.

The Business Case for CSR within a company will likely rest on one or more of these arguments:

Human resources
A CSR programme can be seen as an aid to recruitment and retention, particularly within the competitive graduate student market. Potential recruits often ask about a firm’s CSR policy during an interview, and having a comprehensive policy can give an advantage. CSR can also help to improve the perception of a company among its staff, particularly when staff can become involved through payroll giving, fundraising activities or community volunteering.

Risk management
Managing risk is a central part of many corporate strategies. Reputations that take decades to build up can be ruined in hours through incidents such as corruption scandals or environmental accidents. These events can also draw unwanted attention from regulators, courts, governments and media. Building a genuine culture of ‘doing the right thing’ within a corporation can offset these risks.

Brand differentiation
In crowded marketplaces, companies strive for a Unique Selling Proposition which can separate them from the competition in the minds of consumers. CSR can play a role in building customer loyalty based on distinctive ethical values. Several major brands, such as The Co-operative Group and The Body Shop are built on ethical values. Business service organisations can benefit too from building a reputation for integrity and best practice.

License to operate
Corporations are keen to avoid interference in their business through taxation or regulations. By taking substantive voluntary steps, they can persuade governments and the wider public that they are taking issues such as health and safety, diversity or the environment seriously, and so avoid intervention. This also applies to firms seeking to justify eye-catching profits and high levels of boardroom pay. Those operating away from their home country can make sure they stay welcome by being good corporate citizens with respect to labour standards and impacts on the environment.

Critical analysis
CSR is entwined in the strategic planning process of many multinational organizations. The reasons or drive behind social responsibility towards human and environmental responsibility whether driven by ulterior motives, enlightened self-interest, or interests beyond the enterprise, is subject to much debate and criticism.

Some critics argue that corporations are fundamentally entities responsible for generating a product and/or service to gain profits to satisfy shareholders. Other critics argue that the practice cherry-picks the good activities a company is involved with and ignores the others, thus ‘greenwashing’ their image as a socially or environmentally responsible company. Still other critics argue that it inhibits free markets or seeks to pre-empt the role of governments in controlling the socially or environmentally damaging effects of corporations’ pursuit of self-interest.

Disputed business motives
Some critics believe that CSR programmes are often undertaken in an effort to distract the public from the ethical questions posed by their core operations. Examples of companies that have been accused of this motivation include British American Tobacco which produces major CSR reports, and the petroleum giant BP, which is well-known for its high-profile advertising campaigns on environmental aspects of its operations.

Self-interest
Some CSR critics argue that the only reason corporations put in place social projects is for the commercial benefit they see in raising their reputation with the public or with government. They suggest a number of reasons why self-interested corporations, solely seeking to maximise profits, are unable to advance the interests of society as a whole. They point to examples where companies have spent a lot of time promoting CSR policies and commitment to Sustainable Development on the one hand, whilst damaging revelations about business practices emerge on the other.

For example, the McDonald’s Corporation has been criticized by CSR campaigners for unethical business practices and was the subject of a decision by Justice Roger Bell in the McLibel case which upheld claims regarding mistreatment of workers, misleading advertising, and unnecessary cruelty to animals. Similarly Shell has a much-publicised CSR policy and was a pioneer in triple bottom line reporting, but was involved in 2004 in a scandal over the misreporting of its oil reserves which seriously damaged its reputation and led to charges of hypocrisy. Since this has happened, the Shell Foundation has become involved in many projects across the world, including a partnership with Marks and Spencer (UK) in three flower and fruit growing communities across Africa.
These critics generally suggest that stronger government and international regulation, rather than voluntary measures, are necessary to ensure that companies behave in a socially responsible manner.

Other views from this perspective include:

  • Corporations really care little for the welfare of workers or the environment, and given the opportunity will move production to sweatshops in less well-regulated countries.
  • Companies do not pay the full costs of their impact. For example, the costs of cleaning pollution often fall on society in general. As a result profits of corporations are enhanced at the expense of social or ecological welfare.

Hindrance of free trade
These critics are generally supporters of Milton Friedman, who argued that a corporation’s principal purpose is to maximize returns to its shareholders, while obeying the laws of the countries within which it works. Friedman argued that only people can have responsibilities. Because of this, moderate critics suggest that CSR activity is most effective in achieving social or environmental outcomes when there is a direct link to profit. This approach to CSR requires that the resources applied to CSR activities must have at least as good a return as that that these resources could generate if applied anywhere else. This analysis drastically narrows the possible scope of CSR activities.

Critics who believe that CSR runs against capitalism would go further and say that improvements in health, longevity or infant mortality have been created by economic growth attributed to free enterprise. Investment in less developed countries contributes to the welfare of those societies, notwithstanding that these countries have fewer protections in place for workers. Failure to invest in these countries decreases the opportunity to increase social welfare.

Drivers
Corporations may be influenced to adopt CSR practices by several drivers.

Ethical consumerism
The rise in popularity of ethical consumerism over the last two decades can be linked to the rise of CSR. As global population increases, so does the pressure on limited natural resources required to meet rising consumer demand (Grace and Cohen 2005, 147). Industrialization in many developing countries is booming as a result of technology and globalization. Consumers are becoming more aware of the environmental and social implications of their day-to-day consumer decisions and are beginning to make purchasing decisions related to their environmental and ethical concerns. However, this practice is far from consistent or universal.

