Letter F

Fayol, Henri (1841-1925): A French management pioneer who focused on the problems of organizational structure within large firms at the turn of the last century. Whereas his contemporary, F W Taylor, concentrated on the efficiency of shop-floor labor, Fayol looked at senior management. Fayol played a key role in developing the concepts of chain of command, the organizational chart, and span of control.

First Mover Advantage: It is the competitive advantage realized by a company by entering a market first. First movers are usually better placed to reap economies of scale, to reduce costs through cumulative learning, to establish brand names and customer relationships, to control distribution channels and to obtain the best locations for facilities or the best sources of inputs. The danger with the first mover strategy is that the company may end up creating a market, which will be better exploited by a later entrant offering a superior product. First mover strategies seem to work best when both technology and market conditions remain reasonably steady, economies of scale are significant and customers are conservative about switching suppliers. When both technology and market are changing rapidly, later entrants have ample opportunities to uproot the first mover.

As Michael Porter has mentioned , to succeed, first movers must correctly anticipate industry changes. American companies were early entrants into electronic watches. However, they bet heavily on light emitting diode (LED) displays. This technology proved inferior to liquid crystal displays (LCD) for less expensive watches and traditional (analog) displays combined with quartz movements for watches in higher price ranges. The introduction of LCD and quartz enabled Japanese firms to become industry leaders in watches targeted at the mass market.

Often the wise strategy is to be an early mover, not necessarily the first mover. Just like in a marathon race, a company can be in the front but not necessarily at the top of the pack. That way, it can learn from the first mover and yet move fast when necessary and reach the winning line. In many of its markets, the global software giant, Microsoft has succeeded by pursuing this kind of a strategy.
(See Free Rider)

Five Forces Model: Porter's Five Forces Model is probably the most widely used tool in business strategy. The Five Forces model which helps analyze the attractiveness of an industry can be seen as one of two dimensions in maximizing corporate value creation. The other value creation dimension is how well a company performs relatively towards its competitors. Here the Value Chain framework and Competitive Advantage, both developed by Porter come in handy. The five forces are:

1. Barriers to Entry: The barriers to entry are high or low, depending upon factors like economies of scale, brand image, capital requirements, access to distribution channels, government policies, etc. Higher the barriers to entry, the more attractive the industry.
2. Bargaining power of buyers: This is influenced by buyer volume, buyer information, buyer profits, substitute products available, etc. The lower the bargaining power of buyers, the more attractive the industry.
3. Bargaining power of suppliers: This is affected by various factors like switching costs, differentiation of inputs, supplier concentration, presence of substitute inputs, threat of forward/backward integration, etc. The lower the bargaining power of suppliers, the more attractive the industry.
4. Threat of substitutes: The threat of substitutes is high if there are alternative products with lower prices or better performance parameters for the same purpose. The lower the threat of substitutes, the more attractive the industry.
5. Rivalry: This refers to the intensity of competition among existing players in an industry. Competition among existing players is likely to be high when there exists a large number of companies, slow market growth, high fixed costs, and high exit barriers. The lower the degree of rivalry, the more attractive the industry.

Some scholars argue that the model emphasizes an outside-in approach and underemphasizes the importance of the (existing) strengths of the organization (inside-out). That is the main argument behind a competing school of strategy, Resource Based Theory. Notwithstanding this criticism, the five forces model remains a conceptually elegant way of analyzing the structural attractiveness of an industry.
(See Barriers to entry, Bargaining Power of Buyers, Bargaining Power of Suppliers, Industry, Threat of Substitutes, Rivalry)

Flat Organization: An organization with few layers of management between the highest and the lowest levels. It presents a stark contrast to the classic hierarchical organization which has several layers of managers, each of whom supervises a lower layer. The basic premise behind the flat organization is that trained, empowered workers with assigned goals, who are encouraged to work innovatively, will be more productive than workers who are closely supervised by managers. A flat organization is more transparent, less bureaucratic and improves communication. One problem with a flat organization is that opportunities for career advancement may be limited.
(See Organization Design, Span of Control)

Focus: A strategy which believes in concentrating on a small segment defined in terms of customer segment or geographical territory. A focus strategy means carefully choosing the arena to compete in and narrowing the competitive scope. By selecting carefully a segment and meeting the needs of that segment better than competitors who target more broadly defined segments, companies can gain competitive advantage. A focus strategy takes advantage of the differences between the target segments and other segments in the industry. It is these differences that result in a segment being poorly served by the broad-scope competitor. The firm that focuses on cost may be able to outperform the broad-based firm through its ability to strip out frills not valued by the segment. Alternatively, the product or service can be differentiated, taking into account the unique needs of the segment.

The obvious danger with the focus strategy is that the target segment may shrink or disappear over time for some reason. A new player may ‘outfocus’ the firm. Alternatively, shifting from broad to narrow targeting usually means a dramatic reduction in volumes. This can raise unit costs if the overheads have not been trimmed to match the smaller outputs demanded by the narrower customer base.
(See Generic Strategy)

Follett, Mary Parker: One of the earliest and strongest advocates of collaborative, participative approaches to management and cross-functional problem solving. Follett argued that true authority and leadership were a function of the knowledge and experience of people, not their rank in a corporate hierarchy. If Taylor was the father of scientific management, Follett pioneered a behavioral, post-scientific approach to managing human organizations. She pioneered ideas such as constructive conflict resolution, participative management, and flatter organizations. According to Follett, the proper response to conflict was “integration” of different points of view to reflect multiple viewpoints. Collaboration and cooperation with labor, she argued, were the only rational ways to run a business. Follett seems to have been an early advocate of organizational learning through she never used those words explicitly.

