Financial Elements of Business Resilience

In order to deal with business fluctuations, efforts to develop strategic resilience should extend to financial decision making, approached in a systematic manner.

[powerpress: http://gsbm-med.pepperdine.edu/gbr/audio/spring 2011/resilience_simmons.mp3]

Financial life raftBusiness organizations exist within the context of larger market economies where conditions are always changing. For an organization to survive in the face of this constant change, Hamel and Valikangas recommend an organizational strategy of flexibility.[1] They advocate a strategic resilience, which is achievable when managers anticipate and adjust to changes that threaten a company’s core competencies. However, their suggestions for developing strategic resilience contain little guidance for incorporating financial decisions in the organization’s strategic deliberations.

Despite this omission, financial decision making is an important part of the process of making a business more resilient. In early 2011, a survey of 1,054 senior financial executives reported that 41 percent had an increase in their responsibilities related to strategy/business development in the past 18 months.[2] Other areas with significant increases included information technology, customer service, risk analysis, operations, and human resources. Such expansion in responsibilities of these finance specialists attests to the importance of considering financial elements in developing business resilience. This article outlines recommendations for doing so through a systematic approach to financial decisions that can positively impact strategic resilience.

Step 1: Require the Valuation of Flexibility

An initial step for financial analysis is the quantitative evaluation of a firm’s investment opportunities. But special care is required here. The traditional Net Present Value (NPV) computations, first made popular by Dean, assume that once an investment is made, a manager cannot revise the initial commitment of resources in order to change future cash flows.[3] These methods are still taught today, but they ignore flexibility. Many investments are not passive investments that are unchangeable once committed. Managers can and do act after initial investment commitments have been made to adjust the size and nature of cash flows when past assumptions about future conditions prove incorrect. To reflect the market value of such potential adjustments, Real Option Theory moves away from NPV’s assumption of a passive manager who no longer acts once an investment decision is made, to that of active management that permits managers to enact changes in resource commitments after initial investment is made. In this new view, total NPV of an investment opportunity is seen as a sum of two components: 1. The NPV with no revisions, plus 2. The NPV that is associated with possible revisions in commitments.

Real Option Theory offers financial assessment of the flexibility that facilitates a company’s strategic resilience capabilities. It provides a method to quantify the value of managerial flexibility so that a manager’s real options can become part of NPV analyses. This approach can be used for several different purposes.[4][5] In any of its investment-decision applications, Real Option Theory reflects the reality that managers are not passive, but are able to actively adjust company operations as unforeseeable future conditions unfold.

Real Options Theory is not always as simple to use as computation-guided approaches, such as traditional NPV. It invites subjective judgments as to what could happen instead of focusing only on what is most likely to happen. Think, for example, of putting only enough gasoline in an automobile to safely make a scheduled trip of 100 miles. A traditional NPV approach buys the minimum amount of gasoline because less gasoline reduces investment cost without jeopardizing the scheduled trip. Conversely, Real Options Theory leads management to consider the value of putting an extra amount of gasoline in the automobile—based on the probability that an unanticipated but potentially profitable side trip should be taken during the originally scheduled 100-mile trip. In other words, investing for just the scheduled 100-mile trip does not allow the flexibility to seize an attractive—but unexpected—opportunity. The value of this flexibility involves managerial judgments. The same holds true in evaluating a threat, such as getting a flat tire—would you make this trip without a spare tire? A strictly profit-maximizing approach may seek to reduce costs by recommending against purchasing a spare tire. What is the value of having a spare tire? This is the kind of judgment decision overlooked by traditional NPV calculations.

A company might invest in a power plant that can switch between natural gas and wood fiber in generating electricity so that future power needs can be satisfied by whichever method is cheaper. The initial cost of this switching flexibility might be high and so traditional capital budgeting calculations might favor low-cost, less flexible alternatives. But, if the other side of low-cost is an inability to cope with volatile fuel prices, then traditional methods give the wrong answer. Real Option Theory is a better tool, one that values flexibility, and its proper application will serve managers who desire to make their organizations more resilient to economic stress.

Step 2: Consider the Value of Magnitude and Reversibility

Real Option Theory, as understood by Brealey, Myers, and Allen, suggests that both the size of individual investments and whether or not these investments can be altered over time matter in terms of market value.[6] Why? Because investments that are scalable permit decision makers to follow initial successes with follow-on investments and to cut losses in the event of failure. This scalability, in and of itself, creates value that cannot be seen with traditional capital budgeting methods. Trigeorgis recognizes that decision makers using traditional capital budgeting tools are not valuing their own ability to take an active role in managing economic resources into the future.[7]

Finance chartInvestments that are reversible also create value. The flexibility of a firm is directly related to the degree that its investments are reversible. In any event, as a company takes steps to increase its resilience, it should expect to be able to afford more inflexibility in some of its investments.

Step 3: Remain Within Core Competencies

Strategic resilience comes at a cost, and managers may quickly find that its development places constraints on profits. Much like with other core competencies or “competitive advantages” of a company, resilience requires an investment to develop and maintain. Core competencies lead to a company’s success in its markets, and benchmarking against the competencies of competitors may mandate larger investments just to remain competitive. Even when financial analyses indicate that investments into certain core competencies are not fiscally prudent, managers may choose to make these investments because of strategic goals, such as staying at the forefront of some relevant technology.

Every company needs to ask itself what level of financial resources should be held in reserve? Different levels will be appropriate for different companies, and resilience may affect profits in different ways. The costs of developing resilience may reduce profits; however, resilience contributes to continued company survival. Choosing a specific level of a company’s strategic resilience requires periodic judgments that balance its value against its costs. Such judgments are further complicated by situations where resilience may actually increase profits by allowing a company to seize unexpected opportunities.

When performing financial analyses, managers need to consider how all of the company’s competencies can assist in their efforts. For example, a company may have a “captive buyer” for whom the company is the only possible source for its vital inputs. This kind of company could potentially pass cost increases along to its customers, thereby using its “marketing competency” to maintain financial resilience.

Alternatively, for a company that cannot pass its cost increases along to customers, hedging may be desirable. Hedging may reduce the future profits of a company, but it can allow this company to offer stable prices to customers at a profit for the long-term. Some companies have customers that expect stable prices, while others have customers that accept price fluctuations. For example, a coffee shop may hedge its purchases of coffee because its patrons expect to pay customary prices for standard sized cups. Conversely, a gasoline station operator might not hedge gasoline purchases because customers are used to paying fluctuating gasoline prices. The key is to leverage your strengths against economic uncertainty. Each company will need to assess its core competencies and strategize as to how they can be best utilized in developing the ultimate core competency of resilience.

Step 4: Restrain Financial Leverage

As a company selects investments, decisions regarding financing needs and capital structure can affect company resilience, and therefore require strategic consideration. For example, resilience will decrease as financial leverage increases, because large debts impose cash-flow burdens that reduce flexibility. This is especially troublesome for small businesses because of their tendency to rely on debt financing.

There are other aspects of capital structuring that are often considered, but managers of firms large and small should always remember that companies can increase their resilience by reinvesting profits back into the firm. Such equity can be used to grow the firm or to pay back borrowed money. Internal financing of growth avoids the possibility of immense debt burdens arising when a new “star” product’s sales grow rapidly. Large debts can develop because a company must usually pay for its production and distribution costs before the product can be purchased by customers. Customers may make matters worse if they further delay payment for their credit purchases. Rather than acquire a huge debt burden for financing a high-potential product’s growth, a small company may make a strategic decision to sell the star product to a larger company that can more safely handle the financing.

Step 5: Integrate Resilience into Operations

As a company implements strategic plans, financial managers should be alert for opportunities to use flexibility in the necessary operational activities. This is yet another tool to improve or preserve profits throughout the business cycle. Brealey, Myers, and Allen note that within the context of volatile product markets, the ability of a firm to alter the nature and quantity of inputs and outputs in response to changing prices creates shareholder value.[8] And this flexibility works to create value to the degree that prices are volatile—the greater the volatility in prices for inputs and/or outputs, the more valuable flexible production methods become. This flexibility can serve to offset some of the harm done when sales volumes are reduced.

C.K. Prahalad has studied companies in India that are able to deal with highly volatile business conditions by using “strategic clarity and consistency” to guide “agility and resilience in operations.”[9] He identifies companies that are able to succeed at 30 percent to 40 percent capacity utilization, noting that agility in changing operational activities is vital to resilience.

