Class 7 - Dealing with Change, Vertical Integration


Dealing With Change


The following are some of the principle causes of change in our work environment:

·        WORKLOAD - Today's economic considerations force us to learn to manage increases or decreases with equal dexterity, often with the same amount of staff and resources.

·        POLITICAL - Different administrations inevitably establish different

·        ENVIRONMENT - The priorities, goals and methods used to accomplish them.

·        CHANGES IN MANAGEMENT - As leadership and guidance changes from the top down, individual focus and differing approaches toward fulfilling the mission impact the work force.

·        RESOURCES - Budgetary fluctuations that can be triggered overnight by world events can cause unexpected increases and decreases in funding. Manning is a significant component of resources, and as we move toward the year 2000, significant downsizing of the work force is predicted. This will present a different set of problems that must also be resolved.

·        TECHNOLOGICAL - The accelerated pace of the rate of change in technology is a staggering fact of life. What appears to be current or "state of the art" today becomes obsolete tomorrow.

Types of Change for Discussion:


·        Personal and Organizational Change

·        Capacity and Workload Change

·        Technological Change


Personal and Organizational Change:


(The following is excerpted from the article in “Dealing With Change: Help your entire organization embrace change by considering these key questions.” August 02, 2004 By David G. Javitch)


Many employees report that when management wants a change in policies, people, processes, structure and so on, they offer inspirational sayings such as, "Change is a challenge to us to use our untapped skills" or "It's an opportunity for us/you" or "Change can be energizing." But for whom? Ironically, many employees do not see change as simple or as uplifting as management does.

But you can minimize or avoid potentially negative aspects of change by following the "seven P approach" that includes purpose, people, plan, process, product, perception and problem.

1. Purpose: Ask yourself and others the most important question of all: Is there a need for a change? If the answer is no, then your most crucial task is either to persuade people of the need or to create a need. Otherwise, without a recognized need for change, the entire change process is doomed to failure. Next, as a change agent, you need to ask yourself these questions: Exactly why am I encouraging this change? Who will benefit from it, and who will not? Is the change worth it?

2. People: Look at the people on your team and those who will be affected by the change. Are they committed, and do they have the needed skills to participate in the change process? Are they willing to take risks? Will they support you through the easy times as well as the difficult times? Do they need to see some progress before joining the team or agreeing to engage in the change process?

3. Plan: Do you have a solid, working, practical plan? Is it rational and well thought out? How sure are you that it will succeed? Is it flexible enough to adapt to unforeseen changes or obstacles? Is the plan motivating, uplifting and visionary enough to attract followers and helpers? Have you built in buffers or backups of resources that you might need should unexpected obstacles arise? Are your time frames realistic?

4. Process: What processes have you and others created to ensure the success of the change? Will you start the change with a small unit or group, or will you foolishly begin the change with the entire division, section or organization? What mechanisms are in place to deal with obstacles, especially those you do not anticipate? How are decisions made? Will you allow for dissent or be caught in the sinking process of groupthink, where dissension is not tolerated or voiced? How and by whom will communication within the change team be communicated internally and externally? And finally, but very crucially, how will you deal with conflict before it inevitably arises?

5. Product: Exactly what is it that you and others are working so hard to achieve? How realistic is it that you and your team can achieve this product? What is the cost of this product in terms of time, people, money and equipment? Beyond the vision of creating your product, what will it look like? How will it be used? If your end product is a service, how will it be carried out? How will you know if you have been successful?

6. Perception: How do others perceive you, your colleagues, the change process and the end product? You may believe that everything is moving along smoothly, that all or most of the people understand and accept the change and its implication, but those are your perceptions. Have you verified your reality with the reality of your colleagues and the other people involved in the change? Do other people perceive that you are an effective change agent, that the change will actually benefit them and that they can trust you with this process?

7. Problem: How will you deal with problems that inevitably occur? Do you have a crisis plan in place? Are your team members able to identify potential problems or obstacles before they get out of hand? Do your people know what to do when a problem occurs in terms of how to cope with it, whom to contact, what procedures to follow and how to prevent it from recurring? What will you do if you run out of resources or if the time frame shortens?

When considering any type of change, try to recall these important factors before you even think of moving forward. Remember, a job not worth doing is not worth doing well!

Capacity and Workload Change:


Short Term - (Modulation) Used to accommodate anticipated/ unanticipated changes in capacity demand having a finite and predictable duration, or to bridge the gap until more permanent (long term) capacity changes can be implemented.  Characteristics include: 


·        Response time is a matter of weeks

·        Limited capital investment

·        Plant level, relatively informal decision to implement


Some short-term measures include:


·        Overtime

·        Extra shifts or partial shifts

·        Level production over time to build up finished goods inventory

·        Become more efficient

·        Product redesign

·        Outsource (subcontract part of all of component or product line)

·        Cause consumer to contribute labor to production of finished product, i.e. assembly, calibration, etc.


Long Term - Permanent capacity change to accommodate long range planning relative to capacity requirements.  Characteristics include:


·        Long range planning necessary (2 - 10 years out)

·        Top management decision

·        Capital intensive "Brick and mortar" type effort


Some long-term measures include:


·        Replacement of existing capital equipment

·        On-site expansion of existing facility

·        Establishment of a new branch

·        Relocation to a larger facility


Considerations for long-term expansion include:


·        Size of required capacity change

·        Timing

·        Location, i.e.-

o       Transportation

o       Labor pool

o       Natural resources

o       Taxes

o       Wages and local economic conditions

o       Location to markets

o       Location to suppliers

o       Construction and land prices

o       Available of leasable property and facilities

o       Government incentives offered (tax breaks, training, land grants, etc.)