Force Field Analysis: Developed by Kurt Lewin (Lewin), Force field analysis is a useful technique for diagnosing situations, especially when planning and implementing a change management program.

In any situation, both driving and restraining forces operate. Take the example of productivity. Driving forces include pressure from a supervisor, incentive earnings, and competition. Restraining forces may include apathy, hostility, and poor maintenance of equipment. Equilibrium is reached when the sum of the driving forces equals the sum of the restraining forces.

The level of productivity can be increased or decreased by changing the balance between the driving and the restraining forces. Suppose a new manager takes over a work group in which productivity is high but the maintenance of the equipment has been ignored. The earlier manager had increased the driving forces to increase output in the short run. By doing this, however, new restraining forces developed, such as machine breakdown. When the new manager takes charge, the restraining forces may have begun to increase, resulting in repeated breakdowns and frequent maintenance. Now a new equilibrium at a significantly lower productivity is faced by the new manager.

The new manager may decide not to increase the driving forces but to reduce the restraining forces by spending more time on maintenance and modernization. In the short run, output will tend to come down still further. However, in the long run, the new driving forces will move the plant towards a higher level of output.

Managers often have to strike the right balance between short-term and long-term goals, to ensure sustained performance in the long run. The force field analysis is a useful framework in this regard.

Forward Integration: Forward integration means moving into downstream activities, i.e. getting closer to customers. Such a strategy can help a firm to differentiate its product more effectively by controlling more elements of the value chain. For example, forward integration into retailing, can allow the firm to control areas such as customer interactions, store ambience, etc. Forward integration can also solve the problem of access to distribution channels.

Forward integration can help a company understand the market better. Since the forward stage determines the size and composition of demand for the upstream stages of production, the firm can determine the demand for its products sooner. The firm might also gain first hand information about market trends and competitive developments. This can be very useful in an environment of cyclical, erratic and changing demand. Forward integration may also allow prices to be better matched to market conditions. By setting different prices for different customers, forward integration may facilitate higher overall price realization.
(See Vertical Integration)

Franchise: A business in which one entity (the franchisee) operates a business in conformance to the name, logos and trading method of an existing, successful business (the franchiser). Various restrictions may be placed on the franchisee in terms of the design of the facility, inputs used, processes and the training of manpower. A franchising arrangement enables the franchiser to avoid heavy investments and penetrate a new geographic region quickly. For the franchisee, the risks are limited. The trading strategy and methods have been tried and tested elsewhere. The name and logos may have wide customer recognition and loyalty, ensuring adequate demand for the product/service from day one.
(See Licensing)

Free Rider: Sometimes, it does not make sense to be the first mover. A player who moves in later, can learn from the experiences of the first mover and avoid similar mistakes. In the browser market for instance, Netscape moved first but it was Microsoft which ultimately turned out to be the winner.
(See First Mover Advantage).

Full Costing: It is an attempt to allocate all costs incurred in an organization to cost centers. Both direct and indirect costs are considered and the possibility of losses by under pricing is avoided. Direct labor and material costs can be easily allocated to an activity or a product. Some direct overheads may be easy to allocate. But indirect overheads cannot be allocated easily. An example of full costing would be allocating 35 per cent of the overhead cost of rent to the machine shop if it occupies 35 per cent of the factory space. Activity based costing (ABC) is a better technique for allocating overheads. ABC would look at the actual pattern of usage of the machine shop, instead of just going by the space occupied.
(See Activity Based Costing)

Functional Strategy: The strategies pursued by different functions such as marketing, finance, operations and human resources must be aligned with the long-term corporate strategy. Functional strategies facilitate the implementation of corporate strategy in the sub-units of the company. Thus, functional strategies in marketing may deal with product, price, place and promotion. Those in finance may deal with capital mobilization, capital allocation, cash flow management, working capital management, etc. Those in operations may be concerned with facilities, purchasing, operations planning and control. Human resources strategies span employee recruitment, selection & orientation, career development and counseling, performance evaluation, compensation, labor relations, etc.
(See Operating Strategy)

Functional Structure: In a functionally organized company, the managers of each major function (such as marketing, production, research and development, and finance) report to the chief executive, who provides overall direction and coordination. The same logic can be extended to sub functions. In a functionally organized marketing department, the managers of the different marketing functions (such as sales, advertising, marketing research, and product planning) report to the marketing manager. A functional structure emphasizes specialization and increases efficiency. But such a structure lacks the overall perspectives and the sharper market focus, which the divisional structure can bring. Functions often work in silos and do not leverage the knowledge and expertise available in the organization creating serious problems in activities like new product development, which need excellent coordination across functions. Such problems have led to the concept of cross-functional teams.
(See Organizational Structure)