Describe what you consider to be 'the secrets of success 'for Jill Ezard, the HR Director, since she began working at PACE.
Ans 1) As per the case study, I consider 'the secrets of success' for Jill Ezard, the HR Director, since she began working at PACE, are:
The very first secret of her success was her intution which told her that the company was an apparently aiming firm and as per her it ment that there was a huge opportunity to do something exciting. This shows her confident level in order to handle things, and she has that surity in her statement which reflects that she has experienced this kind of situation before, and has been successful towards her approach. Along with that she admires the capabilities of the employees and believes that they are very talented. Ezard also keeps the track of the customers and is aware that the orders were still being placed. She was also attracted to Gaydon's (Sales & Marketing Director) enthusiasm for change and strong focus on people and people issues.
She noticed that behind the poor financial performance of the company, there was a demolarised team of workers who were struggling because of the over-complex management structure. There were clashes in opinion between sales and engineering departments. The channel of communication amongst the management and various departments was very poor. The workforce had no direction and the innovative culture had fallen by the wayside. The company needed strong leadership so that it can grow in a right direction. To achieve her goal a complete overhaul and restructure was required. The first issue that was to be handled was customer focus. Ezard believes that customers should be at the heart of the business and they should use that phrase. She knew to do that there will be lots of changes in the layers of the management hierarchy.
Combining sales and engineering in the same team was a symbolic move. And it turned out to be incredibly successful. She passed on a message to the workforce that "Work together or you won't deliver". While some structures were dismantled and reformed, one relationship was protected abd strengthened: the one between the employee partnership groups, the elected staff body, and the senior executive team. She made them feel that they were valuable for the company, which in turn motivated the employees to work more hard.
Her next step was to give the organisation an identity, employees could relate to. Employees were given decision making power and gice their view points whenever required. Due to which there were new ideas to do things differently. And senior executive team was also included in it to support other teams. Cultural change was also introduced at PACE. There were sets of behavious & values.The behaviours were: customer focus, leadership, communication, teamwork, driving for results and personal responsibility.The values were: passion, integrity, accountability and innovation and appreciation.
She knew that employees have never been rewarded from past five years of their experience with PACE, hence she made sure that all these values and behavious were implemented and the workforce was rewarded and encouraged in the form of incentives and bonuses. Which were performance and behaviour based. Along with that she wanted all the conversation around behaviour and performance to be recorded, be it in any form. And not just workforce all these matrics were also applied for senior executive team. Even they were similarly reviewed and rewarded.
Her dedication and hardwork is indeed appreciable and PACE is continually being reinvigorated to ensure it continues to deliver. She is ready to face the competitors as she believes that "We never accept that we've arrived. We're always on a journey somewhere and we've really just kicked off that journey again." (Case Study and self analysis)
Rewards: incentives, bonus
Drivers of Performance
Consistency & pace
At the end of the case study Ezard speaks about a mantra of 'success breeds failure'. Imagine that you are a consultant advising her on how to avoid failure. What can the HRM function do in the future to help the business achieve its goals in terms of managing human capital, and the structure and activities of HR.
Ans-2) When Ezard says 'success breeds failure' its means that after an organisation reaches its peak point there is a possibilty that it may decline. In order to secure that position there are several things which an HR manager needs to keep in his mind. These can be company policies, strategies, clients, customers etc. however most important amongst these things, are the employees. The greatest challenges opportunities and frustration that employers experience are often related to managing employees. One of them is the mistaken belief that people are alike and that they can be managed or treated all the same. However this is not true each one is unique. Human resource management recognise the difference between people and works with these differences effectively.
There are three phases to avoid failure:
PHASE 1: Starting employment relationship
It begins the moment employer sets out to find an employ someone. This phase involves human resource planning and HR procurement, which is recruiting possible employees selecting the best ones, and inducting or settling this person into the job.
PHASE 2: Maintaining the employment relationship
It is the most difficult and complex HRM functions. It includes training and development, Remuneration and performance management, maintaining employee well being, healthy labour relations, keep employees productive.
PHASE 3: Ending the employee relationship
It means when an employee leaves the organisation he/she is still satisfied with that company. Irrespective of the reason why the employee left the organisation, He/ she will always have a good image of the company and will always be well wisher of the company.
Ekerman, G (2006, pp.23-58)
An organisation can use these steps for future in order to achieve its goals:
â€¢ The inclusion of HCM in the development of business strategy and objective setting
â€¢ Consideration of areas such as: diversity, training and development, equal opportunities and positive leadership
â€¢ Employee health and safety, and well-being and absenteeism
â€¢ Attraction and retention of the workforce, and turnover rates
(CIPD, reading material, module list)
"Human Capital, as per OECD, 1996, is like knowledge that individuals acquire during their life and use to produce goods and services or ideas in market or non-market situation".