Conclusion

Any organization that possesses a core competency can succeed during times of economic prosperity. Only those that are resilient can survive economic change. Flexible organizations are able to adjust to economic fluctuations while keeping these core competencies intact. This flexibility must extend to the company’s capital investment policy. Managers who employ Real Option Theory can evaluate capital investment opportunities in terms of their flexibility, favoring capital commitments that do not put the future of the organization in jeopardy. This approach, followed by the aforementioned steps, will help optimize a company’s resilience through its financial decision-making processes. Traditional capital budgeting methods will not help managers to do this work.


[1] Hamel, Gary, and Liisa Valikangas. “The Quest for Resilience.” Harvard Business Review 81, no. 9 (September 2003): 52-63.

[2] Mattioli, Dana. “Finance Chiefs Expand Roles,” Wall Street Journal, p. 87, January 31, 2011.

[3] Dean, Joel. Capital Budgeting. New York: Columbia University Press, 1951.

[4] Copeland, Tom, and Peter Tufano. “A Real-World Way to Manage Real Options.” Harvard Business Review 44, no. 3 (March 2004): 90-99.

[5] Ferreira, Nelson, Jayanti Kar, and Lenos Trigeorgis. “Option Games: The Key to Competing in Capital-Intensive Industries.” Harvard Business Review 87, no. 3 (March 2009): 101-87.

[6] Brealey, Richard A., Stewart C. Myers, and Franklin Allen. “Brealey, Myers, and Allen on Real Options.” Journal of Applied Corporate Finance 20, no. 4 (Fall 2008): 58-71.

[7] Trigeorgis, Lenos. Real Options: Managerial Flexibility and Strategy in Resource Allocation. Cambridge, MA: MIT Press, 1996.

[8] Brealey, Myers, & Allen, 2008, pp. 58-71.

[9] Prahalad, C. K. “In Volatile Times, Agility Rules.” BusinessWeek, September 21, 2009.

2014 Volume 17 Issue 1

2013 Volume 16 Issue 3

2013 Volume 16 Issue 2

2013 Volume 16 Issue 1

2012 Volume 15 Issue 3

2012 Volume 15 Issue 2

2012 Volume 15 Issue 1

2011 Volume 14 Issue 4

2011 Volume 14 Issue 3

2011 Volume 14 Issue 2

2011 Volume 14 Issue 1

2010 Volume 13 Issue 4

2010 Volume 13 Issue 3

2010 Volume 13 Issue 2

2010 Volume 13 Issue 1

2009 Volume 12 Issue 4

2009 Volume 12 Issue 3

2009 Volume 12 Issue 2

2009 Volume 12 Issue 1

2008 Volume 11 Issue 4

2008 Volume 11 Issue 3

2008 Volume 11 Issue 2

2008 Volume 11 Issue 1

2007 Volume 10 Issue 4

2007 Volume 10 Issue 3

2007 Volume 10 Issue 2

2007 Volume 10 Issue 1

2006 Volume 9 Issue 4

2006 Volume 9 Issue 3

2006 Volume 9 Issue 2

2006 Volume 9 Issue 1

2005 Volume 8 Issue 4

2005 Volume 8 Issue 3

2005 Volume 8 Issue 2

2005 Volume 8 Issue 1

2004 Volume 7 Issue 3

2004 Volume 7 Issue 2

2004 Volume 7 Issue 1

2003 Volume 6 Issue 4

2003 Volume 6 Issue 3

2003 Volume 6 Issue 2

2003 Volume 6 Issue 1

2002 Volume 5 Issue 4

2002 Volume 5 Issue 3

2002 Volume 5 Issue 2

2002 Volume 5 Issue 1

2001 Volume 4 Issue 4

2001 Volume 4 Issue 3

2001 Volume 4 Issue 2

2001 Volume 4 Issue 1

2000 Volume 3 Issue 4

2000 Volume 3 Issue 3

2000 Volume 3 Issue 2

2000 Volume 3 Issue 1

1999 Volume 2 Issue 4

1999 Volume 2 Issue 3

1999 Volume 2 Issue 2

1999 Volume 2 Issue 1

1998 Volume 1 Issue 3

1998 Volume 1 Issue 2

1998 Volume 1 Issue 1

“The Role of the CIO” with Harvey Koeppel

Harvey Koeppel is the executive director of the Center for CIO Leadership, based in New York City. In this capacity, he sets the Center’s strategy and directs internal and external operations. He also serves as chairman of the center’s Advisory Committee.

From May 2004 through June 2007, Koeppel served as the Chief Information Officer and Senior Vice President of Citigroup’s Global Consumer Group (GCG). In that role, he set the strategic direction for the GCG’s operations and technology and actively supported the development and growth of the operations and technology community across all GCG lines of business globally. Koeppel served as the chairperson of the Offshore Program Office Steering Committee and provided strategic input to GCG’s offshore and outsourcing practices. He additionally provided executive oversight to the Information Security and Data Protection programs for the group.






Harvey Koeppel, executive director of the Center for CIO Leadership

Harvey Koeppel, executive director, Center for CIO Leadership




Prior to taking on the CIO role, Koeppel provided consulting services to CitiFinancial, Citibank, and other Citi affiliates from 1986 to 2004. He was heavily involved in supporting the planning and integration of many of Citi’s major acquisitions, including Travelers Insurance, Associates First Capital, European American Bank, and Golden State Bank.

Koeppel has a distinguished record of IT innovation in the financial services industry. He designed the first graphical user interface for the NASDAQ trader workstation. He was the architect and designer of FxNet, a software program that revolutionized the way large financial institutions manage settlement risk within FX portfolios. He was also a primary contributor to the development of the Maestro platform at CitiFinancial, the online interface between customers, the sales force, and the back office, which fundamentally changed the loan sales and approval process and significantly streamlined branch workflow. Koeppel is the named inventor on the Citibank patent of the “Recommendation Engine,” a software component that advises sales and service staff about products and services to discuss with clients based upon their financial goals and objectives.

In this video interview, Koeppel talks with Charla Griffy-Brown, director of the Center for Teaching and Learning Excellence and associate professor of information systems and technology management at the Graziadio School of Business and Management at Pepperdine University. They discuss the following questions:

  1. What are some of the new leadership and management requirements for Chief Information Officers that have been triggered by the current economic challenges?
  2. Have you seen a change in the evolution for this role in your capacity as the executive director of the Center for CIO Leadership, and your role as the CIO of CitiGroup?
  3. What is the most surprising change you’ve seen in the evolution of the private sector CIO in the last decade?
  4. Why do you think the trend is moving more toward a tactical role for CIO and less toward the strategic?
  5. What are the competencies that are absolutely critical in distinguishing a manager from a leader in terms of the role of Chief Information Officer?
  6. From your vantage point, do you see differences in CIOs globally?
  7. What have you observed in the leap to mobile communications globally?
  8. How do you see real-time systems, which allow for instantaneous interaction between customer and the organization, affecting the public sector and governmental services? What are some examples from New York City?
  9. What technology opportunities or challenges do you see CIOs in business and the public sector facing over the next few years?

