The Examiner's Answers E1 - Enterprise Operations May 2011

The Examiner's Answers E1 - Enterprise Operations SECTION A Answer to Question One 1.1

C

1.2

A

1.3

D

1.4

C

1.5

A

1.6

A

1.7

D

1.8

A

1.9

C

1.10

A

SECTION B The answers that follow in Sections B and C are fuller and more comprehensive than would have been expected from a well-prepared candidate. They have been written in this way to aid teaching, study and revision for tutors and candidates alike.

Answer to Question Two Requirement (a) Organisational competences A competence is an activity or process through which an organisation deploys or utilises its resources. Unlike a resource, it is something the organisation deploys, rather than something it has. (This thinking forms part of the broader 'resource based' view of strategy that assumes that an organisation is a collection of resources, capabilities and competences that provides a basis for its ability to compete.)

Enterprise Operations

1

May 2011

Core competences A competence is classified as being 'core' when it does something differently or better than competitors and this forms the basis of its competitive advantage. Core competences are difficult for the competition to acquire or imitate and so allow the organisation the opportunity to exploit them.

In terms of strategic supply chain management, core competences are areas where the organisation should never consider outsourcing. It is what the organisation knows best and is good at. The organisation should never contract out core competences but should instead keep them 'in-house'.

If core competences are precious and should not be contracted out, it follows that only noncore competences should be considered for contracting out.

Complementary competences, residual competences Two non-core competences are relevant: •

•

Complementary competences. Here the organisation may decide to outsource but only to trusted key suppliers who have the necessary skills to deliver what is required.

Whilst not as fundamental as core competences, complementary competences need safeguarding and the organisation would need to develop a strategic relationship with the supplier if it chose to contract out.

Residual competences. Here the organisation should outsource but will not need to develop strategic relationships with the supplier, instead the relationship can be more 'arms length' by nature. When making a 'buy or make' decision, this will involve a straightforward 'buy' decision.

Quinn and Hilmer consider the risk of potential failure on the part of the outsource partner and the centrality of the competence to organisational strategic success. They put forward three tests for whether any non-core activity should be contracted out or not: • • •

What is the potential for gaining a competitive advantage from this activity? The lower the potential, the more sensible it is to outsource.

What is the potential vulnerability to market failure that could arise if the activity was outsourced? The lower the potential, the more sensible it is to outsource.

What can be done to reduce risks of contractor failure by structuring arrangements in such a way as to offer protection? The more the organisation can protect itself, the more sensible it is to outsource.

Requirement (b) Value for money. Value for money offered by the information systems that produce decision making information is a relevant criterion. Value for money is often expressed as the 3 Es Economy, Efficiency and Effectiveness. An economical operation acquires these resources in appropriate quality and quantity at the lowest cost. This might be interpreted as asking whether the software has been acquired at the lowest possible cost commensurate with its quality. Efficiency concerns performing tasks with reasonable effort ('doing things the right way') whereas effectiveness is the extent to which objectives are met ('doing the right things').

Effective information embraces many of the other criteria including relevance to the business process, as well as being delivered in a timely, accurate and consistent manner.

Cost. Ongoing cost of the existing system is obviously a significant criterion especially when set against other factors such as other organisational investments.

Timeliness. Information must be provided to decision-makers in sufficient time for it to be used in the decision-making process.

Relevance. Information needs to be relevant to the decision being made by reducing uncertainty and increasing knowledge about that decision. For example, making a decision about offering credit to a new customer might include an analysis of the customer's previous credit history.

May 2011

2

Enterprise Operations

Understandability. Information needs to be clearly presented or displayed in an understandable form that permits the user to apply it effectively to a decision-making situation.

Consistency. Information should be presented in a consistent fashion and compiled on a consistent basis in order that there is no confusion in interpretation by decision-makers.

Accuracy. Information must be sufficiently accurate for it to be relied upon by the decisionmaker and for the purpose for which it is intended. (It is sometimes accepted that absolute accuracy can be sacrificed if it means greater timeliness or lesser cost).

Completeness. The degree to which information includes detail about every relevant event necessary to make the decision is also an important criterion. The content of information, particularly if the information is provided to decision-makers, should be of strategic importance, meaningful and actionable. Complete, meaningful information is synthesised from various pieces of data.