Globalization and market forces
As corporations pursue growth through globalization, they have encountered new challenges that impose limits to their growth and potential profits. Government regulations, tariffs, environmental restrictions and varying standards of what constitutes labour exploitation are problems that can cost organizations millions of dollars. Some view ethical issues as simply a costly hindrance. Some companies use CSR methodologies as a strategic tactic to gain public support for their presence in global markets, helping them sustain a competitive advantage by using their social contributions to provide a subconscious level of advertising.(Fry, Keim, Mieners 1986, 105) Global competition places particular pressure on multinational corporations to examine not only their own labour practices, but those of their entire supply chain, from a CSR perspective.

Social awareness and education
The role among corporate stakeholders to work collectively to pressure corporations is changing. Shareholders and investors themselves, through socially responsible investing are exerting pressure on corporations to behave responsibly. Non-governmental organizations are also taking an increasing role, leveraging the power of the media and the Internet to increase their scrutiny and collective activism around corporate behavior. Through education and dialogue, the development of community in holding businesses responsible for their actions is growing (Roux 2007).

Ethics training
The rise of ethics training inside corporations, some of it required by government regulation, is another driver credited with changing the behaviour and culture of corporations. The aim of such training is to help employees make ethical decisions when the answers are unclear. Tullberg believes that humans are built with the capacity to cheat and manipulate, a view taken from (Trivers 1971, 1985), hence the need for learning normative values and rules in human behaviour (Tullberg 1996). The most direct benefit is reducing the likelihood of “dirty hands” (Grace and Cohen 2005), fines and damaged reputations for breaching laws or moral norms. Organizations also see secondary benefit in increasing employee loyalty and pride in the organization. Caterpillar and Best Buy are examples of organizations that have taken such steps (Thilmany 2007).

Government laws and regulation
Another driver of CSR is the role of independent mediators, particularly the government, in ensuring that corporations are prevented from harming the broader social good, including people and the environment. CSR critics such as Robert Reich argue that governments should set the agenda for social responsibility by the way of laws and regulation that will allow a business to conduct themselves responsibly.

The issues surrounding government regulation pose several problems. Regulation in itself is unable to cover every aspect in detail of a corporation’s operations. This leads to burdensome legal processes bogged down in interpretations of the law and debatable grey areas (Sacconi 2004). General Electric is an example of a corporation that has failed to clean up the Hudson River after contaminating it with organic pollutants. The company continues to argue via the legal process on assignment of liability, while the cleanup remains stagnant. (Sullivan & Schiafo 2005). The second issue is the financial burden that regulation can place on a nation’s economy. This view shared by Bulkeley, who cites as an the Australian federal government’s actions to avoid compliance with the Kyoto Protocol in 1997, on the concerns of economic loss and national interest. The Australian government took the position that signing the Kyoto Pact would have caused more significant economic losses for Australia than for any other OECD nation (Bulkeley 2001, pg 436). Critics of CSR also point out that organizations pay taxes to government to ensure that society and the environment are not adversely affected by business activities.

Crises and their consequences
Often it takes a crisis to precipitate attention to CSR. One of the most active stands against environmental management is the CERES Principles that resulted after the Exxon Valdez incident in Alaska in 1989 (Grace and Cohen 2006). Other examples include the lead poisoning paint used by toy giant Mattel, which required a recall of millions of toys globally and caused the company to initiate new risk management and quality control processes. In another example, Mageline Metals in the West Australian town of Esperance was responsible for lead contamination killing thousands of birds in the area. The company had to cease business immediately and work with independent regulatory bodies to execute a cleanup.

CSR and Strategic Management
Within a lecture course at the LMU about CSR Dr. Peter Ulrich, Boston Consulting Group, spoke about the way BCG develops CSR concepts for its clients. That is the first time I heard about a serious CSR management tool that is applicable in practice. Unlike usual CSR concepts BCG focus strictly on the relevant stakeholders of the company analysed and derives from this angle all CSR measures. Here are the central assumptions by P. Ulrich:

4 justifications of CSR that are bound to fail

  • CSR as a marketing tool – Problem: Stakeholders will be aware of misuse
  • Executive wives pet projects – Problem: often not relevant for the stakeholders
  • Philanthropic – Problem: often not relevant for the stakeholders
  • No clear concept at all – Problem: often not relevant for the stakeholders

Ulrich’s justification of CSR activities
CSR activities are able to grow trust among stakeholders. That is more and more important for companies because market corporations are mistrusted in general (see: Corporate Trust Index). At the same time, trust is a very precious good especially in change or crisis situations.

CSR as a strategic topic

  • Companies feel pushed to invest in CSR and in the long-term CSR engagement will be a competitive factor.
  • Today the companies that are most under societal pressure invest already a lot of money in CSR: the big banks, oil and pharmacy companies spent around 1 – 2 percent of the EBITA in CSR.
  • The demand for CSR activities will grow constantly in the future.
  • Therefore there is a need for strategic management.