Stewart, 1997 said, it is the capabilities of individuals, team and communities of practice as they are applied and leveraged by the organisation. Scarborough, H. And Elias, J. (2002, pp.40-125)
Professor Harry Scarborough and Juanita Elias, reporting on human capital for the Chartered Institute of Personnel and Development in 2002, noted that the most useful contribution of human capital to date is in defining the link between HR and business strategy. Indeed, a human capital approach implies that a realistic business strategy must be informed by human capital data. Scarborough, H. And Elias, J. (2002, pp.40-125)
In 2003 the Accounting for People Task Force concluded that:
'â€¦greater transparency on how value is created through effective people policies and practices will benefit organisations and their stakeholders. HCM reporting is highly relevant to institutional investors who manage investments on behalf of beneficiaries: the concept of 'responsible ownership' certainly suggests that investors should take a greater interest in the sustainability of the organisations they help to fund.' (CIPD, reading material, module list)
'In order to manage human capital on a long term basis, it is very important to invest initially on it. The time can be utilised in improving employee's skills and knowledge, and in similar manner the quality of human effort cab be greatly improved and its productivity can be enhanced. Along with this HRM function can provide on job trainings to the employees, so that they can be specialised in their work, which in turn will be beneficial for the company along with the workers. Even, if they choose to join another organisation in future.' Schultz, T.W. (1971, p.25)
Human capital can also be consider as a team investment, this is because most of the time workers are asked to work in a team and hence their performance is also judged as per team's performance. In order to make the team perform it is essential to a make all team members learn to equally and grow at the same pace. (Williamson (1985)). Hart, R.A and Moutos, T. (1995, p.4)
The management of human capital is obviously linked to the development of reporting and measuring systems for human capital. Without these information flows, and the wider accountabilities they generate, managers would be unable to take human capital factors into account when making decisions.
As Mayo puts it, "managers are conditioned to working with numbers and nothing has a greater impact". However, the impact of such systems on management cannot be discussed simply in terms of the 'single loop learning' that increases the efficiency of existing decision-making processes. The more important effect of such flows of knowledge and understanding within organisations- double loop learning, as it were (Argyris, 1977). Thus, in discussing the management of human capital, we need to address the potentially profound implications on management practice. Scarborough, H. and Elias, J. (2002, pp. 40-125)
The development of a human capital perspective on the organisation would clearly have important benefits for management decision-making. Such a perspective could help to:
Guide the management of the most talented or knowledge-intensive work groups
Balance short-term or cost-driven tendencies in management with recognition of the long-term benefits of training and development
Increase the firm's capacity to innovate.
Facilitate the acquisition of key skills such as leadership by enabling the firm to better compete for, develop and retain talented individuals
Aid the development of mergers or corporate restructuring by enabling the systematic identification of people with the key skills to run the new organisation
Avoid the loss of key people. Scarborough, H. And Elias, J. (2002, pp.40-125)
It has been suggested that human capital theory is an economic tool 'will allow managers to make a variety of better reasoned personnel decisions' (Lazear, 1998: 133).
Zwell and Ressler (2000) suggested that systems of human capital measurement are the key to creating a strategic plan for HR, one that aligns people management policies and practices with an organisation's strategic goals.
Becker et al emphasise that 'for HR to create value, a firm needs to structure each element of its HR system in a way that relentlessly emphasis, supports, and reinforces a high performance workforce' (Becker et al, 2001: 13).
TO MAINTAIN THE STRUCTURE OF THE ORGANISATION:
Organisational structure can be considered as the building block required facilitating integration at the job, team, departmental and organisational levels. The correct choice of structure can make high quality a true organisational reality; an appropriate organisational structure can make it difficult to achieve high quality. There are a number of ways in which an organisation may be structure. (Pugh et al., 1968. Child, 1984, 2005)
Pugh et al., 1968. constructed a series of scales to measure the dimensions in a range of organisation in different industries and services.
The extent to which work is structured through the adoption of specialisation, standardisation and formalisation. The nature of work in an organisation that scored highly in relation to these would be highly structured and regulated through the extensive use of specialised rolls and high levels of standardisations and formalisation.
The extent to which the authority is concentrated in an organisation. A structure may be associated with centralised decision-making and low levels of autonomy elsewhere in the organisation; conversely, this may vary along a continuum where organisational structure encourages decentralised decision-making and greater level of autonomy.
