Letter O

O
Offshoring: The increasing trend towards locating non core activities in distant locations to take advantage of lower costs and skilled manpower. A theme well covered in Thomas Friedman’s recent book, “The Earth is flat”. John Hagel III and John Seely Brown have identified four broad waves in the evolution of offshoring:

• Locating operations offshore to facilitate cost arbitrage.
• Locating operations offshore to gain access to distinctive skills
• Locating operations offshore to target the unique and demanding needs of emerging markets.
• Using emerging markets as a base from which innovative products and services can be developed for the global markets.

Two strategic challenges are involved in off shoring. The company must be able to define clearly the scope and contours of its business. The company must also develop the capabilities and master the techniques needed to access and leverage the expertise of partners.
(See Nearshoring, Outsourcing)

Ohmae, Kenichi: A former Mckinsey consultant, well known for his work on strategy, in general and globalization in particular. Ohmae’s famous books include Mind of the Strategist, Borderless World, and End of the nation State. His most recent book is “The Next Global Stage: Challenges and Opportunities in Our Borderless World” published in March 2005. Ohmae has published several thought provoking articles in leading journals like Harvard Business Review.
Oligopoly: A market which is dominated by a small number of sellers. The word is derived from the Greek for few sellers. As there are few participants, each seller is aware of the actions of the others. The decisions of one seller influence, and are influenced by the decisions of other sellers. Strategic planning by oligopolists must take into account the likely responses of the other market participants. An oligopoly can be quantified using the four-firm concentration ratio, the percentage of the market share accounted for by the four largest firms in an industry. Using this measure, an oligopoly may be defined as a market in which the four-firm concentration ratio is above say 40%. The Herfindal index is another useful measure.
In industrialized countries, oligopolies are found in many sectors of the economy, such as cars, consumer goods and steel. In regulated markets such as wireless communications, the state often licenses only two or three providers of cellular phone services, effectively creating an oligopoly. Marketing professor, Jagdish Sheth has coined the Rule of Three. In many industries, equilibrium is reached when there are three main players.
Oligopolistic competition can result in various outcomes. Firms may collude to raise prices and restrict production in the same way as a monopoly. In some industries, there may be an acknowledged market leader who informally sets prices to which other producers respond. In other situations, competition between sellers can be fierce, with relatively low prices and high production. This can lead to an efficient outcome approaching perfect competition. Competition would be less if the firms are regional and do not compete directly with each other.
Oligopsony is a type of market in which the number of buyers are small while the number of sellers is large. A small number of firms compete to control the inputs of production.
(See Concentration Ratio, Game Theory, Herfindal Index)

Operating Strategies: These refer to the day to day actions that need to be aligned with long term objectives. These may include sales planning, production scheduling, working capital management, inventory management, etc.
(See Functional Strategy)

Opportunity Cost: The cost of the opportunity foregone. Most decisions involve an opportunity cost. When resources are committed somewhere, some other area is starved of them. Opportunity costs must be considered while taking decisions.

Optimizing Planning: The optimizing approach believes in achieving the best possible outcome, using mathematical models. An optimizer tries to minimize the resources required for a given level of performance or to maximize the performance, given a certain level of resources or to obtain the best balance of resources consumed and performance.
(See Russell Ackoff)

Organic Growth: Means expansion from within the firm, i.e. not as a result of acquisitions. Organic growth is likely to be steady, even slow, but very secure. That is why some CEOs consider it the most “precious” form of growth. In contrast, growth by acquisitions tends to be risky and often fails to add value for shareholders.

Organizational Behavior: Organizational behavior is the study of what people think, feel and do in and around organizations. It explores individual emotions and behavior, team dynamics and the systems and structures of organizations. Organizational behavior attempts to provide an understanding of the factors necessary for managers to create an organization that is more effective than its competitors.
(See Organizational Development)

Organizational Chart: A visual representation of an organization structure. It identifies the organizational unit and indicates each position in relation to others. Positions are usually represented by squares or rectangles (although circles or ovals are sometimes used) that contain the position title. They may show the name of the incumbent as well. Each position is connected by a solid line running to the immediate supervisor and to positions supervised, if any. Broken or dotted lines may be used to show other than reporting relationships (e.g., advisory or functional).
(See Organizational Design, Organizational Structure)

Organizational Culture: The beliefs and values of people within the organization shape the organizational culture. Culture tells employees what is accepted and what is not, what is important and what is not. Culture implicitly makes employees set priorities. Culture develops over time, as people get exposed to problems and find ways to solve them. Leadership plays an important role in shaping culture.