2014 Volume 17 Issue 1

2013 Volume 16 Issue 3

2013 Volume 16 Issue 2

2013 Volume 16 Issue 1

2012 Volume 15 Issue 3

2012 Volume 15 Issue 2

2012 Volume 15 Issue 1

2011 Volume 14 Issue 4

2011 Volume 14 Issue 3

2011 Volume 14 Issue 2

2011 Volume 14 Issue 1

2010 Volume 13 Issue 4

2010 Volume 13 Issue 3

2010 Volume 13 Issue 2

2010 Volume 13 Issue 1

2009 Volume 12 Issue 4

2009 Volume 12 Issue 3

2009 Volume 12 Issue 2

2009 Volume 12 Issue 1

2008 Volume 11 Issue 4

2008 Volume 11 Issue 3

2008 Volume 11 Issue 2

2008 Volume 11 Issue 1

2007 Volume 10 Issue 4

2007 Volume 10 Issue 3

2007 Volume 10 Issue 2

2007 Volume 10 Issue 1

2006 Volume 9 Issue 4

2006 Volume 9 Issue 3

2006 Volume 9 Issue 2

2006 Volume 9 Issue 1

2005 Volume 8 Issue 4

2005 Volume 8 Issue 3

2005 Volume 8 Issue 2

2005 Volume 8 Issue 1

2004 Volume 7 Issue 3

2004 Volume 7 Issue 2

2004 Volume 7 Issue 1

2003 Volume 6 Issue 4

2003 Volume 6 Issue 3

2003 Volume 6 Issue 2

2003 Volume 6 Issue 1

2002 Volume 5 Issue 4

2002 Volume 5 Issue 3

2002 Volume 5 Issue 2

2002 Volume 5 Issue 1

2001 Volume 4 Issue 4

2001 Volume 4 Issue 3

2001 Volume 4 Issue 2

2001 Volume 4 Issue 1

2000 Volume 3 Issue 4

2000 Volume 3 Issue 3

2000 Volume 3 Issue 2

2000 Volume 3 Issue 1

1999 Volume 2 Issue 4

1999 Volume 2 Issue 3

1999 Volume 2 Issue 2

1999 Volume 2 Issue 1

1998 Volume 1 Issue 3

1998 Volume 1 Issue 2

1998 Volume 1 Issue 1

Best Practices for Headcount Reporting

Headcount reporting is supposed to be a simple counting process with a tangible outcome. However, counting the “number of people a business employs on a global basis” is not as straightforward as it should be. In one recent case, a corporate human resources (HR) report showed that the company’s global workforce was comprised of 4,100 persons, while a tabulation across business units came to 3,570, and a finance report showed 4,320 persons.

While all were arithmetically correct and tabulated for the same day, each report adopted a different construct. The HR report counted full-time employees, temporary workers who replaced full-time workers on leave, and part-time employees. The business units reported only full-time workers, and the finance report was based on full-time workers, part-time workers, temporary workers, and contractors. Above and beyond these tabulations, the budgeting headcount was 4,000, and the workforce planning number for the comparable period of the previous year was 3,915. An objective observer could say these counts are technically all correct. A frustrated executive would say there should be one, and only one, answer.

This article explores why headcount reporting problems exist and will likely worsen, especially for multinational companies, unless improved workforce planning frameworks are implemented.





Photo: Viorika Prikhodko






Differences in headcounts can be frustrating to executives and managers because they slow down or provide false information about business results, contribute to debates about who has the right numbers, and add hours of work in the form of manual tracking and exception reporting. Perhaps the good news, as noted by the Gartner Group, is that “HR management systems are expanding to include talent and workforce management, and multi-process human resource outsourcing services, as well as new geographic locations (increasing the number of countries/markets with local regulatory support).”[1] The bad news is that this process is still in the early stages for large enterprises.

The Real Reasons for Headcount Reporting Problems

One oft-cited reason for the headcount reporting problem is the different taxonomies finance and HR departments employ to tabulate headcounts. Finance groups typically report and track headcount by cost centers, while HR headcounts are usually summed up based on job role boundaries and managerial or supervisor hierarchies. When cost centers are mapped into a managerial hierarchy, the top corporate or division cost center is usually the only one accounted for. Changes that occur in lower level cost centers do not normally appear on the HR’s headcount reporting radar and are therefore not included in the count. However, even when these types of cross-functional challenges are resolved, headcount reporting problems still exist. The real culprits are the stickiness of HR change processes and an inability to reliably establish who is a worker.

The Stickiness of HR Change Processes

At the lowest or building block level, cost centers can be readily added, deleted, combined, separated, and realigned on a monthly basis. Managerial or supervisor hierarchies are, on the other hand, stickier or slower to change. Changing the personnel side of the business extends well beyond cost center code changes. Managerial approval processes, workforce management systems, administrative applications, and workflows need to be updated along with roles, job descriptions, compensation formulas, incentives, benefits, stock option plans, and bonus reviews. Changes must also be documented and verified so that they do not adversely affect workers on the basis of age, race, and sex. In some cases, unions and work councils must also be notified. These constraints mean that HR change processes will always lag financial and business change processes.

Given the stickiness of HR change processes, workforce planning efforts need to account for and build in transition periods for HR to catch up and realign with changes in financial and strategic business plans.

Defining Who is a Worker

An accepted definition of workforce planning is “the systematic identification and analysis of what an organization is going to need in terms of the size, type, and quality of workforce to achieve its objectives.”[2] The workforce planning process provides a framework to sequence the steps required to obtain the right number of the right people in the right place at the right time.[3] This reinforces the theory that timing and identifying the types of workers with respect to quality, experience, knowledge, skills, and effort levels required to deliver an organization’s objectives are key factors in workforce planning success. According to this model, determining who is a worker is integral. However, in today’s global business environment, the task of determining the worker types needed by an organization can be especially difficult. For example, organizations facing skill shortages or increases in labor costs can now readily access cost-effective alternatives locally or internationally, thus changing the composition of the workforce with very short notice or no notice at all. These types of adjustments often outpace the sticky HR change processes.

The real sources of headcount reporting problems, then, are a failure to properly account for the stickiness of HR change processes versus business and finance change processes and the lack of a sustainable definition of who is to be counted as a worker.

These problems point to a need for organizations to:

  • Adopt a broad and adaptable definition “worker,”
  • Create planning scenarios that provide for tradeoffs between workers employed across geographic areas,
  • Analyze planning scenarios that incorporate changes in the types of workers employed,
  • Build a planning method that can support financial planning scenarios, and
  • Sustain a planning method that remains consistent with annual headcount numbers.

Companies must also decide if worker types should include geographic identifiers. Smart headcount reporting rules may be needed to align downstream operational headcounts by type with workforce planning headcounts. The challenges are substantial, but clearly, they begin with workforce planning.





Photo: Jim Jurica





Workforce Planning Challenges and Opportunities

To meet the challenges of workforce planning, businesses must be able to anticipate emerging business changes and get ahead of the curve so that the necessary timing adjustments for stickiness and accommodations for potential new worker types can be made. Changes must also be analyzed and tracked on multiple levels.[4] In this article, global market and societal changes and emerging business models are explored as two important opportunities to assist workforce planners in anticipating change.

Expanding Business Choices and Societal Change

Societies are experiencing rapid social, demographic (see Figure 1), economic, technological, and cultural changes. Product life-cycles are shortening, and customers are demanding greater choice and personalized delivery. Meanwhile, employees are demanding more choice at work. Strategies to expand physical and material resources, emphasized in the bygone industrial era, are being challenged by strategies to reduce such resources in today’s service-based era.

Developed countries with productivity measures of $10,000 per worker or higher are experiencing record demographic changes, characterized by declining birth rates, greater longevity, aging populations, and, in some arenas, skill shortages.[5] This focuses attention on the increased competitiveness required of organizations to attract and retain skilled workers in their national and local labor markets. However, when the problem of declining labor supply is considered from a global perspective, a different picture emerges.

Figure 1: Labor Force Growth Projections[6]

In conjunction with the market-seeking and resource-seeking behaviors of global firms, the labor market for skilled workers has also become global, “both in terms of demand and supply for skilled labor.”[7] Global labor supply is expected to grow at an average rate of approximately 40 million persons per year, with the majority of this growth occurring in less developed nations[8] (see Figure 2). This growth represents a new resource for organizations. As such, workforce planners must consider new sources of international demand and competition for skilled labor in order to identify the best choices. These new demands require additional planning resources, new planning and analysis skills, and increased flexibility in terms of HR change processes.

Figure 2: World Population Projections: 1950–2050[9]

However, access to a global talent pool does not necessarily equate with acquisition. Global firms that relocated production centers to access low-cost resources and capture new sources of innovation and new markets are now competing for talent in an environment where internal market demands for talent are rising dramatically.[10] In countries such as India, local firms are turning their talents to internal projects rather than external markets. Similar shifts are also actively underway in China.[11]

While the huge supply of low-cost workers in China has enabled the nation to become the world’s manufacturing workshop,[12] labor pool talent shortages in key skill areas are emerging as concerns. According to the People’s Daily, in 2006, China had 88 vacancies for every experienced, skilled blue-collar worker and 16 vacancies for every factory technician. Difficulties filling senior management positions are also being reported.[13] Access to low-cost workers is also being challenged. In China, pay and benefits are on the rise, with average annual salary increases for mid-level and senior managers at 6 to 10 percent and accountants’ salaries rising by 14 percent per year.[14]

These societal and labor market shifts will require workforce planners to add, reduce, and even eliminate different worker types in the future. With limited resources and an overabundance of possible business strategies to examine, workforce planners will need to carefully pick and choose which trends to follow and which must be reinterpreted to fit constantly evolving business models.