Management tool for a CSR concept

  1. Define Stakeholders of the company
    Relevant Questions:
    Which are the most important stakeholders for the company?
    Which are the most important stakeholders for the economic prospective of the company
    Usually CSR concepts focus only on an abstract group of stakeholders. However, what is relevant is the focus on the concrete stakeholders of the analysed company. That is the important point of the BCG concept!
  2. Assess the stakeholders’ priorities by…
    market overview
    benchmarking
    market research
    interviews with opinion leaders.
  3. Align with the company
    Relevant Questions:
    Which expectations must be met by the company?
    Which areas should be prioritised considering the company values/image?
    In which area is the company especially fit to help?
  4. Select area of action
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Corporate Social Responsibility

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Recommendations for Conflict Resolution – a Framework

Conflict is an inevitable part of organizational life, and the right degree and kind of conflict can be beneficial. If the pocesses that can make conflicts destructive are attended to, conflicts can either be minimized, resolved, or avoided. Self awareness and social awareness can make the difference between constructive and destructive conflict.

I myself negotiated within several conflic situations, acting as a mediator or moderator. From my personal point of view there is a strict set of guidelines one has to stick to if a conflict shall be resolved without desctructive consequences. I wrote down the most essential elements of my personal experience below…

Recommendations

  • Be honest with yourself about what is really at stake
  • Be open with others about your real needs and concerns
  • Don’t bluff or escalate
  • Look for opportunities to fins win-win solutions
  • Describe the possible costs and risks of continuing the conflict
  • Verify that the messages you are trying t send are the ones that are being received
  • Always keep reconciliation and resolution in mind
  • Challenge the position, not the person, and convey supportiveness and positive regard for the person
  • Frame things positively rather than negatively
  • Convey a commitment to mutually beneficial, superordinate goals
  • Allow others to save face
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Conflict Resolution

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Basics of Compliance Management

Effective compliance is driven by two elements:

  • A clear and simple set of rules and guidelines
  • Employees and leaders who live a value based corporate culture

Several compliance problems don’t arise because of missing compliance rules, but because employees are not fully convinced or motivated and don’t really live the existing rules actively. Thus, internal communications with a strong focus on engagement play a significant role in motivating employees to live culture of integrity!

The role of internal communications:

  • internal communications regularly and thoroughly inform leaders and employees about compliance regulations and guidelines
  • internal communications engage leaders and employees to actively and responsibly live a value based culture and thus to achieve a company wide compliance execution

Via various engagement activities and dialogue formats, internal communications enable employees to experience sensitive topics and deal with them directly, to they can understand and get convinced about the mechanics and benefits of compliance.

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Compliance

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Some Ideas on Ethical Decision-Making

The UK Institute of Business Ethics suggests a simple ‘test’ for ethical decision-making in business (see their website for their version). Adapted below it is applicable to all decisions in all types of organisations and in life as a whole. It’s a remarkably easy test to apply. Try it next time you have to make a decision:

  • transparency – am I happy to make my decision public – especially to the people affected by it?
  • effect – have I fully considered the harmful effects of my decision and how to avoid them?
  • fairness – would my decision be considered fair by everyone affected by it (consider all stakeholders – the effects of decisions can be far-reaching)

If you can honestly answer Yes to each of the above questions then you are likely to be making an ethical decision. If you have any doubt about saying Yes to any of the questions then you should think about things more carefully. Maybe there is an entirely different and better solution – there often is.

If you can’t decide how to answer these questions, seek input from someone who has strong ethical principles, and who owes you nothing. Especially do not ask anyone to advise you about difficult decisions if they owe you some sort of allegiance.

Leaders can sometimes be blinded by their own feelings of self-importance, and more dangerously can believe that the leader’s job requires them to shoulder the burden of decisions which cause anguish and suffering, or worse. Believing that leadership carries some sort of right to take risks with other people’s well-being is nothing more than arrogant delusion. A strong feature of good leadership is knowing when, and having the strength, to find another way – the ethical way.

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Business Ethics

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Book of the Week: The McKinsey Mind

The_McKinsey_Mind“The McKinsey Mind” Understanding and Implementing the Problem-Solving Tools and Management Techniques of the World’s Top Strategic Consulting Firm, by Ethan M. Rasiel and Paul N. Friga, 2001 McGraw-Hill. 218 pages

Take-Aways

  • McKinsey & Co. relies on a fact-based method of problem solving and management
  • McKinsey’s model for problem solving includes identifi cation of a business need, problem analysis and presentation of a solution
  • The critical fi rst step is framing the business problem so it can be subjected to rigorous, fact-based analysis
  • The mutually exclusive, collectively exhaustive (MECE) approach separates problems into distinct, non-overlapping issues
  • After distilling the essential components of the problem, form a hypothesis for the solution
  • Determine what types of analysis you need to prove or disprove your hypothesis
  • In your analysis, start with the annual report, look for outliers and consider best practices
  • The 80/20 rule says that 80% of the effect you are studying results from 20% of the examples you analyze
  • If the facts don’t confi rm your hypothesis, don’t change the facts, change your hypothesis
  • When presenting your solutions, keep it clear, organized and simple

Relevance – What You Will Learn

  1. The problem-solving and management techniques employed by the consultants at McKinsey & Co.
  2. Tips for improving communications and presentation skills
  3. How to adopt these methods to improve performance within your own organization

Recommendation
Throughout the 1990s, consultants were the kings of business and one fi rm, McKinsey & Co., reigned above all others. In The McKinsey Mind, Ethan M. Raisel and Paul N. Friga, former McKinsey & Co. consultants, describe the methods that the famed fi rm uses in improving the performance of its consultants. These techniques, which relate to problem solving, management and communications, combine to produce the equivalent of a basic MBA textbook. But unlike much of your grad-school reading, this one is right on target to address your real-life executive concerns. As such, getAbstract.com recommends this book not just for its McKinsey cachet, but for its applicable approaches to business.