Line management exercise control over work rather than this being exercised through impersonal form of control such as operating processors this dimension can be evident in organisations in which team working is highly important and the key product or services of the organisations are. Predominantly developed within the boundaries of this team or department.
The relative size of the work force in an organisation's structure engaged in support roles, as opposed to those that contribute directly to the goals of the organisation.
Child's (1984) summarised the dimensions of the organisational structures. His major dimensions are:
The way in which work is allocated to individuals in an organisation. This relates to specialisation standardisation and formalisation
The way in which reporting relationship are determined this relate to configuration, including the number of levels of an organisational level hierarchy and resulting spans of control.
The way in which the work is grouped together in section or department, then how these are grouped together in larger operating units and divisions, and finally how these are grouped in the organisation this also relates to configurations.
The way in which the organisational system are incorporated to integrate efforts, insure effective communication and information sharing, and promote necessary participation.
The way in which the organisation system to motivate employees, through a praising performances and structuring rewards rather than alienating them.
Millmore, M et al., (2007 pp45-200)
Gross Profit Margin = Gross Profit x 100
Gross Profit = Sales - Cost Of Sales = 12542-10255 = 2287
Revenue = 12542
= 2287 x 100
Net Profit Margin = Net Profit x 100
Turn Over (sales)
= 682 x 100
= 5.44 %
ROCE ( Return on Capital Employed)
= Net Profit before Tax/ Interest & Dividends x 100
Net Profit before Tax/ Interest & Dividends = Net Profit after interest Tax - (Tax = Interest on loans)
= 1107 x 100
=1107 x 100
= 5.89 %
Current Ratio = Current Assets
= 1.94 %
Acid Test = Current Assets - Inventory
= 1.57 %
Inventory Turnover = Cost of Sale
Avg. Stock Value
=30.16 (30 Days)
Receivables Collection = Debtors x 365
Debtors = 437; Sales = 12255
= 437 x 365
= 12.71 (13 Days)
Gearing Ratio = Long Term Loans x 100
=1750 x 100
= 11 %
Payable Payment = Creditor + Accruals x 365
Cost of Sales + Other Purchases
= 950 x 365
= 33.8 %
Operating Profit Margin = Operating Profit x 100
= 1107 x 100
HR Director would use some of the ratios from above, however not all of them. These are gross profit, net profit, ROCE, current ratio, inventories turnover, receivables collection, payables payment, gearing and operating profit margin ratio. HR will also consider operating cost of the company.
Let's compare few of the ratios in order to identify Strengths and Weaknesses of the company's financial health.
GROSS PROFIT MARGIN RATIO
The higher the better it is. It enables the firm to assess the impact of its sales and how much it cost to generate (produce) those sales. A gross profit margin of 45% means that for every £1 of sales, the firm makes 45p in gross profit. Over here when we see industry average ratio, it is given as 18.4% in 2006, however in case of PACE it is 18.23% which means it was less as compare to its industry and the company needs to start worrying about its sales and outstanding debts, so that this can increase. (Lecture Slides)
NET PROFIT MARGIN RATIO
The higher the better it is. Net profit takes into account the fixed costs involved in production - the overheads. Keeping control over fixed costs is important - could be easy to overlook for example the amount of waste - paper, stationery, lighting, heating, water, etc. In the case of PACE we see the net profit which calculated for 2006 comes upto 5.44% however the net profit ratio for industry average ration was 9.6% in that year. This was an alarm for the organisation as it was too low for them to access their performance or company's stability. And if the situation persists then HR Director knows that it's the time for liquidation, if no further measures are taken to improve the losses. (Lecture Slides)
ROCE (RETURN ON CAPITAL EMPLOYED)
The numerator is operating profit as this shows the profit before the interest payments and tax are paid. There are different interpretations of what capital employed means but we going to use (Capital employed = long-term lenders + shareholders). The higher the better it is. Shows how effective the firm is in using its capital to generate profit. A ROCE of 25% means that it uses every £1 of capital to generate 25p in profit. Partly a measure of efficiency in organisation and use of capital. With PACE when we calculated this ratio, we found that it was too low i.e., only 5.89% as compare to the industry average ratio for 2006, which was, 10.1%. (Lecture Slides)
Since current ratio = current assets: current liaabilities. Hence, the ideal level of this ratio is 1.5: 1. If a ratio is 5: 1 then it would mean that the firm has £5 of assets to cover every £1 in liabilities. A ratio of 0.75: 1 would suggest the firm has only 75p in assets available to cover every £1 it owes. Too high - Might suggest that too much of its assets are tied up in unproductive activities, e.g.-too much stock which is not being used. And if it is too low then it means that there is a risk of not being able to pay your way. In our scenirio industry average ratio was 1.63 and for PACE it came up to 1.94. this shows that liabilities aren't much as per the assets, which is a good sign but needs to clear out all the debts so that the company can earn some profit. Along with adapting necessary measures at the management level. (Lecture Slides)