Bias free. This means that information is not biased towards one particular perspective or from one particular source. Biased information is likely to lead the decision-maker to the wrong decision or an incomplete decision.

Requirement (c) Geert Hofstede first researched the role of national culture within the organisation in a study of many thousand IBM managers. He identified a framework of four dimensions which he argued largely accounted for cross-cultural differences in people's belief systems and values, referring to them as: • Uncertainty avoidance • Masculinity • Individualism • Power-distance Later he added a fifth dimension, long versus short-term orientation or 'Confucian dynamism'.

Uncertainty avoidance Uncertainty avoidance measures a society's tolerance for uncertainty and ambiguity. In other words, the extent to which a national culture programmes its members to feel comfortable in novel, unknown, surprising, or different situations. Uncertainty avoiding cultures (such as Japan and France) try to minimise the possibility of such situations by strict laws and rules, safety and security measures. Uncertainty accepting cultures (such as Denmark and Sweden) are more tolerant of opinions different from what they are used to and try to have as few rules as possible.

Masculinity (versus femininity) Masculine cultures (such as Japan and USA) emphasise 'assertiveness' compared to 'nurturance' for feminine cultures (such as Denmark and Sweden). Men in feminine countries have the same modest, caring values as the women, but in masculine countries women are more assertive and competitive; but not as much as men!

Individualism (versus collectivism) This dimension measures the degree to which individuals are integrated into groups.

Individualist societies (such as UK and USA) expect individuals to look after themselves and their immediate family, differences are admired and the cult of individuals prospers most.

Collectivist societies (such as China, Pakistan and Taiwan) have individuals integrated into strong in-groups, such as extended families which protect one another. Here, conformity is generally considered the norm and society's rights and responsibilities are dominant and individual needs are subservient.

Enterprise Operations

3

May 2011

Power-distance Power-distance is the extent to which the less powerful members of organisations accept and expect that power is distributed unequally. In high power-distance organisations, superiors display their power and exercise it. Subordinates expect this behaviour and feel uncomfortable if they do not personally experience their superiors displaying their status and power. In high power-distance cultures (such as France and India) subordinates feel separated from one another. In low power-distance societies (such as Denmark and Austria) members of organisations, and of society, tend to feel equal and relatively close to each other at work. Power is much more likely to be delegated in low power-distance cultures.

Confucian dynamism Asian cultures replace the dimension uncertainty avoidance by Confucian dynamism which relates to different values taken from long verses short term orientation. Long term oriented countries like China and other Asian countries value persistence and thrift. Western countries (e.g. Germany and USA) by comparison have a short term orientation where people value actions and attitudes that are affected by tradition and the past.

Requirement (d) There are two categories of controls, referred to as general controls and application controls.

General controls These controls are designed by the organisation to ensure the completeness and effectiveness of the organisation's overall control environment over its information systems.

These controls concern the overall transaction processing environment and include: • Personnel controls, including the appropriate segregation of duties, policy on usage and hierarchy of access.

• Access controls, such as password systems, user identification, timed lock-outs, etc.

• Computer equipment controls to protect equipment from destruction, damage or theft.

• Business continuity planning which involves a risk assessment to establish which activities/systems will have a critical impact on the ability of the organisation to continue its business activities.

Application or program controls These controls are performed automatically by the systems and designed to ensure the complete and accurate processing of data, from input through to output and may also help ensure the privacy and security of data transmitted between applications. These controls vary based on the purpose of the specific application, but the categories of IT application controls can include: • Completeness checks to ensure that all records are processed from initiation to completion.

• Validity checks to ensure only valid data is input or processed.

• Identification and authorisation checks to ensure all users are uniquely identified and authorised.

• Problem management facilities to ensure that all application problems are recorded and managed in a timely manner.

• Change management controls to ensure that all changes are implemented.

• Input controls to ensure data integrity.

Requirement (e) Globalisation refers to the closer integration of countries and people around the world. It is the result of a number of factors, some unrelated, some interconnected, some of which are briefly described here.