A “Smaller is Better” Business Model

One of the most fundamental and important relationships is that between size (growth) and performance. This raises the question: Is bigger better? If the answer is yes, headcount reporting will focus on existing worker groups and on ways to accommodate and reduce stickiness.

If the answer is no, workforce planners will need to consider new types of alternative workers, including contractors, third-party providers, alliance partners and temporary, off-shore, and outsourced worker types. Employee counts may be fewer, but overall headcounts could rise, especially if alternative workers are cheaper and less productive than current employees. As increased demands for alternative workers by governments and local companies drive up wages, the cost advantages of alternatives will be reduced and business strategies could revert to past trends. Volatility across alternative worker groups will require workforce planners to expand and pull back preferred strategies with equal ease.

In today’s dynamic global labor market, workforce planners must be equally prepared to expand the footprints of alternative worker groups and to reduce them and, in doing so, set the standard for headcount reporting. In general, however, workforce planners should expect the number of alternative worker groups to increase as national labor market demands and societal make-up change. Risk factors are emerging, as they did in financial planning, to define the likelihood that an alternative worker group will be of interest downstream. Typical risk drivers include cost differentials, availability based on internal and external labor market demand, contracting timelines, connectivity differences, and worker productivity or skill differences.

Implications for Headcount Reporting

The challenges that lie ahead for workforce planners have specific implications for headcount reporting. They include:

  • Creating a methodology to assess emerging business strategies, especially those based on a “smaller is better” business model;
  • Maintaining consistency with financial views, such as position planning;
  • Tracking and reporting the impacts of change on different worker groups;
  • Providing workers with choices and information so they can make more informed decisions; and
  • Incorporating reasonable timeframes to roll out new business initiatives.

These challenges can only be met if headcount reporting can provide information on:

  • Full-time employees as well as part-time workers, contractors, temporary, and outsourced workers. Enterprise-wide HR information systems, such as PeopleSoft 9.0, are designed to provide information on these groups and others as “persons of interest” to business and financial planners.
  • Alternative worker headcounts in different countries, age groups, and generational subgroups. Changes in the cost competitiveness of different groups in the global labor market affect financial and strategic business choices. For example, if the costs of technical workers in India increase more quickly than in Romania, companies like IBM, which now employs 70,000 Bangalore citizens, will consider moving technical jobs from India to Romania.
  • Workers at or near the mandatory age of retirement. The mandatory age of retirement is rising. In Japan, Europe, and the United States, the movement is toward age 70 as the new mandatory age of retirement. Older workers who would have retired at age 65 through 67, based on their country’s mandatory age of retirement, may elect to continue working. Existing business plans to replace older workers will have to be revisited.
  • Proposed restructuring of cost centers by financial planners. The headcount reporting problem amounts to more than keeping operating HR headcounts aligned with operating finance headcounts. It also entails keeping HR planning headcounts aligned with finance planning headcounts during transition periods. The stickiness of changes in headcounts during transition periods can be associated with union contracts, Work Council rules in European countries, incentive packages offered to affected workers, and review and acceptance processes rolled out as initiatives.

In summary, workforce planning will require new and better analytical tools to remain aligned with changing business strategies and financial planning analyses. The value of conducting reliable benchmarking comparisons for key workforce metrics, avoiding cycle-to-cycle trend discrepancies, meeting statutory reporting requirements, and using HR knowledge performance indicators to achieve business objectives can only be realized when business strategists and financial planners recognize the need to include workforce planners at the planning table.


[1] James Holincheck. “MarketScope for Large Enterprise HRMS,” Gartner RAS Core Research Note G00154565 (February 19, 2008).

[2] BusinessDictionary.com. Workforce Planning: Definition, http://www.businessdictionary.com/definition/workforce-planning.html.

[3] Ralph Bledsloe. Building Successful Organizations. A Guide to Strategic Workforce Planning. National Academy of Public Administration, (May 1, 2000).

[4] Samuel J. Palmisano. “The Globally Integrated Enterprise,” IBM (2006); Jorn Kleinert. “Trade and the internationalization of production,” Kiel Institute for the World Economy (April 2002); Lynn A. Karoly, and Constantin (Stan) Panis. The 21st Century at Workforces Shaping the Future Workforce and Workplace in the United States. RAND Corporation (2004).

[5] Brad Jorgensen, and Philip Taylor. “Older Workers, Government and Business: Implications for Ageing Populations of a Globalising Economy,” Institute of Economic Affairs Journal, 28, no. 1 (2008): 17–22.

[6] OECD. “Ageing Populations: High Time for Action,” Meeting of G8 employment and labour ministers (March 10–11, 2005).

[7] Petra Zaletel. “Competing for the Highly Skilled Migrants: Implications for the EU Common Approach on Temporary Economic Migration.” European Law Journal, 12, no. 5 (September 2006): 613–365.

[8] Global Commission on International Migration. “Migration in an Interconnected World: New Directions for Action (October 2005).

[9] United Nations. “World Population to 2300,” (2004).

[10] MGI. “The Emerging Global Labor Market,” (2005).

[11] Diana Farrel and Andrew J. Grant. “China’s Looming Talent Shortage,” The McKinsey Quarterly, (November 2005).

[12] Ibid.

[13] Manpower.com, “The China Talent Paradox,” www.manpower.com.cn.

[14] “China’s People Problem,” The Economist, April 14, 2005.

2014 Volume 17 Issue 1

2013 Volume 16 Issue 3

2013 Volume 16 Issue 2

2013 Volume 16 Issue 1

2012 Volume 15 Issue 3

2012 Volume 15 Issue 2

2012 Volume 15 Issue 1

2011 Volume 14 Issue 4

2011 Volume 14 Issue 3

2011 Volume 14 Issue 2

2011 Volume 14 Issue 1

2010 Volume 13 Issue 4

2010 Volume 13 Issue 3

2010 Volume 13 Issue 2

2010 Volume 13 Issue 1

2009 Volume 12 Issue 4

2009 Volume 12 Issue 3

2009 Volume 12 Issue 2

2009 Volume 12 Issue 1

2008 Volume 11 Issue 4

2008 Volume 11 Issue 3

2008 Volume 11 Issue 2

2008 Volume 11 Issue 1

2007 Volume 10 Issue 4

2007 Volume 10 Issue 3

2007 Volume 10 Issue 2

2007 Volume 10 Issue 1

2006 Volume 9 Issue 4

2006 Volume 9 Issue 3

2006 Volume 9 Issue 2

2006 Volume 9 Issue 1

2005 Volume 8 Issue 4

2005 Volume 8 Issue 3

2005 Volume 8 Issue 2

2005 Volume 8 Issue 1

2004 Volume 7 Issue 3

2004 Volume 7 Issue 2

2004 Volume 7 Issue 1

2003 Volume 6 Issue 4

2003 Volume 6 Issue 3

2003 Volume 6 Issue 2

2003 Volume 6 Issue 1

2002 Volume 5 Issue 4

2002 Volume 5 Issue 3

2002 Volume 5 Issue 2

2002 Volume 5 Issue 1

2001 Volume 4 Issue 4

2001 Volume 4 Issue 3

2001 Volume 4 Issue 2

2001 Volume 4 Issue 1

2000 Volume 3 Issue 4

2000 Volume 3 Issue 3

2000 Volume 3 Issue 2

2000 Volume 3 Issue 1

1999 Volume 2 Issue 4

1999 Volume 2 Issue 3

1999 Volume 2 Issue 2

1999 Volume 2 Issue 1

1998 Volume 1 Issue 3

1998 Volume 1 Issue 2

1998 Volume 1 Issue 1

The Last 100 Feet of the Supply Chain

Tremendous progress has been made in the realm of supply chain management since 1989 when Wal-Mart made point-of-sale (POS) data available to its suppliers. Initiatives in category management, vendor-managed inventory, direct-to-store delivery, electronic data interchange, advanced shipping notice, and collaborative forecasting replenishment have eliminated costs from the supply chain, improved inventory turnover, and increased sales.

Today, the battleground for maximization of supply chain performance depends largely on execution in the last 100 feet the distance between the receiving docks of a retail store and its customer checkout counters. While new systems and technology have improved the visibility of goods from manufacturing to store delivery, they appear to fall into a “black hole” once they reach the retailer’s receiving dock, either directly from the supplier or through the retailer’s distribution center. The operational steps currently undertaken in the final 100 feet are burdened by inaccuracies, delays, and suboptimal in-store execution.