Culture is the knowledge used by people to interpret experiences, set priorities and guide their behavior. The beliefs and values of employees form the core of organizational culture. Culture is acquired by learning and experience. Culture is shaped by various organizational influences. For example, in some companies, employees are encouraged to take risk, while in others, playing safe is the accepted norm. In some companies, the work environment may be very informal with people operating on a first name basis, while in others, it can be very formal with great importance being attached to seniority, designation, etc. Some cultures lay a premium on getting the work done while others attach equal if not more importance to how the work is done. For example, in the Tata group companies, giving bribes to government officials, something very common in a country like India to get work done, is strictly prohibited.

Geert Hofstede, the famous Dutch scholar has identified four well-known dimensions of culture: power distance, uncertainty avoidance, individualism and masculinity.

• Power distance: The extent to which employees feel that power is unevenly distributed across various levels of the organization from the top to the bottom. Power distance tends to be less in knowledge intensive industries such as computer software. In such industries, individual expertise is as important as seniority and designation.
• Uncertainty avoidance: The extent to which people feel threatened by uncertainty.
• Individualism: The tendency of people to be self-centered as opposed to collectivism where people care for each other. Individualism is a typical cultural trait found in investment banks. Americans are considered to be more individualistic, compared to the Japanese.
• Masculinity: Refers to a strong emphasis on success, money and material objects as opposed to femininity, which emphasizes caring for others and quality of life. For example, academic institutions have a feminine culture. Scandinavian countries in general have a feminine culture. Japan has a masculine culture, where the desire to be a high performer in the work place leads to burn out or Karoshi.

Organizational Design: Designing organizations is a complex exercise. Organizational Design involves making choices about how to group individuals and structure their tasks. According to Harvard Business School professor Robert Simons , organization design must take into account the company’s strategy, competitive environment, stage of the lifecycle and various other factors. In short, it is a fine balancing act.

In the early days of an organization, organization design receives little attention. But over time, problems emerge as the charisma of the founders becomes insufficient to manage a larger enterprise. Systems and processes become important. This is when a functional structure is typically chosen. After some time, the functional structure becomes inadequate to respond to the needs of the market place because of centralized decision making. At that point, a divisional structure becomes necessary. But with time, a divisional structure leads to fiefdoms. Coordination becomes difficult, resources are wasted, knowledge sharing does not happen effectively and profitability declines. At this time, headquarters may take control. But this leads to red tape and decision making slows down. The pressure builds for simplifying the organization, divesting non core businesses and removing red tape. In short, organization design is a dynamic concept. The design should change in line with the company’s circumstances.

Designing organizations that can adapt over time, effectively means learning to reconcile the tensions between:

• Strategy & structure
• Accountability and adaptability
• Ladders and rings
• Self-interest and mission success

Managers must design organizations to implement the current strategy and also allow new ideas to flow that will feed into tomorrow’s strategies. Structure determines how information from the market is processed and acted upon. Thus structure determines strategy and strategy determines structure in an interdependent fashion. Accountability is at the heart of organization design. While, people must be answerable for performance on some measured dimension, they should not be discouraged from experimenting and working on new ideas. An effective organization structure must not only take into account the ladders (vertical hierarchy) but also the rings (horizontal networks). Human behavior is a critical design variable. Organization design must promote the kind of behavior that strikes the right balance between employee aspirations and organizational needs.

The basic building blocks of any organization structure are market facing units and operating core units. Market facing units gather market data about customers, competitors, opportunities and threats. Responsiveness must drive the design of market facing units. This responsiveness must be balanced by efficiency elsewhere. It is the job of the back office functions to do just that. Managers of these functions are responsible for standardizing work processes, applying best practices to the firm’s internal operations and ensuring efficiency through economies of scale and scope. The scarce resources must be distributed optimally between the market facing and operating core units.