Reduced trade barriers Trade barriers have been loosened and this has been a driver of globalisation. In recent years, the World Trade Organisation (WTO) which comprises over 150 countries has been prominent in advocating free trade and has been instrumental in reducing barriers to trade in goods and services.

May 2011

4

Enterprise Operations

Improved transportation Transportation systems, especially rail, shipping and air travel have improved. More goods than ever can now be moved relatively easily, quickly and cheaply from where they have been produced to countries and regions where they are consumed. In particular, the introduction of cold storage facilities and handling has made a significant difference to the extent of international trade.

Low cost efficient communication systems Advances in, and the subsequent spread of, new technologies have revolutionised international communications and encouraged the development of global patterns of production and consumption. It is now possible for people to communicate with each other instantaneously and meet regularly, despite living and working in different parts of the world.

As such, videoconferencing, email and webcams have all been significant developments.

Increased movement of capital and technology Easier access and cheaper transport has led to increased movements of capital and technology across borders. Inevitably, this has, in turn, impacted on local cultures, knowledge sharing and learning as people travel further.

Production efficiencies The development of industrial and agricultural production processes through greater automation and improved methods has decreased reliance on labour for basic agricultural and production needs. This has led to a redeployment of people to satisfy global consumer needs and wants.

Improved financial systems The efficient and safe transfer of funds from the buyer to the seller is essential and so improvements in the financial systems have been important in developing international trade.

There has been an enormous expansion of international financial markets. In addition, the growth of international financial institutions has enabled capital to be obtained in the cheapest markets and this would enable large projects to be undertaken in most countries and enable the countries to exploit their natural resources and skills.

Emergence of BRIC economies There has been a large increase in foreign direct investment (FDI) flowing to developing and transition economies. The emergence of the BRIC economies (Brazil, Russia, India and China), plus others such as Indonesia and Mexico has fuelled world trade and globalisation.

Their declining dependence on agriculture and governments encouraging foreign investment has led to a rapid growth in trade, especially of manufactured exports.

Requirement (f) Supply is now accepted as a more fundamental and strategic concept when compared to purchasing. Twenty years ago Reck and Long (1988) were prominent in identifying a coherent purchasing development model. The model describes different development stages for an organisation's function and reflects the way in which the supply chain is being managed.

According to this thinking, an organisation might position itself strategically according to a continuum that includes: Passive The purchasing function acts on the requests from other departments and attempts to get the best deal it can. Some departments may get involved in the detail of the negotiations, others may not. Purchasing has no strategic direction and passively reacts to the requests from other departments.

Independent The independent stage is further developed from the passive stage and involves a more professional approach to purchasing including use of technology and enhanced

Enterprise Operations

5

May 2011

communication. The function may adopt some of the latest purchasing practices but the strategic direction it takes is independent of organisational corporate strategy.

Supportive At this supportive stage, purchasing is corporately recognised as being essential. The function provides timely information about price and availability. Strategically, the function supports the organisation's competitive strategy through its purchasing techniques and activities.

Integrative The final stage of development means the function is fully integrated with the organisational strategy. Purchasing is integral to organisational competitive strategies and its management is involved in its development.

May 2011

6

Enterprise Operations

SECTION C Answer to Question Three Requirement (a) The International Standards Organisation (ISO) issues standards that are globally recognised, and include the ISO 9000 series. ISO 9000 provides a systematic approach to managing business processes to manufacture products that conform to customer expectations. The Chief Executive believes that significant benefits to 2TW might arise through gaining the quality standard ISO 9000 certification.

Overcoming internal weaknesses Currently 2TW has inadequate quality control systems which have led to differing operating efficiencies between SBUs and there are significant numbers of returned goods which require replacement or reworking. ISO 9000 accreditation should help in overcoming these weaknesses as it is based on product standardisation and quality control.

Customer satisfaction The significant numbers of returned goods mean that customers are not currently receiving products of the quality they expect. The standardised practices guaranteed by a company complying with ISO 9000 will mean that consistently dependable processes and products will reverse this situation. Fewer returns should result in improved customer satisfaction.

Enhanced company reputation If 2TW customers are not currently receiving products of the quality they expect then this can be very damaging to the company's reputation. The outcomes arising from achieving ISO 9000 will improve customer satisfaction and customer loyalty, leading to repeat purchasing and an enhanced company reputation.