Photo: Jonathan Heger




Tremendous progress has been made in the realm of supply chain management since 1989 when Wal-Mart made point-of-sale (POS) data available to its suppliers. Initiatives in category management, vendor-managed inventory, direct-to-store delivery, electronic data interchange, advanced shipping notice, and collaborative forecasting replenishment have eliminated costs from the supply chain, improved inventory turnover, and increased sales.

Today, the battleground for maximization of supply chain performance has come to depend largely on execution in the last 100 feet the distance between the receiving docks of a retail store and its customer checkout counters. While new systems and technology have improved the visibility of goods from manufacturing to store delivery, they appear to fall into a “black hole” once they reach the retailer’s receiving dock, either directly from the supplier or through the retailer’s distribution center. The operational steps currently undertaken in the final 100 feet are burdened by inaccuracies, delays, and suboptimal in-store execution.

According to the management consulting firm VeriSign, nearly 70 percent of chain retail stores fall below compliance levels for key operational processes.[1] Over 70 percent of out-of-stock (OOS) scenarios are the result of store staff’s inability to locate items in the store. Furthermore, an inexperienced and uncommitted workforce contributes to nearly 50 percent of the shrinkage issues that cost retailers, on average, two percent of sales.

OOS scenarios are usually the result of inaccurate inventory lists and product locations that lack visibility, causing shelf-outs and “can’t find” situations. Sales lost to competitors due to OOS total $93 billion, according to the 2008 store systems study produced by Retail Information System News (RIS) and research partner IHL Group.[2] This study polled 124 individual retailers operating over 85,000 stores and earning a combined total of $460 billion in annual revenue. It found that “… if a retailer completely fixes the [OOS] problem, it could increase same-store sales by 3.7% by converting out-of-stocks into transactions. Put another way, the average retailer loses the equivalent of $3.19 for every transaction it makes, either through lost sales of specific items or by creating a situation where shoppers purchase nothing in the store, even though they came in to buy.”

The lack of adequate business processes and information synchronicity between trading partners as well as poor quality and turnover of part-time retail store employees truly exacerbate the problem. Some major contributors to operational problems at the store are:

  • Less than 100 percent usage of advanced shipping notices (ASN) from suppliers
  • Suboptimal receiving practices at the dock
  • Lack of adequate product location and shelf replenishment systems in the back room
  • Difficulty ensuring proper shelf placement of products that customers have scattered in the store
  • Inaccurate product data exchange with supplier
  • Difficulty taking frequent and accurate physical inventory
  • Product theft

In other words, even if the supply chain does everything right, it does not ensure that products get onto store shelves in a timely and accurate manner. The “black hole” distorts the decisions made for replenishment, promotions, and returns management. The result is lost sales, excess inventory, receivables write-offs, and an overall high cost of doing business.

The oft-quoted “Bullwhip Effect” explains how small amplitudes in the last 100 feet of retail are considerably magnified in the supply chain upstream. That is, insufficient and untimely visibility of inventory has a disproportionate impact on stock-outs, inventory turns, product mix, promotional effectiveness, and product returns.[3]

The resultant increase in the amplitude of the demand or on-hand inventory signal could range from 20 to 100 percent. While mass merchants and retailers are embarking on certain steps to mitigate the problem, a systematic approach is required wherein in-store operations and merchandising and information systems work together to overcome deterrents to both higher levels of customer satisfaction and profitability. Additionally, business intelligence and exception reporting through analytics can provide a compass to navigate through the black hole.

How Can RFID Solve the Last 100-Feet Dilemma?

Technology has come to the rescue. With Radio Frequency Identification (RFID) technology, the last 100 feet can now be managed and monitored effectively by the manufacturer and the retailer. Nearly four decades ago, the Universal Product Code (UPC) produced a unique DNA for the supply chain. Today, a new product numbering standard, the Electronic Product Code (EPC), in conjunction with RFID technology, goes far beyond simple product identification; it gives the ubiquitous barcode a makeover. RFID enables the retailer to monitor inventory and product movement between the dock and the checkout counter in real time to facilitate optimal management decisions.

Dr. Bill Hardgrave, founder and director of the RFID Research Center at the University of Arkansas’ Sam M. Walton College of Business, found that Wal-Mart saw a 16 percent OOS reduction in 2005, the year it launched RFID.[4] In addition, for RFID-tagged items, manual reordering was reduced by 10 percent and replenishment was executed three times faster than for non-tagged items. By the end of 2008, Wal-Mart’s top 1,000 product suppliers will have complied with the retailer’s mandate requiring all pallets and cases to be RFID-tagged.[5] Over 1,300 Wal-Mart stores are currently RFID-enabled.

At Best Buy International, the application of RFID on a test basis has resulted in an increase in on-shelf availability from mid-80 percent to 93 percent, with promotional availability even higher.[6] Procter & Gamble used RFID to track its FusionTM razors’ placement on store shelves in 400 retail locations and was able to get the razors onto shelves 11 days faster than normal for product launches.[7] British retailer Tesco is going one step further with RFID technology by introducing so-called “smart shelves” that record any changes as a product is removed from the shelf.[8] In the future, such information may even help retailers interact with their customers as they navigate through the aisles of a store.

The establishment of business processes utilizing RFID data appears to be the next breakthrough opportunity at retail. Vendors of RFID technology are embracing the economics of these low-cost tags prices should fall to as low as 10 cents per tag in the not-too-distant future, depending on volume. RFID readers are already plentiful and range from installed systems in loading docks to readers embedded on forklifts to handheld models.

How Does RFID Work?

RFID technology, utilizing the EPC code, assigns a unique number to every single item that rolls off a manufacturing line, allowing every company in the supply chain, including retailers, to track products at the individual or case or pallet level. This means that every single item on a shelf can be traced back to its manufacture and sale (or to when it went missing).

Due to the enormous quantity of unique numbers required to track at the item level, the EPC utilizes a 96-bit numbering scheme. EPC tags are encoded with both the product identification and a unique serial number that has the potential to greatly reduce or eliminate the number of errors resulting from items not being counted or located properly. As this technology is further adopted, it will lead to automated in-store shelf replenishment and electronic proof of delivery, thereby reducing inventory write-offs that result in discrepancies between receipts and shipments.

An RFID system consists of a tag/label/PCB (printed circuit board), an antenna that communicates with the tag, and a controller that manages communication between the antenna and the personal computer (PC) or programmed logical controllers (PLC).

RFID employs radio frequency communications to exchange data between a portable memory device, a host computer, or PLC. An RFID tag/label/PCB contains a coil and a programmed silicon chip, and comes in a variety of sizes, memory capacities, and temperature ranges. Tags can be powered by an internal battery (called an “active tag”) or by inductive coupling (a “passive tag”). The antenna uses radio waves to read and write data to the tags/labels/PCBs, and the controller manages the communication interface between the antenna and a PC, PLC, or server.

The management consulting arm of VeriSign recently reported that the inventory of an RFID-enabled store was more than 99.5 percent accurate, as opposed to traditionally inventoried stores, which can be off by as much as 15 to 20 percent.[9] In addition to realizing further sales, RFID greatly reduces the need for safety stock. Finally, the increased visibility of product movement and location provided by RFID makes it possible to compare actual inventory count and location against model stock, enabling proactive responses to potential OOS conditions.




Photo: Elisabeth-Mechthild von Bredow




Store Merchandising: Where the Rubber Meets the Road

In June 2007 at the second annual conference of the Entertainment Supply Chain Academy (ESCA), executives of major national merchandising companies provided unprecedented insight into the realities of in-store merchandising in the last 100 feet of the supply chain.[10] They revealed that merchandisers are the unsung street warriors who touch and feel the weakest link of the physical delivery of goods across a wide spectrum of industries, such as entertainment, apparel, consumer electronics, financial services, and communication.

These merchandising companies, such as Mosaic, SPAR, Handelman, and Anderson, cover all product classifications and classes of trade, including mass market, drug store, electronic store, convenience store, and grocery chains. The broad array of services they provide and that impact the last 100 feet of the supply chain includes in-store merchandising, event management and staffing, promotion management, category management, auditing for vendor-managed inventory (VMI), fixture asset tracking, returns and recycling management, web-enabled visibility, and RFID technology solutions.