Making Decisions the McKinsey Way
McKinsey & Co., founded in 1923, has become one of the world’s most successful strategic consulting firms. It has 84 offices around the world and employs 7,000 professionals from 89 countries. It has consulted with over 1,000 clients, including 100 of the 150 largest companies in the world, and many state and federal agencies in the United States. Many of is former consultants have become well known, including Tom Peters, author of In Search of Excellence, and less happily today, Jeffrey Skilling, former CEO of Enron. McKinsey & Co. relies on a well-defined, fact-based method of problem solving and management. All new consultants go through a rigorous training program to learn the firm’s techniques. When a McKinsey team enters into an assignment, known internally as an engagement, it looks for the key drivers affecting the problem. The process is based on a six-step model, which includes these elements, which you can apply in your own company:

  • Identifying the Need. Isolate the core problem facing the client. Generally, business problems are based on competitive, organizational, financial or operational needs.
  • Analyzing. Once an organization has identified a need, the problem-solving process used is fact-based and hypothesis-driven. It begins with framing the problem in a way that defines its boundaries, breaks it down into its component elements, and suggests an initial hypothesis for a solution. The next step is designing the analysis, whereby the team determines what analysis is needed to prove the hypothesis. In step three, the team gathers the data. With the data in place, the team is ready to determine if the information at hand proves or disproves the hypothesis, after which the team develops a course of action for the client.
  • Presenting. The team communicates the solution to the client and gains the client’s acceptance. The presentation must be clear and concise in order to generate buy-in for the solution.
  • Managing. Assembling a problem-solving team and keeping them motivated is the key to success. Individual team members must be able to balance their lives and careers so they can meet the client’s expectations without burning out. This is critical if the team is to keep the client informed, involved and inspired.
  • Implementation. Once a solution has been identifi ed, the team must dedicate sufficient resources to the organization, and the organization must respond in a timely way to any obstacles to implementation. All tasks related to implementation must be completed in a timely manner, and the organization must develop an iteration process that leads to continual improvement. To this end, the team must reassess the effectiveness of its implementation and make additional changes as necessary.
  • Leadership. This model requires strong leadership from the head the organization. This leader must express a strategic vision and inspire those in the organization who will implement the solution. He or she also must make the right choices on how to delegate authority to make the implementation happen. When you apply this model, you’ll often fi nd a tension between your intuition and the data. Generally, it’s impossible to have all of the relevant facts before you reach a decision, so like most executives, you need to make your business decisions based partially on facts and intuition. A good decision requires being able to balance both.

Framing the Problem
The first step in the McKinsey process is framing any business problem so that it can be subjected to a rigorous, fact-based analysis. To do so, use a structured framework that will generate fact-based hypotheses. Once you’ve arrived at your hypothesis, gather data and analyze the results to prove or disprove it. Your hypothesis will speed your research, since it provides you with a road map to guide your analysis and presentation of the solution. In framing the problem, used a structured method that identifies its boundaries and breaks it down into its components. MECE — mutually exclusive, collectively exhaustive — will help you separate your problem into distinct, non-overlapping issues, and will prevent you from overlooking any issues relevant to your problem. When attempting to break down a problem, McKinsey often uses logic trees, which create a hierarchical listing of all of the problem’s components. When forming a logic tree, start with a broad, 20,000-foot view, and move downward to get closer to the problem. You might start with an overview of a company’s products, move down to revenues and expenses broadly, narrow that perspective to particular sources of revenue, such as sales, leasing, and service, and then look more closely at one of these areas, such as dividing sales into the separate regions of sales activity. Once you have determined the essential components of a problem by using the appropriate frameworks, you can form a hypothesis or series of hypotheses about a likely solution. Since you don’t have many facts at this point, use your instinct or intuition to help you generate these hypotheses. Just take what you already know about the problem, combine that with your gut feelings, and imagine what the most likely answers will be. These answers may not be correct, but they are a great place to start. Designing the Analysis To start the analysis, find the key drivers by drilling down to the core of the problem, instead of looking at everything separately. Look at how solving this problem fits into the big picture and don’t waste time trying to analyze every aspect of a problem. Determine what analyses you need to prove or disprove your hypothesis. In some cases, you may not be able to come up with a hypothesis initially because the problem seems too confusing. In that case, use your analysis of the facts to guide you to a solution. Generally, though, your hypothesis will determine how you conduct your analysis. Get your analytical priorities straight by deciding what not to do, so you can concentrate on the most important facts to analyze. For instance, decide which analyses are quick wins, since they are easy to complete and can make a major contribution to proving or disproving a hypothesis. Don’t worry about absolute precision — you can’t be perfect at this stage. Triangulate around the toughest problems by analyzing other issues that will determine the limits of these sticky issues.