Improved sales Organisational growth could arise as sales improve through: • Repeat purchases by satisfied customers. • New customers attracted through the recommendation of existing customers. • New customers attracted through a growing reputation and a guarantee of quality through ISO accreditation.

New sources of business might also arise once 2TW has ISO 9000 accreditation as some large organisations often have approved supplier lists that exclude companies without accreditation.

Standardised practices The review has identified differing operating efficiencies between SBUs. By gaining ISO 9000 certification, 2TW will develop systems that should lead to standardised practices and the maintenance of consistently dependable processes. The consistent approach to policy documentation is a requirement of certification which also includes systems for control of products that do not conform to the agreed standard. The standardisation gained by the process will improve the efficiency of business processes and should reduce expenditure (and therefore improve profitability).

Elimination of inefficiencies Adoption of the most efficient processes will allow SBUs to discuss and consider mutual learning and best practice. SBUs will need to agree upon common modes of operating and standards to be achieved and will allow 2TW to identify the most efficient processes. This should drive out bad practice and inefficient operations. This should increase profitability.

Mechanisms for quality control The need for control of quality records (according to the standard 'at all locations where operations essential to the effective functioning of the quality systems are performed') means

Enterprise Operations

7

May 2011

that once a recognised mechanism is in place, an effective quality control mechanism can be established. Compliance can be easily assessed by conformance of a particular operation to the agreed standard. This may help the Chief Executive overcome his/her fears of a loss of control over SBU operations.

Improved management information As part of quality control, the standard encourages a company to use these statistical techniques that would be most appropriate for its industry. This would force 2TW to adopt such techniques routinely in order to correct that which does not comply to the standard and to prevent poor quality occurring. These techniques and systems will improve business processes by improving decision making as SBU managers would be able to base decisions on more reliable information in future.

A stimulus to continual improvement The need to document every procedure and work instruction will make the way in which 2TW operates visible and will lead to improvements if unnecessary practices are identified or an improved method is identified. In this way the system might stimulate continuous quality improvement leading to improved business processes, reductions in waste, improved product quality and cost savings. By seeking the international standard, 2TW will be forced to focus on how it does business and, unlike a training programme, this initiative is more than a one off exercise or event. Periodic audits conducted by external independent auditors are a requirement of certification. This will keep the issue of quality permanently 'on the agenda'.

Improved employee morale As 2TW's external reputation grows through rigorous quality standards, employees will be proud to be associated with the company. The fact that the standard implies a need for the workforce to take control of its processes and document its work processes will mean that it will feel valued. A key message of a shared responsibility for quality should provoke a positive attitude throughout the organisation. Such an attitude should lead to an increase in workforce morale, a nurturing of goodwill and a positive organisational culture.

Requirement (b) Appropriateness of basic pay as part of the remuneration and reward package Redesign of the package will need to balance basic and performance related pay in an appropriate way. The basic pay element should recognise factors such as: • the size of the SBU, • the relative contribution of the SBU to the company as a whole, and • the responsibility, past experience and specific skills and competences demanded of the individual manager by the nature of the SBU. A need to address recruitment and retention The overall reward package will need to address not only internal targets of quality and profitability but also marketplace levels of reward for similar work. If not, there may be problems of both recruitment and retention of good managers. As 2TW operates across the continent, local pay rates may vary enormously between countries in which the SBUs are situated, meaning that basic pay levels will need to be varied to reflect these conditions.

Ability of package to influence behaviour The entire employment relationship is built on a 'wage-effort bargain'. Rewards must be commensurate with effort and attainment. Consistent with expectancy motivation theory, if bonuses are relatively small they may not change behaviour. Similarly, if they are difficult to achieve, they may not motivate managers.

Control of total payroll costs Although the scheme is in part based on profitability, 2TW cannot leave the scheme cost open, otherwise it may be writing an 'open cheque'. 2TW needs to decide how much it can afford in overall payroll costs. Once the costs associated with other groups are calculated, then the base salary costs and performance related payments for managers can be determined. The HR department will conversely need to recognise that too great a constraint

May 2011

8

Enterprise Operations

on performance related pay available could act as a source of dissatisfaction for SBU managers.