According to Jack Talley, vice president of sales and retail expansion at Sony Pictures Home Entertainment, the basic responsibilities of merchandisers include:[11]

  • Restocking replenishment product
  • Setting all products on dedicated fixtures according to plan-o-gram
  • Blitzing all new and promotional products on street dates
  • Locating back stock and excess products every visit
  • Executing revisions/change-outs and promotions
  • Sending OOS reports after every visit
  • Providing cycle counts and quarterly physical inventory counts
  • Verifying price updates
  • Processing all returns and pull-downs, and placing products to be returned in an easy-to-find location
  • Performing fixture audits as necessary

The scanning of RFID tags or UPCs on products enables merchandisers to perform in-store replenishment, take inventory of exception items, and facilitate returns. The ease of capturing item-level RFID data enables rapid decision-making with accurate, timely, and more comprehensive data. Rather than unleashing a flood of RFID data, exception management with process controls produces immense value.

Responding to the challenges of the last 100 feet, Mark Heidel, vice president of business development at the home entertainment merchandising division of the $1.2 billion Handleman Company, says that his company has expanded supply chain and field services to overcome shortcomings in the final delivery of goods to retail shelves. These expanded services include:[12]

Monitoring Suspicious Sales

  • Utilization of software programs to study sales patterns and identify irregular selling patterns at the title level
  • Deployment of field call visits to verify specific title inventory and reset as needed

Promotions Management

  • Visible client support along the promotional life cycle
  • Timed field deployment to coordinate with promotional delivery
  • Secured, verified, and reported promotion placement
  • Utilization of a customized, drillable portal for relaying in-store merchandise information to client

OOS Reporting and Retail Adjustments

  • Electronic OOS capture with UPC/EPC, with upload to customized portal
  • Resetting of item discrepancies with retailers

Forward and Reverse Logistics

  • Electronic returns process
  • On-site returns invoice generation to eliminate discrepancies
  • On-site product disposal documentation

Marketing Services

  • Customer and client support with respect to consumer buying patterns, promotional tools, and display and product feedback
  • Market analysis of sales trends, high OOS stores, and ASN opportunities
  • Monitoring and tracking of in-store fixtures and semi-permanent displays
  • Reporting of overstock conditions

Kori Belzer at SPAR emphasizes that as a group, merchandisers can benefit from RFID technology. SPAR is currently conducting a pilot study in which corrugate displays are manually tagged and tracked once they leave the backroom and make their way to the selling floor.[13] The system software provides data on how long the displays remain up, where they are placed, and whether or not they are moved. Customers can view an “Execution Map” online and watch as promotions hit the floors of store locations nationwide.

Merchandising staffers wear badges that are individually tagged with RFID to provide remote monitoring of in-store movements. The old notion of merchandising, with its quaint connotations of stocking, straightening, and dusting products, has been transformed into a world of handheld, web-enabled RFID scanners. It is these technology-driven merchandising capabilities that have begun to overcome some of the emptiness of the black hole.

Information Systems and Data Synchronization: The Holy Grail

With an information technology (IT) infrastructure in place at most companies, what is now most necessary to eliminate the black hole is greater collaboration among supply chain partners. IT transformation is required to synchronize POS, master, and other transaction data across the trading partners in the supply chain. Additionally, merchandiser information integration and RFID intelligence from additional data points at the retail level will provide disproportionately high value. The visibility, efficiency, and effectiveness of these processes, which cover the retail extremity of the supply chain, will have the most positive impact on the last 100 feet of the chain.

The opportunity today is to connect retail stores with suppliers to better monitor business activity in real time with greater accuracy and timeliness. The tools of business analytics and intelligence are readily available; POS information services, in particular, provide a critical link for visibility. The use of analytical tools and event exception management reporting will enable managers to deal with common execution deviations and failures in the last 100 feet. The resulting ability to respond in a timely manner to unexpected deviations in demand and on-hand inventory data will help mitigate the impact of unavoidable errors in forecasting and replenishment. Finally, the potential to gather additional points of product movement, made economically feasible by RFID, has major implications for enhancing management decision-making in the supply chain.

A major challenge of the existing business-to-business infrastructure is the maze of firewalls, systems, and applications that critical transactions must navigate to reach their final destinations usually order management systems or enterprise resource planning systems, where inventory replenishment takes place. Trading partners are made to muddle through disparate systems, platforms, operating systems, and configurations, resulting in misalignment, discontinuity in information flow, real-time or batch processing modes, time shifts, and data translation and accuracy issues. A concentrated effort to reconfigure the infrastructure for business process orientation by using service-oriented architecture (SOA), instead of the existing functional silos of excellence, will be transformational.

Multi-Pronged Strategy: The Key to Success

Improved business processes at retail, alignment with in-store merchandisers, synchronization of systems and data, utilization of analytics to respond to exceptions, and deployment of RFID technology will shrink the black hole.

The recent focus on increasing sales and reducing the costs of doing business within the last 100 feet is breaking down silos within companies as well as between trading partners. Executives in operations, information technology, sales, and marketing have found supply chain management to be a holistic approach for problem solving. In the process, supply chain agents have moved from being manufacturing-centric to consumer-centric. One is optimistic that the multi-pronged approach suggested above will soon become the strategy of CEOs of industrial enterprises, as only they are empowered to bring about collaboration amongst the functional departments of a company as well as with trading partners.


[1] Paul D. Mackinaw. “RFID: Lessons Learned from Mandate Compliance and Item-Level Pilot,” IRMA Supply Chain SIG Conference, March 8, 2006.

[2] Greg Buzek and Lee Holman. “Seizing The In-Store Opportunities,” Fifth Annual Store System Study 2008, Retail Information System News (RIS) and IHL Group.

[3] Hau L. Lee, V. Padmanabhan, and Seugjin Whang. “The Bullwhip Effect in Supply Chains,” MIT Sloan Management Review, 38, no. 3 (spring 1997): 93-102.

[4] Bill Hardgrave. “Show Me The Value: The Business Case for RFID,” Consumer Electronics Supply Chain Academy Conference, January 10-11, 2007.

[5] Based on discussions with Wal-Mart executives.

[6] Robert Willett. “The Future of the Consumer Electronics Supply Chain,” Consumer Electronics Supply Chain Academy Conference,” January 10-11, 2007.

[7] Devendra Mishra. “Supply Chain Management: The New Competitive Edge in the Global Marketplace,” paper, EMBA Program, Graziadio School of Business and Management, Pepperdine University, July 13, 2007.

[8] Ibid.

[9] Mackinaw.

[10] Mark Fisher, Mark Heidel, Jack Talley, Vic Hernandez, and Kori Belzer. “In Store Merchandisers’ Panel: Managing The Last 100 Feet,” Entertainment Supply Chain Academy Conference, June 27-28, 2007.

[11] Ibid.

[12] Ibid.

[13] Ibid.

2014 Volume 17 Issue 1

2013 Volume 16 Issue 3

2013 Volume 16 Issue 2

2013 Volume 16 Issue 1

2012 Volume 15 Issue 3

2012 Volume 15 Issue 2

2012 Volume 15 Issue 1

2011 Volume 14 Issue 4

2011 Volume 14 Issue 3

2011 Volume 14 Issue 2

2011 Volume 14 Issue 1

2010 Volume 13 Issue 4

2010 Volume 13 Issue 3

2010 Volume 13 Issue 2

2010 Volume 13 Issue 1

2009 Volume 12 Issue 4

2009 Volume 12 Issue 3

2009 Volume 12 Issue 2

2009 Volume 12 Issue 1

2008 Volume 11 Issue 4

2008 Volume 11 Issue 3

2008 Volume 11 Issue 2

2008 Volume 11 Issue 1

2007 Volume 10 Issue 4

2007 Volume 10 Issue 3

2007 Volume 10 Issue 2

2007 Volume 10 Issue 1

2006 Volume 9 Issue 4

2006 Volume 9 Issue 3

2006 Volume 9 Issue 2

2006 Volume 9 Issue 1

2005 Volume 8 Issue 4

2005 Volume 8 Issue 3

2005 Volume 8 Issue 2

2005 Volume 8 Issue 1

2004 Volume 7 Issue 3

2004 Volume 7 Issue 2

2004 Volume 7 Issue 1

2003 Volume 6 Issue 4

2003 Volume 6 Issue 3

2003 Volume 6 Issue 2

2003 Volume 6 Issue 1

2002 Volume 5 Issue 4

2002 Volume 5 Issue 3

2002 Volume 5 Issue 2

2002 Volume 5 Issue 1

2001 Volume 4 Issue 4

2001 Volume 4 Issue 3

2001 Volume 4 Issue 2

2001 Volume 4 Issue 1

2000 Volume 3 Issue 4

2000 Volume 3 Issue 3

2000 Volume 3 Issue 2

2000 Volume 3 Issue 1

1999 Volume 2 Issue 4

1999 Volume 2 Issue 3

1999 Volume 2 Issue 2

1999 Volume 2 Issue 1

1998 Volume 1 Issue 3

1998 Volume 1 Issue 2

1998 Volume 1 Issue 1

Developing a Barometer for Workplace Attitude (WPA)

The role of attitude and its importance in decision-making are becoming more apparent to the business leader/practitioner. He/she knows that the right attitude can provide tremendous financial gains, along with the catalyst for the development of a learning organization, and will result in the thinking, feelings, and actions of a positive business environment. However, the perceived power of measuring workplace attitude has not as yet been realized because it needs to be packaged in a measurable format that is acceptable to business practitioners.