Till recently, organization design has essentially amounted to a trade off between responsiveness and efficiency. Information Technology (IT) is facilitating higher efficiency with an acceptable level of responsiveness. IT can forge very close links with customers. Dell is a good example.
(See Organizational Structure)

Organizational Development: The field of organizational development (OD) is concerned with the performance, development, and effectiveness of human organizations. According to Warren Bennis, OD aims at changing the beliefs, attitudes, values, and structure of organizations so that they can better adapt to new technologies, markets, and challenges. OD involves organizational reflection, system improvement, planning, and self-analysis. OD helps an organization to develop the internal capacity to be the most effective with respect to its chosen line of business and to sustain itself over the long term.
(See Organizational Behavior)

Organizational Inertia: The inability to change and adapt to the external business environment is called organizational inertia. Many organizations struggle to cope with the pace of change. They do not recognize that competition has increased or that the company’s products are no longer as distinctive or superior or as much in demand as in the past. Inertia is dangerous under the following circumstances.

• Competing or substitute products have come onto the market;
• Technology is changing rapidly;
• Customer preferences are undergoing a major change;
• Substitute products are driving down prices and threatening to take current and potential customers;
• Products are maturing, resulting in reduced prices, market saturation and risk to brand reputation;
• Social upheavals are taking place;
• Political developments have led to regulatory changes, lowering the barriers to entry;
• A significant new competitor has arrived;
• Rising exit barriers have resulted in intensifying competition, in the face of falling sales;
• The company is no longer strong either in product differentiation or cost leadership.
(See Change Management)

Organizational Learning: Learning is all about going through experiences, observation and reflection, conceptualizing what has been learnt and active experimentation. Learning begins with observation, reflecting on the observation and assessing the underlying factors that drive behavior. Learning is a continuous process. Reflection and action combine to produce learning. Organizational learning means continuous modification of behavior by an organization in line with changes in the environment. A learning organization is good at creating and acquiring knowledge and at modifying its behavior to reflect new knowledge and insights. Learning organizations make conscious attempts to improve productivity, effectiveness and performance on an ongoing basis. The greater the uncertainties in the external environment, the greater the need for learning.

Organizational Mapping: Mapping is a well-known technique for understanding how people, departments, customers and other functions in the organization interact. Mapping allows us to examine a business process clearly. It uncovers weaknesses in structure that may need to be resolved. It identifies bottlenecks, barriers and errors and creates a map of the ideal process to put in place and implement improvement plans. Process mapping is particularly effective in determining breakdowns in communication and information sharing. Process mapping helps in improving existing processes and identifying new processes that will increase efficiency and effectiveness.
(See Business Process Reengineering)

Organizational Structure: The way activities are grouped in an organization. Structure promotes specialization, defines roles more clearly and facilitates efficient execution of day-to-day tasks. However, a rigid structure may reduce flexibility and create watertight compartments that stand in the way of knowledge sharing and innovation. The organizational structure should be sufficiently flexible, so that people from different departments can come together to discuss new ideas and solve complex problems. Indeed, the ability to form and dismantle cross-functional task forces at short notice can be a key competitive advantage in a dynamic environment.
(See Organizational Design)

Outsourcing: Outsourcing (or contracting out) is essentially the delegation of non-core operations or jobs to an external entity (such as a subcontractor) that specializes in that operation. Outsourcing often aims at lowering costs or sharpening the focus on competencies. A related term, offshoring, means transferring work to another country. Outsourcing has taken off in a big way in recent times thanks to the availability of information and communications technology that facilitates effective coordination of geographically dispersed activities.
(See Dynamic Specialization, Nearshoring, Process Networks)

Overheads: These are the costs incurred in addition to the direct costs of manufacturing or of providing services. As organizations grow in size, overheads tend to increase. Attacking overheads is usually an integral part of most corporate restructuring activities.
(See Activity Based Costing)