Levels of performance related pay Performance related pay represents an attempt to establish closer links between results (improved quality and profitability) and rewards. The success of the scheme is dependent upon SBU managers behaving in the ways in which the Chief Executive would wish and incentives should be directed towards those who adopt the behaviours required. As such, the incentive of performance related pay should be: • seen as no less generous than the previous bonus scheme; • sufficient to make managers improve quality and improve bottom line performance.

Non-financial incentives A belief that money alone can encourage the enhancement of individual management performance is incorrect. Other forms of incentive should also be considered including promotion, training and career development opportunities. The reward system could therefore also involve adjustment to issues such as succession planning and career progression or promotion using developmental pathways and career ladders, etc.

Accounting for non-controllable factors that influence performance An underlying philosophy of performance related pay should be to provide a fair and consistent basis for rewarding managerial performance. However, other organisational factors such as the local economy within which the SBU is situated, availability of technology, raw materials and financial resources will also have an important effect on SBU performance.

Consideration needs to be given as to how to account for these factors.

Potential corruption of existing systems The Chief Executive has announced that the new performance targets system will be linked to the appraisal process. This means that performance appraisals involving SBU managers (presumably conducted by regional directors) may cease to be positive developmental processes and become more defensive and even confrontational.

Impact of adjusted HR policies on other groups The positive impact of workgroups on individual motivation has long been recognised and famously illustrated by the Hawthorne studies. The new reward system should not therefore be seen in any way undermining teamwork within SBUs. SBU managers are the main focus of the Chief Executive's initiative. Other groups however, such as directors and other members of the workforce also contribute to SBU profit and quality levels. If managers alone are perceived to be receiving unfair reward and recognition, this might have a negative impact on these other groups and lead to workplace disharmony and endanger improved overall performance. It is likely that HR policies will also need to be reviewed for all other groups to prevent this happening.

A need for consultation Consultation with SBU managers, trade unions and other relevant groups is necessary. The Chief Executive appears not to have consulted with SBU managers before making the announcement. If the revised scheme is to be accepted by SBU managers, there needs to be wide consultation in order that there is universal 'buy in'.

Requirement (c) 2TW's HR department will redesign the remuneration and reward package for SBU managers including the existing bonus scheme. SBU managers need to be aware of the levels of performance they need to attain with absolute certainty. Indicators that are not SMART (specific, measurable, achievable, realistic and time bound) may invalidate the whole scheme.

Specific So far, the Chief Executive has announced the initiative in an open letter to all SBU managers. Further dialogue between 2TW's HR department (which is responsible for the complete redesign of the remuneration and reward package including the bonus scheme) and

Enterprise Operations

9

May 2011

these managers will have to take place. Although SBU managers will need to agree precise targets as part of the normal appraisal processes, measures need to be readily available. Any measures devised would need to be agreed by SBU manager groups (and possible relevant trade union groups if they exist within 2TW) as being appropriate and fair. If no such agreement is reached then the whole scheme is discredited.

Measurable Rewards for SBU managers will need to encourage profitability and quality. Precise quantifiable measures are readily available in respect of net profit. Appropriate metrics and evaluation criteria need to be agreed upon and put in place presumably aligned to ISO 9000 standards and levels, cost of returns and reworking. For a scheme to be viewed as fair and workable, as much subjectivity as possible should be eliminated. Profitability is subject to decisions as to what might be charged against it. However, returns, reworks and ISO metrics might possibly be seen as more precise.

Such measures should be immune from potential manipulation by SBU managers anxious to gain performance related payments. Avoidance of undesirable behavior (such as a slackening of safety standards, mistreatment of subordinates, or a lack of cooperation with other SBU managers, etc.) in order to hit targets should also be avoided.

Achievable 2TW's HR department must recognise that individual managers need to have control over reaching performance targets. If hitting a target is primarily the result of events outside of their control there will be difficulties. Under these conditions individuals may become frustrated and demotivated because, irrespective of their effort, the targets may remain elusive.

Realistic 2TW's HR department needs to translate scheme aims into realistic targets which are recorded accurately and reliably. Otley's work (1987) into behaviour and accounting control indicated that if targets are unrealistic or are not met, a demoralising effect might occur whereby there is a dramatic fall-off in performance. The scheme may be counter-productive if this happens and may cause a worsening rather than an improvement in profit and quality.