Photo: Darren Hester





The purpose of this article is to introduce an approach that measures workplace attitude without relying on the practitioner’s intuition or perception. In the case study presented, workplace attitude is measured using an index created by taking the experiences of workers (using a Likert scale) and dividing them by the expectations of the respective experiences.

Attitude has become a defining factor in the workplace because it may be at the root of most business decisions. In a study conducted at the beginning of this century, David Maister provided evidence that workplace attitudes affect a company’s financial success.[1] But beyond financial gains, they provide the catalyst for the development of Senge’s learning organization and the formulation of Hofstede’s mental connections that affect the thinking, feelings, and actions in a business environment.[2]

The complex process of attitude formation has been studied over the past century; “from its relatively simple beginning as a state of preparedness or a set to make a particular overt response, the concept has grown into its present-day formulation as a complex, multidimensional concept consisting of affective, cognitive, and conative components.”[3] However, today’s business practitioner does not have the time, knowledge, or budget to determine the attitudes of the workers before undertaking a task or implementing change. They must be decisive and able to make decisions based on partial information, making use of available shortcuts in measuring his or her environment and/or situation. Historically, great leaders have had the intuitive ability to gage their group’s attitude, although questions still remain.

Questions Left Unsolved About Attitude in the Workplace

  • Can we create a tool that requires minimal time, investment, and expense that measures workplace attitude?
  • Can the intuitive nature of attitude be measured?
  • What leads to these attitudes?
  • How can we use tools for measuring attitudes to foster change?
  • Can less intuitive leaders use a tool to be as effective as those with innate intuition?

Although the focus of this article is on the first question, the article will also touch upon the rest of these questions. A study was conducted with 125 business students who had an average of 10.5 years of work experience in their industry and were pursuing their business degrees at the Graziadio School of Business and Management at Pepperdine University. Three business processes were measured using a proposed theoretical workplace attitude (WPA) index formula whereby: WPA index = f (experiences/expectations).

The three business processes were systems, operations, and people. A series of statements were presented to the business students in each of these business processes for their respective workplace environments. The respondents chose among seven alternatives from “Strongly Disagree” to “Strongly Agree.”

Using this approach, the data sets resulted in an overall WPA index of 0.85, which may be interpreted as 85 percent of this sample population’s expectations in their workplace were met with matching experiences. Further studies are being conducted to refine the index and statistically prove that an index above 0.50 denotes a positive workplace attitude. Figure 1 represents the empirical results from our study and is formatted according to the proposed approach.

Figure 1: The Overall WPA Index

 





Source: Valadez 2005





Creating an area value from the cumulative Likert scores for the experiences and expectation components and forming a ratio between the areas, the WPA index is developed resulting in a ratio value of 0.85. The ratio of 1.0 could be achieved when expectations are met by the experiences.

The ability for a leader to know what a group’s attitude can be is viewed as the greatest limiting factor in business success. In order to accomplish this, leaders must have an attitude barometer that signals the readiness of the workers to undertake a new task or accept a change in the organization. Some leaders have the ability to do this intuitively, while others require assistance in order to assess the group’s readiness.

With or without assistance, it is clear that expectations need to be aligned with experiences, and this is the basis for developing a workplace attitude index (WPA Index).

The development of the WPA Index requires us to explore three critical areas:

  1. What is Attitude?
  2. What is Workplace Attitude (WPA)?
  3. How to Develop a Workplace Attitude Index?

Ultimately, the research indicates that when expectations are matched by experiences, the results lead to positive attitude formation and the creation of values in the organization. When expectations are not matched by experiences, the results may lead to negative attitudes that will adversely affect the work environment.

1. It Starts with Attitude

Before we can begin to measure workplace attitude we must agree on how we define attitude. In general, attitude has been referred to as, “A state of readiness, a tendency to respond in a certain manner when confronted with certain stimuli[,] are usually dormant[, and] … are expressed … only when the object of the attitude is perceived.”[4]

By managing attitude, a leader directs attention or awareness, guides the judgment, and triggers the desired behavioral responses.[5][6] Further, proofs show that affect, one of the components of attitude, has become a major variable factor in decision-making. Positive affect has a significant effect on decision-making, problem-solving, and behavior.[7] “Affect directs attention, guides decision-making, stimulates learning, and triggers behavior.”[8]

Emotions are the strongest factors in decision-making because they have the capacity to arouse feelings to a point of awareness to take action.[9] We form beliefs, make judgments based on those beliefs, and take action on our judgments.[10][11]

The emotional process of attitude formation is based on several components but the common thread appears to be a reliance on the person’s past experience and expectations of the results from any action or environmental condition when making the evaluations and judgments. Additionally, studies show that affect has the most influence among the three components in attitude formation and subsequent behavior. Consequently, we say our behavior is driven by our attitude.





Photo: David Kneafsey





2. Getting a Finger on the Pulse


Attitude has been traditionally defined in the past 20 years as a feeling or emotion, but workplace attitude is defined in different ways. Workplace attitude is the sum total of workplace attitudes of employees that reveal themselves in everyday judgments or decisions.

Attitudes are revealed through statements or opinions about the challenges, comfort, self-perception, and financial considerations surrounding the three business processes. Workplace attitude is defined and viewed in three different forms: by traditional statements, by job satisfaction, and as a state of readiness. The state of readiness is the least understood of these but holds the potential for the greatest gain.

Often, successful business leaders apply a basic but obscure principle: the principle of feeling the pulse of a situation and sensing their followers’ state of readiness to act in that situation. Observation of the behavior and actions of these successful leaders or negotiators indicate that they clarified what had happened and what was expected.

The beauty and mystery of the mind is its learning and decision-making processes. At the root of these processes are the filters of past experiences and the cognitive ability to overcome these experiences in setting the expectation that forms workplace attitude.

3. Managers Need Their Own Barometer

Research is proving that the ability to measure workplace attitude is possible. It has been subsequently called the Workplace Attitude (WPA) Index and it signals the readiness of the workers to undertake a new task or accept a change in the organization. The WPA Index uses experiences and expectations in the workplace to form a mathematical ratio in the areas of systems, operations, and people processes. When expectations and experiences form a one-to-one ratio, this may indicate a readiness for a new task or change.

The state of readiness is attitude-measuring and knowing the workers’ attitude or predispositions to act which may have economic consequences in a business setting.

The WPA Index gives the business practitioner another tool and opportunity to improve workplace environments by checking the level and degree of change in the index, reframing the expectations, and delivering on the expected experiences. These expectations and experiences may be unique for the individual business or industry. However, the workplace attitude survey developed for this study provides the business practitioner with a generic tool from which to start.

The need for a tool to help business practitioners is apparent as they are caught up in a dynamic business environment with more competition, stakeholder demands, and time constraints than ever. The WPA Index will serve business practitioners by swiftly capturing the workers’ state of readiness or disposition to act in a business environment created by three processes: information systems, operations, and people. This encapsulation of job satisfaction or workplace attitude gives the business practitioner an index, the WPA Index, to judge the disposition of the workers in directing change or simply accomplishing the tasks assigned.

The goal in our study was to find a relationship between workplace attitude, as measured by the four components of challenge, comfort, self-perception, and financial, with the WPA Index created by the experiences and expectations of employees in the three business processes.