·        State of the art vs. state of existing facilities (add vs. replace existing)

·        Financial position of the firm

·        Business outlook for the future


[Relate examples and discuss why]


  Service Industry Capacity:


Characteristics of Service -


·        Provided on demand, consumed on delivery

·        Customer - Provider Interaction

·        No Inventories


Demand can be adjusted by -


·        Modification of pricing policies

·        Expansion of Services


Demand can be accommodated by -


·        Process improvements

·        Increased allocation of essential resources

·        Training

·        Customer involvement


Technological Change:


Define Product vs. Process Innovation –


Product Innovation pertains to those features incorporated into a product (or service) that reflect innovation due to the use of emerging technology and “state-of-art” functionality.


Process Innovation pertains to the nature of the manufacturing (or service delivery) process itself and how innovation exists within that process.


Radical vs. Incremental Change (i.e. drastic vs. gradual - Driven by pace of technology of either Product or Process).  Radical change would include a “start from scratch” approach to incorporation of technology.  Incremental change employs a measured approach to implementing changes as the need to do so becomes apparent over a period of time.


Product Development Cycle:


As process matures, improvements (changes) are noted in -


·        Learning curve (worker learning of job)

·        Design

·        Process methods/improvements

·        Management and Organization

·        Use of materials


Understand the concept of  "preemptive pricing" -


Upon introduction of new product:


·        Established prices are low

·        Initial profit margins are based upon the expectation - that volume production, learning curve, will enable margin to increase via lower production costs over time

·        Preferable for large company with significant capital resources


Evaluation and Implementation of New Technology:


Manager must understand total costs of technology vs. return on investment and Look for a clear payback in terms of profit, quality, customer service, efficiency, etc.


Understand exactly what new technology will accomplish in terms of quality, efficiency, enhanced production, marketing opportunities


What effects will technology have upon existing functions of - 


·        Labor, union impacts, and skills requirements

·        Plant maintenance

·        Quality of the product/service

·        Materials requirements

·        Management

·        Customers

·        Other?


Know certainties involved -


·        Cost

·        Potential return

·        Implementation demands (both tangible - resources and  intangible - psychological, social, morale)


When change is being considered, examine how it will fit into the existing goals of the firm and how committed management will be to ensure its successful implementation


Innovate only when a clear present or future return can be identified or reasonably anticipated


Consider workers attitudes, consumers, government concerns


Appoint a change agent to act as a catalyst and be the change advocate or honest broker of change


Exercise:  Identify a significant change in your organization or elsewhere in your work life and discuss your impression as to how this change was implemented.  Consider both pros and cons.


Vertical Integration (VI)


Define Vertical Integration:  A characteristic of some firms in some industries whereby the firms attempt to own and control activities which are both "upstream" and "downstream" from their core businesses. A good example is the petroleum industry, in which multinational petroleum firms tend to own oil production facilities, refineries, and retail outlets for refinery products -- the entire chain of activities from production to commercialization.


Factors in the VI decision


Should a company vertically integrate at all?


·        Potential benefits?

·        Potential pitfalls?


How far backward or forward should a company go?


How complete should backward or forward integration be?


Economic rent can be a determining factor in VI decisions. Economic rent is the difference between what a factor of production is earning (its return) and what it would need to be earning to keep it in its present use. It is in other words the amount a factor is earning over and above what it could be earning in its next best alternative use (its transfer earnings).


Economic rent = Market price minus cost to produce product or service (Can be positive or Negative)


High demand, scarce supply causes economic rent to be great (use value of a resource)


Resources will normally be put to the USE THAT brings about the highest economic rent, i.e. land for grazing vs. land for development


Some reasons to vertically integrate:


·        Obtain better control over -


·        Quality of raw materials or components, hence the end product

·        Delivery and certainty of supply continuity

·        Protect proprietary technology (preserve trade secrets)


Reduce costs by –


·        Eliminating the middle man

·        Integrating processes

·        Make better use of by products


Perils of Vertical Integration -


·        Potential for losses to be incurred from economically weak links in VI chain

·        Possible imbalance in capacities if partial VI is implemented in areas which are uneconomical, having low economic rents

·        VI pinches firm out of its technological league


It is critical to maintain the proper degree of backward - forward integration, consistent with the organization’s business model.


Some issues are -

·        Flexibility (to react to change)

·        Effect on the core company and its traditional niche

·        Increased exposure to market risk due to higher profile


It is important to understand and compare the attractions vs. perils of VI, understanding their relative benefits and weaknesses on the organization as an integrated system


Virtual Integration:  Virtual integration is similar to vertical integration in the sense that it attempts to link the components of an integrated system to operate as a single entity. The means with which this objective is reached, however, are quite different. Virtual integration emphasizes coordination through inter/intra organizational management agreements, service incentives and information systems, rather than investment in large numbers of facilities and people. The virtually integrated system seeks to link the core competencies of individual organizations through cost-sharing and risk-sharing agreements so that these organizations can act as a larger, single entity. 


The biggest attraction of virtual integration is that organizations can integrate services without investing huge amounts of capital or completely altering their structures. These savings should allow the linked organizations to invest in the technology and training needed to improve the cost structure and quality of services of these organizations. Virtual integration also allows for the linked organizations to continue operating as separate entities, giving them opportunities to pursue business in other areas.


·        Complex Relationships evolving continuously

·        Focus on mission and/or support functions

·        Supply chain constantly being modulated to fit instant requirement

·        Lines of separation may blur (example: data center operations, human resources, staff training, printing, accounting, distribution) WITH FOCUS ON “SHARED” SERVICES

·        Virtual partner may provide products, services, or both



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