Gathering the Data
Now is the time to look for the facts. Don’t let people you interview tell you, “I have no idea,” which is an answer that communicates a lack of time, insecurity or just plain laziness. Instead, probe with a few sharp questions. McKinsey-ites use three high-impact techniques in data collection. They start with the annual report. Next, they use computers to identify outliers, the key subjects for later investigation. Generally, these outliers are uncovered by comparing ratios or key measures like high and low performers. Finally, they seek relevant best practices to glean insights from a competitor or top-performing organization. Before you interview anyone for information, prepare a written interview guide. Once the interview commences, use active listening and guide the interviewee to stay on track. Some other tips for successful interviewing are to interview in pairs, use the indirect approach in asking questions, and don’t ask for too much. Avoid sensitive subjects at the beginning of the interview and recognize where the interviewee may have a conflicting agenda like a job that is threatened by cost-cutting measures.

Interpreting the Results
Once you have your data, you must understand what it says and decide what steps you should take based on your results. Assemble these fi ndings into an externally directed end product that provides a course of direction for your organization or client to follow. A chart that identifies the three most important things you learn each day will help to focus and direct your thinking. Be receptive to facts that prove you wrong. If the facts don’t fit your hypothesis, be ready to change it. Don’t try to change the facts to fit what you think is the likely solution. Remember the 80/20 Rule: 80% of the effect you are studying will result from 20 percent of the examples you analyze. This rule was originally propounded by the economist Vilfredo Pareto, who found that a small fraction of the elements in any study usually account for a large fraction of the effect. In creating the end product, tailor your solutions to fit the needs of your client. Look at the results through the client’s eyes and ask how your recommended solution will add value. Respect the limits of your client’s abilities to ensure that your solutions are realistically actionable based on the client’s current skills, systems, structures, staff and budget.

Presenting Your Ideas
You must present your solutions in a way that your client understands and can accept. To do so, make your presentation clear and convincing. To do so, use a structure that your audience can easily understand and follow. McKinsey recommends keeping it organized and simple. Use a structured series of steps that present your idea clearly. Use the elevator test, which means you should be able to explain your solution clearly and precisely during a 30-second elevator ride. Keep any charts simple — communicate a maximum of one message per chart. Think of your charts as the basis for getting your message across, not an art project. This presentation, however, is only a tool, not an end in itself. Think of your presentation as selling your solution. The greatest presentation is worth nothing if the organization rejects your recommendations or fails to implement them. Your only goal in making a presentation should be getting a buy-in to your recommendations. To this end, pre-wire everything by walking the relevant decision makers through your findings in advance, so there are no surprises.

Managing Your Team, Your Client, and Yourself
Management of the problem-solving process entails managing your team members, managing the client and managing yourself. Successful team management starts with good team members with the right mix of skills. Establish good communication, which is critical to effective team functioning. Keep the information fl owing by making your messages and meetings brief and focused. In managing your client, the three areas to consider are obtaining, maintaining and retaining your clients. Use an indirect approach based on building relationships to get new clients, and only promise what you can really accomplish. To maintain clients, keep them involved in the process and get their buy-in. To retain them, meet and exceed client expectations. Finally, for successful self-management, delegate around your limitations, make the most of your network and respect your own time limitations to avoid burn out.

About The Author
Ethan M. Rasiel was a consultant in McKinsey & Co.’s New York office. Among his clients were major companies in finance, telecommunications, computing and consumer goods. Paul N. Friga worked for McKinsey in the Pittsburgh office. His projects related to international expansion, acquisition and strategic planning, education, water, and other industries. He is Acting Director at the North Carolina Knowledge Management Center at the University of North Carolina.

Business_Books_Teaser

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Book of the Week: Peter Drucker – Shaping the Managerial Mind

Peter_Drucker_Cover“Peter Drucker – Shaping the Managerial Mind”, by John E. Flaherty. Jossey-Bass © 1999. 445 pages

Take-Aways

  • Peter Drucker is the father of modern management.
  • Drucker coined the terms “knowledge society” and “knowledge worker.”
  • Drucker developed his insights into “the marketing concept.”
  • Drucker explains that every business exists in three different time zones — traditional, transitional, and transformational.
  • To plan now for tomorrow, manage all three business time zones simultaneously.
  • Look at your business from the customer’s point of view.
  • To respond systematically to change, ask: “What will the business be?” and “What should the business be?”
  • The development of technology is the prime catalyst of today’s knowledge society.
  • Technology is the engine of change; information in action is the fuel.
  • The executive’s role is to sharpen corporate vision, generate improved performance and become increasingly effective through learning and practice.

Review
Peter Drucker is perhaps the most influential thinker on business and management in the world today, and John E. Flaherty explains why in this in-depth analysis of Drucker’s work and ideas. He starts with biographical details and provides a definitive account of Drucker’s achievements as a management researcher, thinker, and writer. Flaherty’s fascinating book highlights Drucker’s contributions to the fields of management and business strategy. Of necessity, the author includes summaries of Drucker’s books and quotes from his work. But, reaching a little deeper, Flaherty also shows how Drucker, who began as a social and political theorist, came to create the new academic field of management. Many of Drucker’s early ideas are still applicable today, as Flaherty makes abundantly clear in this book, which I strongly recommend to managers of all levels and students of business.