Time-bound Pre-set dates should be established when 'snapshots' of performance over a period are taken and awards paid (this might be annually or bi-annually). Issues of who collects the data and the recording mechanisms used will need to be addressed. The HR department should ensure that a mechanism is in place to deal with instances where managers dispute attainment against targets within a pre-determined time frame.

Transparency of targets and awards given It would be counter-productive to keep awards secret and a lack of transparency could lead to suspicion and lack of trust. The publication of all awards should act as a stimulus to improved performance and encourage an open, sharing organisational culture.

May 2011

10

Enterprise Operations

Answer to Question Four Requirement (a) Communication of the organisational vision Brands are a shorthand means of communicating to the market place what an organisation stands for. As well as communication of the unique product characteristics, brands assist image creation and vision projection. These factors are important for 99, which through its brand can share its vision for globally available clean water whilst respecting the environment.

Differentiation of product from competitors A strong brand distinguishes a company from its competitors by making it easily recognisable.

99 is recognised as a charity brand. In this case, a particular difficulty is that there are plenty of natural bottled natural spring water products on the market and competition in the industry is intense. This makes the value of the 99 brand more important because it helps emphasise a source of differentiation from the competition. It appears that because of its beliefs, 99 has already found a market niche in the face of bigger competitors but the basis of differentiation may need greater emphasis through effective brand management.

Ability to command premium prices Branding that communicates 99's social and environmental credentials allows 99 to charge a little more for its products. The importance of 99 having a strong brand is what it can achieve through it. A strong brand is good for sales, so contributing to 99's corporate aims. The scenario indicates that most consumers choose socially and environmentally responsible products over others. This is fortunate for 99 as a relatively small player in a large bottled water market. Due to an insufficient volume of production and consequent diseconomies of scale allied to the more costly green electricity, 99's unit costs are likely to be relatively high.

Unlike large bottled water producers, 99 is unable to compete on the basis of charging low prices for its products. The strength of the brand and customer loyalty means that despite the fact that unit prices may not be the cheapest, 99 can still remain competitive.

Perceived superiority of the product Branded goods will always attract higher prices than unbranded products. Their appeal is that because of branding they are somehow perceived as being 'superior' in some way. In the case of 99, the nature of this superiority is the company policies and aspirations that lie behind the product. The product is, as a result, less price sensitive in the face of competitor actions such as price cuts, due to its brand.

Connection with the customer base The 99 brand represents the linkage between the product and what it stands for and the consumers' beliefs. Successful brands create special relationships with customers because of their intangible qualities that provoke strong emotional responses by individuals. Presently, 99 uses 'green' electricity and funds the provision of clean water to some of the poorest communities in the world. These ideals apparently resonate with consumers. Modern consumers have higher expectations of companies than ever before, thanks to greater choice of products and easy access to company information. A brand is a way of describing all the information or perceptions that are connected with a particular product or service. The brand is therefore important in captivating consumers and fulfilling their expectations.

Perception management Brands shape perceptions. There is no suggestion that E has expertise in brand development and management (indeed he sees the tie-up with Z as an opportunity to develop the 99 brand further). A recent national survey indicates that customers blame large retailers for not providing more environmentally and socially friendly products. It may be that this widely held view has worked to 99's advantage. In short, 99's growth might in part be explained as being a result of being an independent, small brand with, so far, possibly unsophisticated promotion and packaging. One danger of a tie-up with Z might be that customer loyalty could be jeopardised. Care will have to be taken to ensure that 99 loses none of its 'smallness appeal' but the brand is developed sensitively.

Enterprise Operations

11

May 2011

Customer loyalty When customers have a level of familiarity and recognition for the 99 name and its associated aspects such as symbols and strap line, brand awareness has been achieved. This awareness will hopefully lead to brand loyalty, repeat sales and habitual buying of 99's water (subject to easy availability). Repeat sales are particularly important for fast moving consumer goods (FMCG) such as 99's water which by nature are low cost and rely on sales volumes. A maxim of marketing is that it is more effective to satisfy customers who will make repeat purchases rather than having to constantly attract brand new customers. For the customer, choice is simplified when making a purchase because the 99 brand is in tune with their needs and wants. Satisfied customers also act as a source of promotion and influence to others leading to increased sales and market penetration.