Research indicates that most successful businesses demonstrate effectiveness in and alignment of systems, operations, and people processes, but they are not all-inclusive. The focus in our study then became not only on the relationship between experiences and expectations but with the measurement of the ratio of expectations to experiences by these three businss processes to arrive at an index that may serve as a way to guide a successful business.

You may design your own WPA Index with the help of a professional using a series of questions and statements that will measure the important attitude drivers or processes in your business or organization using a ratio between their respective experiences and expectations.

Getting to Results

Parents, the first managers, have been applying the concept of an attitude index for quite some time. Parents have helped to sort out the trials and tribulations of life with their children by asking if their outcomes (experiences) were in line with their expectations, and if not were these expectations realistic. Misalignment in these two fields leads to improper attitude formation; the same can be said of any business person in the world today.

Great managers, like great parents, have the ability to discover whether those they manage have realistic expectations and correlated experiences. The proper line of questioning can reveal this to the manager, but the WPA Index creates a more accurate assessment of this situation.

The main crux of the WPA Index comes from eight survey questions, each with five sub-statements grouped according to the attitudinal dimension being measured. Responses to the sub-statements within each question reflect agreement or disagreement with statements related to workplace attitude, job satisfaction, and the WPA index. By agreement with the sub-statements, the response denotes a positive disposition or positive attitude.

The first set of five statements consists of an employee’s expectations while the last set of five statements is in relation to an employee’s experiences. Each set of five statements consists of systems, operations and people processes which involve both co-workers and supervisors. The proposed WPA Index ratio is done by taking the total Likert values for the experiences and dividing this value by the total Likert values for the expectations.

In most organizations, systems (information and its distribution) are critical to its success. Therefore, forming attitudes about systems becomes important to the organization.

Attitude survey questions can become so complex, contextual, and are highly multi-faceted. Thus, they have to be approached from a number of different directions using several statements/questions. Generally, the experts in attitude survey formation have agreed on at least five statements/questions to capture the item attitude. The workplace attitude index uses five statements for each of the important three business processes.

An example of five statements that capture the expectations within systems are:

“Ideally, in my job I would expect to receive…”

With the modification below, repeat these five statements that capture the experiences within systems. “

In my job I receive…”

Then we create a WPA index ratio using the Likert values (total or average values from the experience component as the numerator of the ratio and the total or average values from the expectations component as the denominator of the ratio).

The table represents one possible way to interpret the WPA index. If a project based on important management criteria is being considered, the WPA index may be used to guide management’s actions. The manager would take the WPA index for a group of workers (unit, department, subsidiary, or company) and determine the readiness of the workers in undertaking a new task or accepting a change.

The task may not be just a project; it may be a major organizational structural change. It would be rare that the WPA index would exceed a value of 1 in a group situation. However, it may be possible. If the WPA Index exceeds “1,” the group will still be deemed to be ready for the task or change.

Further, it means that the experiences have exceeded the expectations, and therefore, the group has a positive disposition towards the workplace environment composed of systems, operation, and people. One could say that the expectations were too low and management may need to reframe the expectations by setting higher goals or objectives. The index’s scaling will have to be refined after further study and field testing.

Summary

The question, “How does one arrive at the WPA index ratio from the data gathered?” needs to be attended to in more detail. The answer may lie in taking the average values for the experiences and dividing this value by the average values for the expectations. Another method that can provide the same results is calculating the ratio for each of the three business processes using and adding their respective values to arrive at the overall WPA Index ratio.

In order to calculate the WPA Index, the experiences and expectations from systems, operations, and people processes need to be calculated individually to form the ratio between experiences and expectations that creates the index. Measuring and knowing the workers’ attitude or predispositions will give a business practitioner the added information to increase his/her emotional intelligence when dealing with people’s behavior.

With the WPA Index, a business practitioner will be able to manage the expectations and deliver the experiences in the workplace. Managing the expectations means management is making sure that expectations are realistic, worthwhile, and attainable. Delivering the experiences means management is making sure that both the working environment and management improve upon or deliver the expected experiences once the expectations have proven to be realistic.

The WPA Index aims to improve workplace environments by checking the level and degree of change in the index, reframing the expectations, and delivering on the expected experiences. These expectations and experiences may be unique for the individual business or industry, but the workplace attitude index provides the business practitioner with a generic tool from which to start.


[1] D.H. Masiter. “Employee Attitudes Affect a Company’s Financial Success,” Employment Relations Today 28, no. 3, (2001): 17-33.

[2] P.M. Senge. The Fifth Discipline, the Art and Practice of the Learning Organization, (New York: Doubleday/Currency, 1990). G. Hofstede. Cultural Consequences 2nd ed. (London: Sage Publications, 2001).

[3] M. Fishbein. Readings in Attitude Theory and Measurement, (New York: John Wiley & Sons, Inc., 1967).

[4] A.N. Oppenheim. Questionnaire Design, Interviewing and Attitude Measurement rev. ed., (London: Wellington House, 1999): 174.

[5] J.T. Cacioppo, W.L. Gardner and G.G. Bernston. “The Affect System Has Parallel and Integrative Processing Components: Form Follows Function,” Journal of Personality and Social Psychology, 76, no.5 (1999): 839-855.

[6] R.W. Scholl. Attitudes and Attitude Changes, University of Rhode Island, (2002/01), http://www.uri.edu/research/lrc/scholl/Notes/Attitudes.htm

[7] B.E. Hermalin, A.M. Isen. “The effect of affect on economic and strategic decision making,” Unpublished manuscript, University of California at Berkeley.

[8] Cacioppo, Gardner, Bernston, (1999): 2.

[9] Ibid.

[10] D. Heise. “Affect Control Theory’s Mathematical Model, With a List of Testable
Hypotheses, A Working Paper for ACT Researchers,”
Indiana University, (1992). University.http://www.indiana.edu/~socpsy/ACT/math/eq_1.html. Hermalin, Isen. “The Effect of Affect…”. J.H. Mellers, A. Schwartz, I. Ritov. “Emotion Based Choice,” Journal of Experimental Psychology: General, 128, no. 3 (1999): 332-345. R.B. Zajonc. The Selected Works of R.B. Zajonc, (Hoboken, NJ: Wiley, 2004).

[11] Senge, (1990).

2014 Volume 17 Issue 1

2013 Volume 16 Issue 3

2013 Volume 16 Issue 2

2013 Volume 16 Issue 1

2012 Volume 15 Issue 3

2012 Volume 15 Issue 2

2012 Volume 15 Issue 1

2011 Volume 14 Issue 4

2011 Volume 14 Issue 3

2011 Volume 14 Issue 2

2011 Volume 14 Issue 1

2010 Volume 13 Issue 4

2010 Volume 13 Issue 3

2010 Volume 13 Issue 2

2010 Volume 13 Issue 1

2009 Volume 12 Issue 4

2009 Volume 12 Issue 3

2009 Volume 12 Issue 2

2009 Volume 12 Issue 1

2008 Volume 11 Issue 4

2008 Volume 11 Issue 3

2008 Volume 11 Issue 2

2008 Volume 11 Issue 1

2007 Volume 10 Issue 4

2007 Volume 10 Issue 3

2007 Volume 10 Issue 2

2007 Volume 10 Issue 1

2006 Volume 9 Issue 4

2006 Volume 9 Issue 3

2006 Volume 9 Issue 2

2006 Volume 9 Issue 1

2005 Volume 8 Issue 4

2005 Volume 8 Issue 3

2005 Volume 8 Issue 2

2005 Volume 8 Issue 1

2004 Volume 7 Issue 3

2004 Volume 7 Issue 2

2004 Volume 7 Issue 1

2003 Volume 6 Issue 4

2003 Volume 6 Issue 3

2003 Volume 6 Issue 2

2003 Volume 6 Issue 1

2002 Volume 5 Issue 4

2002 Volume 5 Issue 3

2002 Volume 5 Issue 2

2002 Volume 5 Issue 1

2001 Volume 4 Issue 4

2001 Volume 4 Issue 3

2001 Volume 4 Issue 2

2001 Volume 4 Issue 1

2000 Volume 3 Issue 4

2000 Volume 3 Issue 3

2000 Volume 3 Issue 2

2000 Volume 3 Issue 1

1999 Volume 2 Issue 4

1999 Volume 2 Issue 3

1999 Volume 2 Issue 2

1999 Volume 2 Issue 1

1998 Volume 1 Issue 3

1998 Volume 1 Issue 2

1998 Volume 1 Issue 1