Abstract
The Importance of Peter Drucker
Seminal management theorist Peter Drucker is recognized as the father of modern management and as the man who invented the corporate society. He has the rare distinction of having established a modern academic discipline. His books are landmarks in the discipline of management. For the most part, Drucker’s ideas have been accepted with little criticism. In fact, many authors borrow from him freely. Drucker came to his position as a leading management thinker via three major formative influences. Initially, he was influenced strongly by two elementary school teachers who helped him develop a short, clear writing style that enables him convey his ideas effectively. He also was influenced by his family’s friends: the leading professional and intellectual leaders in Vienna just after World War I. Though Drucker didn’t go to college, his curiosity and quest for learning spanned ordinary disciplines. He worked first as a trainee in a Hamburg trading house. Then he became a security analyst for a bank in Frankfurt, where he first linked his knowledge with his ability to write as a financial reporter for a leading regional newspaper. Meanwhile, he studied for a doctorate in political science at a German university and, in 1937, he left Germany and came to the United States. In 1939, he began teaching at Sarah Lawrence College. He continued university-level teaching over the next decades at Bennington, New York University, and Claremont College. The year he began teaching he also published his first major book, The End of Economic Man, which began his academic focus on management.

Drucker’s Early Work
From 1938 to 1954, when he published The Practice of Management, Drucker searched for a deeper understanding of the effects of modern industrialism. The meanings, threats and challenges of the rapid expansion of the industrial economy especially intrigued him. He came to believe that the big corporation was the single most powerful institution of modern society. He identified corporate professional managers as a new major leadership group. Initially, he approached his subject more as a political philosopher, since here was no field of management, but these early writings paved the way for him to build the discipline of management. As he described in The End of Economic Man, he firmly believed in the superiority of capitalism. However, he felt that for it to survive, it needed effective approaches to the unemployment, class conflict and social alienation the system produced. He urged combining economic pursuit with ethics and a concern for the larger community.

In his 1942 book, The Future of Industrial Man, Drucker lauded the large corporation as the basis for structurally changing the fundamental system of society. He called the corporation, “the chief institutional symbol of a new social order.” Yet, even in an economically successful corporation, he said managers still must clarify the firm’s social mission and overcome the frictions between managers and workers. He was quite hopeful that corporate management was up to the task, noting: “There has never been a more efficient, a more honest, a more capable and conscientious group of rulers than the professional management of the great American corporations today.”

In 1946, he wrote a groundbreaking inside study of General Motors, Concept of the Corporation. The book examined the company’s policies, practices, and performance. Drucker noted the benefits General Motors realized from decentralization, but said its top executives were not aware of the detriments of decentralization. They did not recognize such weaknesses as failing to provide sufficient management development and taking the company’s strategic mission for granted. Drucker felt the firm’s focus on economic performance was too single-minded. He urged large companies to become more responsible for the quality of life in the larger society. He perceived the corporation as “a social and political system as well as an economic organization.”

In 1950, Drucker also showed an early insight into the direction of society, in The New Society. He identified the growth of a society made up of multiple organizations and spoke of the rise of the knowledge worker, well before the boom in knowledge work in the 1990s.
His early thought culminated in The Practice of Management, published in 1954. In this book, Drucker says managers should unite their companies’ separate business functions into a coherent whole based on purpose. He observed that both the business world and academia lacked a systematic approach to the corporation, and urged study of management as a discipline. Drucker pointed out that the great U.S. corporate leaders from 1900 to 1950 were trailblazers in establishing a systematic approach of managing for results, although they weren’t aware that they were doing this or that their practices could be taught to others. He cautioned managers to think about managing change effectively for successful future results. The enthusiastic popular response to this book helped establish Drucker’s reputation as the father of modern management and set the stage for the management themes that Drucker — and other scholars — would address over the next decades.

Strategy and Entrepreneurship
As time passed, Drucker developed certain major themes in his writings about management and building successful corporations. His themes included managing change strategically, promoting entrepreneurship, and developing strategies to manage a business in transition. Drucker pointed out that every business exists in three different time zones — traditional, transitional, and transformational, which correspond to the past, present, and future. The traditional is the status quo; the transitional is what you do now; and the transformational relates to building your business for the future. In his view, strategically, you have to manage all three of these segments at the same time, so you can plan today for tomorrow. As he put it, there is “no such thing as a future decision, only the futurity of a present one.”

Drucker identified corporate culture. He urged businessmen to hire a mix of different types of employees with different skills, values, and commitments, as businesses change over time. He called for strategic planning as the best way to manage change, and said entrepreneurship provided a way to manage change systematically. Entrepreneurs must accept uncertainty and risk, but greater risk resides in doing nothing, which invites entropy and stagnancy. All physical processes, including corporations and other institutions, tend to disintegrate unless they receive new inputs. He said IBM stumbled and failed to change at the beginning of the computer revolution because it was technology-driven, not market-driven. Conversely, Drucker attributed Wal-Mart’s success to its ability to listen to the market and respond.

The Marketing Concept
Drucker also developed insights about what came to be called the “marketing concept.” His writings about this concept examined six major areas:

  1. Consumer sovereignty.
  2. Consumer rationality.
  3. The utility function.
  4. The distinction between sales and marketing.
  5. The systems approach.
  6. The demand factor.

His emphasis on consumer sovereignty broke with convention wisdom, which characterized a business based on what it produced. Instead, Drucker urged looking at the business from the customer’s point of view. He stressed the need to recognize the way customers assigned value. Customers don’t just buy a product, he said. Customers buy satisfaction based on a product’s “utility function,” which is how they use it and benefit from it. He said business should employ marketing to know and understand the customer so well that the product sells itself. He viewed marketing as the corporate catalyst that “integrates all comparative strengths and core competencies” in pursuing the desired results, viewed from the customer’s perspective.