Stock turnover = Cost of goods sold / stock expressed as times per year. The rate at which a company's stock is turned over. An increase in stock turnover might mean increase in efficiency. However it depends on the type of business - supermarkets might have high stock turnover ratios whereas a shop selling high value musical instruments might have low stock turnover ratio. Low stock turnover could mean poor customer satisfaction if people are not buying the goods and high turnover would mean customer satisfaction and people are buying the products. In PACE in 2006, inventory turnover was of 30 days; on the other hand industry average was only 9 days. This shows that customers were not at all conviced to place orders. There were orders placed however at a very slow speed. This was not a healthy sign for the company in a long run. (Lecture Slides)
Shorter it is the better it is. Gives a measure of how long it takes the business to recover debts. Can be skewed by the degree of credit facility a firm offers. It is the number of days a firm might take to collect debt from its debtors. The lower it is, better it is. If it's high then it would mean company will need more time to pay what it owes to others. This will impact the organisation, in terms of profit, stability, growth etc. With PACE when we calculated we that the number of days which it will take are 13 days and industry average is 14 days, which is a good sign as it is less than the industry average. Which will be beneficial as the company grows internally or externally. (Lecture Slides)
Shorter it is the better it is. Gives a measure of how long it takes the business to pay to the market. It is the number of days a company would need to pay money it owes to others. If it is less then it would mean that the company has enough capital to get rid of its debts. And if it is more then it would mean that the company doesn't have much capital. In our scenario industry average is 37 days and with PACE it came up to 34 days approximately which is again a positive sign for the firm. Even after not generating much profit, company has the ability to pay off its debts. (Lecture Slides)
With this comparison we came up with few strengths and weaknesses:
Company has more stability in the market, as it can pay its debtors in less time and can get its money back in less time from the market.
Not much strength but there was few weaknesses that were hampering the company as a whole. PACE did not have enough inventory turnovers; it was too high which was one of the main reasons why the company was not earning much profit. Since the return on capital employed was too low, it became obvious that gross profit and net profit will also be low. And the company was in a bad shape. (Own Analysis)
There are few pitfalls involved in ratio analysis such as:
A single ratio rarely tells enough to make a sound judgment- it means that just by calculating any one ratio, like operating cost margin; one cannot determine the exact situation. It should be supported by evidence and the picture needs to be clearer at a large scale. Only then any decision can be made.
Financial statements used in ratio analysis must be from similar points in time- financial statement when used is old not current, or sometimes there are few transactions that will be added later however by then data will be released and there will be no point of that information after everything is calculated.
Audited financial statements are more reliable than unaudited statements- it means oce the financial statement is reviewed it becomes a very important piece of information as all the aspects of the company are analysed. And most of the time financial statement is not reviewed before making decisions. Or before coming up with a set of information that is critical for the firm.
The financial data used to compute ratios must be developed in the same manner- whatever date is being used in order to calculate ratios should be generated in the similar way otherwise the result varies to each other, hence the company doesn't gets the right picture of its profit and loss. Whatever result is there the company remains in a myth and the process keeps following years after years.
Inflation can distort comparisons- when calculations are not accurate, it may result in confusion. Hence the company gets weak financially and there are chances of heavy losses.
Financial accounts are usually prepared using the historic cost concept, ie they traditionally show the cost of an asset when first purchased- however the cost of the asset keep appreciating or depriciating. And the data after calculation is inaccurate to judge future.
Financial accounts relate to a period which has already ended, but most users of accounts - including loan creditors - are far more concerned with the future prospects of the business.
Financial accounts incorporate only those transactions resulting from monetary transactions. Other strengths and weaknesses, such as customer goodwill, human resources, new product developments, etc which could have a dramatic effect on future earnings potential, remain largely undisclosed. (Lecture Slides)
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OECD (1996). Measuring what people know: human capital accounting for the knowledge economy. Paris: OECD.
Scarborough, H. and Elias, J., Evaluating Human Capital, CIPD, 2002.
Zwell, M. and Ressler, R. (2000). Powering the human drivers of financial performance. Strategic Finance, 81, 40-45.