Brands as corporate assets Positive brands are a significant source of organisational strength and may even be a key organisational asset. Despite being intangible, brands such as 99 can be of substantial value.

99's success has led to two take-over bids being made because larger players value the 99 brand that has been created and developed. Sources of water and green technology are in no way unique or particularly valuable. What is of value, however, is the inherent goodwill and reputation the brand communicates when persuading customers to make a purchase or retailers to stock 99's water.

A means of customers making a statement Brands are important because they allow individual customers to make statements about themselves. For instance, branded watches, jewellery, footwear and clothing help project images for those who wear them as being either sophisticated, trendy, fun-loving or sporting etc. In the case of 99's water, it is likely that customers buying a bottle of water will feel that they have (however indirectly and modestly) somehow contributed to some worthy cause.

The statement customers are making when they buy 99's water is that they 'care'.

Reassurance over the purchase Following a purchase, the individual customers will inevitably consider whether they made the 'right' choice or not. Companies hoping to achieve long-term success need to create relevant and consistent experiences for their customers. In the case of 99's water, the drink itself must have an acceptable taste and the bottle must be of an appropriate standard. It is the underlying ethics of the company however, that give reassurance to a customer that they have made the 'right' purchase.

Requirement (b) The product mix and place mix form part of the variables of the marketing mix comprising product, promotion, place and price.

In terms of a tie-up between the two companies there appear to be mutual advantages. For 99, these would include strengthening the place mix through an improved distribution network, environmentally cleaner transport and an ability to get 99's water onto supermarket shelves. 99 would also strengthen its product mix through the opportunity to ensure bottles and packaging become 100% biodegradable or recyclable, and expertise to develop the 99 brand further. Z, by comparison, sees the acquisition of 99 as a way of strengthening its product portfolio and hence its product mix.

Product Products are the items that the organisation offers for sale, including their features, so includes issues of quality, design, brand name, packaging etc.

For 99, the product range is rather modest; limited as it is to two individually sized (plastic) bottled products, still natural spring water and sparkling spring water. The key characteristics of these products are not so much the basic product content (water) or its packaging, more the vision the product represents; what the company is trying to do and how it operates.

Z has a rather more extensive range of products it is offering to the market. There is no detail whether its brand image is as strong as 99 or not. Z is described as a large food and drinks

May 2011

12

Enterprise Operations

company which sees the acquisition of 99 as a way of complementing its product portfolio.

This suggests that its portfolio of products does not presently include bottled water (or if it does, it does not possess the brand kudos 99 has). Z's products have already helped build a 'green' track record through its practice of carbon labelling on all of its products and its environmental plans to make all packaging biodegradable or recyclable, and 99 fits in well with the portfolio ethos.

Z's approach to purchase 99 represents an attempt to strengthen its product mix. Where small brands have proven successful, larger competitors tend to respond by either launching rival products or buying these smaller brands. It is often easier and certainly quicker for companies such as Z to choose the 'buy' option rather than attempt to build market share themselves through internal growth.

Assuming Z adopts the marketing concept as a business philosophy, it will have stayed close to its customers and attempted to understand and then respond to their feelings, wants and desires. Even before the national survey was conducted therefore, Z should have already noticed that consumers like to believe that in some way they are 'changing the world' with the choices made in their shopping baskets. Increasingly consumers are interested in companies' responsibilities to their customers, employees, communities and the environment. (Possibly they may believe that where governments may have failed to address certain concerns, then business can and should.) Ethical products are therefore seen as addressing a number of agendas including issues such as environmental, organic, fair trade, as well as animal rights, etc. Given that there are a growing number of consumers with ethical concerns, 99's business ethos fits this thinking by providing products with green and ethical credentials.

It is apparent that the 99 brand has considerable strength already and Z has expertise to develop the 99 brand still further. For Z this means that adding further products or product lines in the future will be less risky, as existing customers are likely to try the new product(s), thanks to brand loyalty.