Drucker embraced change when others did not. After World War II and during the 50s, most U.S. business people preferred continuity. They tolerated moderate change, at best. Drucker said managers’ preferences did not matter: They had to cope with accelerated change because it was inevitable. He said that once they managed basic business fundamentals — including knowing about the marketing concept and using capital assets productively — they then needed to adopt an entrepreneurial approach to integrating the past, present, and future so they could create a transition to the company of tomorrow.

Drucker recognized that change was coming due to the pressure of external force of globalization and the rise of the transnational corporation. He said major regional blocks would become the key structural units of the global economy. He urged top management to ask two key strategic questions to respond systemically to change: “What will the business be?” and “What should the business be?” He offered a methodology to diagnose risk and opportunity, along with specific proposals and guidelines for converting opportunities into concrete results. Drucker told businesses how to prepare to handle the unexpected, analyze business incongruities, identify vital demographic trends, examine the patterns of industry structure and understand the significance of creative imitation.

Becoming an Effective Executive
Drucker cared about executive effectiveness. He emphasized managing for change in light of the challenges of the post-industrial, knowledge-age society. In 1968, he coined the terms “knowledge society” and “knowledge workers,” in his book The Age of Discontinuity. These terms are common today, but Drucker was the first to see where the management revolution was going. In his viewpoint, the development of technology laid the foundation for today’s knowledge society. Technology was the prime “catalyst” for defining the nature of work and worker expectations, the “engine of change.” Knowledge or “information in action” was its fuel, but knowledge without skill is unproductive. Thus, the knowledge worker’s effectiveness depends on “contribution not effort, output not input, performance not technique, and responsibilities not activities.” Drucker taught that this third technological revolution based on applying knowledge to performance, was the major force shaping our society today. He identified five key characteristics of knowledge:

  • Storability
  • Measurability
  • Mobility
  • Impermanence
  • The need to be used responsibly

Finally, Drucker looked closely at leadership, noting that the basic principles of leadership technique had been around for centuries. He stressed that the role of the executive was to sharpen the corporate vision, generate improved performance and become increasingly effective through learning and practice. In his various books about effective leadership, he described key techniques you need to use to be an effective leader, including good time management, effective communication skills and solid decision making techniques.

About the Author
John E. Flaherty is professor emeritus of management at Pace University in New York City, where he was formerly dean of the Graduate School of Business and chairman of the Social Science Department. After meeting Peter Drucker while auditing one of his management courses at New York University in the mid-1950s, Flaherty followed Drucker’s work over the years, keeping notes from Drucker’s lectures, books, articles, conversations and correspondence, much of which is incorporated into this book.

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Book of the Week: Shakedown – How the New Economy is Changing Our Lives

Shake_Down_Cover“Shakedown – How the New Economy is Changing Our Lives”, by Angus Reid. Doubleday Canada Limited, Toronto, 1996.

About the book
“The 1990s have witnessed a great stirring of the Canadian soul. Issues of national unity, anxiety over jobs, the emerging of the global economy, new technologies and fundamentally different demographic forces are rapidly changing our social space. Many Canadians feel marooned on what seems an alien landscape, confronted by seemingly contradictory paths to the future. I wrote this book because I’m convinced that the concerns and anxieties about the future expressed in recent polls need to be addressed. Canadians sense that something is happening – that powerful changes are coursing through their lives. And they’re right.” (p. xii)

The word that Reid uses to describe the collective effect of these forces is ‘shakedown’. As the term implies, this is a period of major restructuring of the economy and of society overall. (The new (1996) ITP Nelson Canadian Dictionary defines ‘shakedown’ as “..a period of appraisal followed by adjustments to improve efficiency or functioning”.) Reid is singularly qualified to chart these trends: as President of the Angus Reid Group, he has been polling Canadians on various matters of economic, social and political interest for nearly 20 years.

His vision of the future is a very bleak one. He characterizes the change that we are living through now as having gone from a ‘spend and share’ era, which lasted 25 years from 1965 to 1990, to a ‘sink or swim’ era, which started in 1991. In the ‘spend and share’ era there was a general air of optimism: women were working, the economy was strong, jobs were plentiful, and there was confidence in the role of government as a generator of economic benefits. The labour force, government and the services sector were all growing and Canadians were benefiting from the ‘trickle down’ of household, corporate and government spending. In those times of growth, Canadians didn’t mind so much sharing part of their wealth with others less fortunate – hence the development of our much-vaunted ‘safely net’. The prevailing philosophy during the ‘spend and share’ era was, according to Reid, that Canadians had “…found a formula for what had never existed before: a society that allowed its citizens to be both selfish and generous at the same time.” (p.66)

The ten myths
Now, however, we have entered a harsher time when our economic destiny is less secure than it seemed during the halcyon days of ‘spend and share’. Reid maintains that this has shattered ten myths that Canadians fondly held during the ‘good times':

  • Myth #1: Big is safe – This is patently no longer true when one looks at the downsizing that has occurred at large entities such as Ontario Hydro, the banks, the CBC, etc. etc.
  • Myth #2: Growth is good for everyone – In these times of record corporate profits (the banks, for example) yet very high unemployment rates and unprecedented need for food banks, the old idea that economic growth was good for all has little credence.
  • Myth #3: Science and technology will save us – Reid maintains that we are increasingly questioning the ability of science and technology to provide the answers that we will need in future, and points to the flurry of questions raised about the human genome project and the inability of science to develop a cure for aids as examples.
  • Myth #4: A good education means a good job – “There is no longer any surefire formula for translating education and training into the kinds of rewarding jobs baby boomers once had for the asking.” (p.26)
  • Myth #5: Loyalty is all – see Myth no. 1
  • Myth #6: Location, location, location – Telecommunications technology has largely broken the barriers of location, and made possible new methods of doing business such as telecommuting. (Just how Reid sees this factor as creating a more challenging and difficult time for Canadians in the future is not clear.)
  • Myth #7: Time is linear – One result of the globalization of business is that there is no longer a linear flow of ‘work time’ (i.e. day) and ‘non-work time’ (i.e. night). Now we are on call 24 hours a day, if we want to keep up with the world.
  • Myth #8: What you see is what you get – With digital technologies that are able to alter any photograph or image to make it look real, we increasingly learn to distrust our senses, and question everything we see.
  • Myth #9: Canadian culture is a sacred trust – It is obvious when drastic cuts are made to the budgets of the CBC and other Canadian institutions, and when the Mountie image can be sold to the Disney Corporation, that Canadian culture is no longer seen to be worthy of protection and development.
  • Myth #10: The public interest still counts – The political mania towards increasing privatization of things once held to be the responsibility of government because they were in the public interest, such as hospitals, utilities, transportation, etc., shows that the public interest is clearly secondary to financial considerations.

Findings
In the ‘sink or swim’ era, Reid contends, two major forces impact on the workforce in Canada. One of these is technology – jobs will be replaced by microchips. The other is globalization, as companies outsource production to a much cheaper labour force in the third world (and decisions that impact on the future of companies operating in Canada are increasingly made in Washington and elsewhere). This shakedown in the jobs market will have ripple effects – less consumer spending, lower demand for services, fewer job opportunities for young people, and a general malaise regarding the prospects for the future.

Fundamentally this situation is confusing to Canadians because many sectors of the economy are growing at the same time as they are cutting back on their workforces. In addition to reduced labour costs through downsizing, this is a result of productivity gains through technology, and the pursuit of global markets. The resulting paradox of strong economic growth (read profits) in some industries without a commensurate increase in the number of jobs available in those same industries has frustrated and maddened Canadians. Growth in the economy used to mean growth in jobs, but now the era of the ‘jobless recovery’ is upon us. Thus we read of record-high bank profits and stratospheric salaries paid to CEOs, while the ranks of the unemployed and homeless swell and the lineups at the food banks get longer. Reid hints darkly that these may, finally, be Marx’s Ô’internal contradictions of capitalism’ coming to light.

The result of all this for Canadian households is that, not surprisingly, they are cutting back on spending, and becoming increasingly value-conscious in their purchases. However, Reid also sees a positive side to this in terms of a return to more spiritual and community-oriented values, as Canadians realize that they simply cannot be as materialistic as they had been in the past.

Turning toward public institutions, though, Reid does not see this greater sense of community displayed. Instead he notes the swing to the right in many recently-elected provincial governments, and the emphasis on downsizing, privatization, decentralization and deregulation that has accompanied them into power. In many respects, he notes, governments have abandoned their traditional roles of protecting and supporting sectors of society and the economy, and points to welfare cutbacks, health care reforms, and the withdrawal of support for Canadian culture as examples. These trends threaten the very essence of Canada’s uniqueness: “I therefore think that the greatest risk inherent in the sink or swim era is that its central proposition – unrestrained self-interest – will drown some of the most important attributes of Canadian society.” (p. 277)

This situation bodes particularly badly for the prospect of Quebec remaining in Canada. A Canada that is no different from the U.S., Reid holds, is meaningless to Quebec, and there will be no compelling reason for Quebeckers to remain part of it. He sees a very real danger of Quebec leaving the Canadian fold.

Is there any hope? While he may have diagnosed the problem well, Reid doesn’t offer much by way of solutions. He envisages an emphasis on entrepreneurship and small home-based businesses that will create some jobs that may offset to a small extent the job losses that we have suffered. He talks about the building of a society founded on trust, civility and fairness. He says we must recognize the legitimate role of governments in creating benefits for us all, and allow and enable them to do that. But he offers no specific program or action plan to achieve this.

“I began this book by stating the obvious: there are powerful forces arrayed against us. Let me conclude by observing that we can swim against them if we see the opportunity, but as so often when facing powerful forces, opportunities for true confrontation will be scarce. In most case, we are likely to have more luck if we can ride those current forces the way a canoeist navigates a stream, accepting the inevitability of their strength without letting them gain complete ascendancy. And whatever we do, we must do everything in our power to resist becoming victims.

To achieve this, Canadians are going to have to look inside themselves for entrepreneurial spirit, and outside themselves for the communal spirit that has sustained this country through its most difficult times. We can get through this if we are determined to grow, rather than shrink, as a people. We must change. But, no matter how dark the clouds, we cannot abandon who we are.” (p. 312)

Such platitudes and home-spun advice, though do not a program for action make. Reid’s dark vision of the future cannot help but leave one with a sense that not much can be done when we’re up against the monstrous and overwhelming forces of technological change and globalization. It is a very bleak and depressing vision, and unfortunately, it may well be right.

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