99's products involve packaging its natural spring water (both still and sparkling varieties) in individually sized plastic bottles. Obvious extensions to the product range include different sized bottles (e.g. mini or large), different packaging (e.g. paper cartons or glass) or taste varieties (e.g. flavoured water).

99's products are fast moving consumer goods (FMCGs) which tend to be purchased for personal reasons and generally involve many relatively low financial outlays. FMCGs often involve habitual purchasing but their products tend to have short life cycles. Of particular relevance to FMCGs is advertising, branding and packaging. It is important, therefore, that longer term the 99 brand is developed still further and therefore E's belief that by agreeing a deal to access Z's greater expertise is well founded.

Place Place involves more than just the location of sales outlets and includes distribution channels and coverage, stock levels, warehouse locations, etc. In this case, 99's water is sold in a few garages, on airplane flights and in airport shops but not, significantly, in supermarkets. E believes that a tie-up with Z would be beneficial because of its ability to get 99 onto supermarket shelves. This suggests that Z's products are currently sold in supermarkets.

Supermarkets are the place where large volumes of sales are achieved; something important if the product happens to be a FMCG such as 99's water.

In terms of distribution, 99 sees advantages in joining Z which offers an improved distribution network. Z is described as 'a large food and drinks company' and as such operational issues including distribution, stock management and warehousing represent threshold competences for continued operation and are likely to be well established and robust.

99 would also benefit from the more environmentally friendly transport as Z's distribution involves the use of low-carbon vehicles.

Enterprise Operations

13

May 2011

Requirement (c) Team working and empowerment It is important that every member of the workforce should support the company's marketing activities and corporate ethos. In the case of 99, only 10 people, apart from E, are used in the production and sale of its products. As such, they will be well known to one another and are likely to operate as an intimate team. It is unlikely that there would be much specialism given the size of the operation; more likely individuals will be multi-skilled and adaptable. Their focus on the sale of sufficient bottles of water to finance a charitable purchase of a clean water pump is reinforced by visits abroad to help with the installation. From this Z might learn something about effective team working, empowerment and a shared focus on outputs. This thinking has implications for Z in terms of organisational structuring and culture.

Connecting workers to company outcomes The Chartered Institute of Marketing explains internal marketing as ensuring 'everyone within the organisation not only understands why the organisation exists but also its key outputs and metrics and, most importantly, how every person and department contributes to the delivery of the proposition'. Due to its size, 99 has achieved this. Doubtless, as a large employer, Z will have policies for training and development. Possibly these should focus more on improving the way employees contribute to organisational values, goals and the future direction of the organisation.

Retention The recent national survey indicates that two thirds of people say they would work for an ethical employer even if it meant being paid less. The evidence is borne out by the fact that the wages of 99 employees are modest but no-one has ever left the company, suggesting that staff are engaged and content. This means that so long as pay rates are reasonably competitive, work is engaging and Z maintains its credibility as a good ethical employer, then the chances of retaining key staff will be enhanced.

Recruitment/Employer branding If potential employees believe that a potential employer's ethical approach and track record is important then recruitment may be easier. 99's stance has achieved success amongst consumers and represents the core of its external brand. If the same stance is adopted by Z, it should also lead to superior employer branding which in turn will improve recruitment possibilities. A consequence of this is that in a battle for talented workers, Z will be a more attractive organisation to join.

Overall reward package Staff at 99 may feel that they are contributing to a noble cause and that by accepting reduced pay, more funds might be directed to worthy causes such as installing water pumps. This demonstrates that the reward is more than monetary remuneration and it might be speculated that trips abroad and charitable work installing pumps represent part of an enriching package for 99's workers. Z might learn from this the value of developing a broader reward package including both pay and non-pay features.

Motivation When workers take a similar perspective to owners and managers, the so-called unitary view of the organisation exists. It is likely that, under these conditions, staff will be motivated by company values and a positive organisational culture. Every time 99 sells enough bottles to build a new pump, it sends two members of staff out to help with the installation and pictures are published on the company website. This represents a positive connection with the corporate cause. Z might also consider ways of connecting its workforce with the causes it engages in, such as the charities it supports, its carbon policy and its packaging policy. Such engagement can provide a motivational stimulus to workers.

May 2011

14

Enterprise Operations