ACCA P3 Business Analysis - 2010 - Study text

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Chapter 16: Leadership and human resources management

seen as an investment, not a cost. Johnson, Scholes and Whittington have

commented: ‘Since the early 1990s, the resource-based view of strategy has become

highly influential.’

They also comment that entities should make full use of employees’ knowledge in

order to develop emergent strategies. ‘If employers can only see strategies in terms

of deliberate planning, they not only risk that such strategies go unrealised, but they

also waste the learning that can emerge from their employees.’

Leadership and the management and development of human resources affect all

aspects of business s strategy. The examiner for Business Strategy has commented:

‘People issues will be inevitable in most questions set in this examination.

Candidates must remember to explore … this perspective.’

Human Resource Development and change management

Business strategy development calls for change. The culture of an entity might resist

change, or there might be a culture of welcoming change in order to move the

business forward.

Change management was discussed in an earlier chapter. You should be aware of

the close link between the management and development of employees and other

human resources is related to the management of change.

1.2 A brief history of leadership theory

Leadership is an important management skill. It can be defined as an inter-personal

influence directed towards the achievements of a goal or objective. An effective

leader is someone who leads other people towards the achievement of a goal. An

effective manager is therefore a person who is able to lead other people towards the

successful achievement of the entity’s objectives. He or she gets other people to do

whatever helps the entity to achieve its objectives.

‘Other people’ are the individuals that the leader works with, including his or her

‘subordinates’ in an entity with a hierarchical authority structure. However, ‘other

people’ may also be members of a project team, individuals to whom work is

outsourced, and individuals in other parts of the entity.

Leadership theory is concerned with the qualities that make someone an effective

leader. There have been different views about leadership and the qualities of an

effective leader, especially for managing change and implementing business

strategies. ‘Whoever is in the position of managing change needs to consider the

style of management they adopt’ (Johnson, Scholes and Whittington).

There are several theories about what makes a good leader:

 Trait theory

 Style based theory

 Contingency based theory

 Activity based theory

 Strategic visionary leadership.

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Trait theory

Trait theory assumes that there are certain qualities or traits in an individual that

makes him (or her) a ‘born leader’. Leaders are born, not made. The theory takes the

view that if a person possesses the traits required for leadership, he or she will be

able to provide effective leadership in any type of situation.

The traits required for good leadership might be physical, intellectual or personal

qualities. They might include physical vitality, skill in dealing with people, an eager

ness to accept responsibility, an ability to motivate people, courage and resolution, a

need for achievement, decisiveness, self-confidence, trustworthiness, assertiveness

and an ability to adapt and show flexibility.

The list of traits can be very long. A problem with trait theory is that not many

individuals show all the traits of effective leadership, so how many are needed to be

effective? It is also recognised that some leadership traits are more relevant in some

situations than in others.

Trait theory is therefore of only limited value in identifying what is needed to

provide effective business leadership.

Style theory (behavioural theory)

Style theory or behavioural theory is based on an analysis of how leaders behave

rather than the traits or qualities they possess. It is suggested that the effectiveness

of a leader depends on the style of leadership and how the leader behaves,

especially towards subordinates or team members. It is the style of management

that matters.

Early theorists who put forward a behavioural theory of leadership identified some

or all of the following styles:

 Concern for the task. These leaders focus on the achievement of specific

objectives. They concentrate on the successful achievement of goals, and

organising people to achieve a high level of productivity.

 Concern for people. These leaders treat their subordinates or team members as

people, show concern for their interests and problems and try to develop them

in the work that they do. People are not simply units of resource that are paid to

achieve a business purpose. By showing concern for people, it should be possible

to develop them into more effective and efficient workers.

 Directive leadership. This style of leadership is based on telling people what to

do and making decisions for other people to act on. Subordinates or team

members are expected to do what they are told.

 Participative leadership. These leaders try to encourage participation in

decision-making by subordinates or team members. The view is that by

involving others on decision-making, they will be motivated more effectively

and will therefore perform better in their work. Motivated individuals are much

more likely to work harder to achieve clear work objectives.

A leader might be autocratic or democratic, participative or bureaucratic, people-

orientated or task orientated. There is an appropriate style for each work situation.

Chapter 16: Leadership and human resources management

Behavioural theory suggests that leaders can be trained in the appropriate style to

use.

Situational theory (contingency theory)

Situational theory or contingency theory is a development from behavioural theory.

It considers the situation in which leadership is exercised. The theory is that the

most suitable form of leadership differs according to the situation. The most

effective form of leadership in one situation is not the most effective form in a

different situation.

Situational theory or contingency theory suggests that there is no single set of

characteristics that make a good leader. If a manager is in charge of people who

expect to be closely managed, then an autocratic style might be appropriate. With

other employees that style would not work and a more participative style would

need to be adopted.

For example, a leader may need to be more directive in situations where a quick

decision is needed and where people are used to being told what to do. (The armed

forces are an obvious example where such situations arise regularly.)

Hersey and Blanchard (1977) identified four different leadership styles, and

suggested that one style was more appropriate than the others for a given situation.

The four styles they identified were as follows.

 Telling. This style gives high emphasis to the task and getting the task done, and

gives low emphasis to relationships and people. This style is characterised by

giving directions to subordinates and defining the roles of subordinates and the

goals that the work group should achieve. This style might be appropriate for

dealing with new staff, or where the work must be completed quickly or

urgently, or where the work is manual or repetitive (and employee skills are not

so important).

 Selling. This style gives high emphasis to the task and getting the task done, and

also gives high emphasis to relationships and people. The leader gives most of

the directions, but also makes an attempt to get subordinates to ‘buy into’ the

task. The leader acts as a ‘coach’, similar to a sports coach. This style might be

appropriate where employees are motivated and willing to do well, but lack the

ability or maturity, and therefore need guidance from the leader.

 Participating. This style gives low emphasis to the task and getting the task

done, but gives high emphasis to relationships and people. The leadership style

is focused on facilitating and communicating. Subordinates are given a great

deal of encouragement, and use their abilities to get the work done. This style

might be appropriate when subordinates have the ability to get the work done,

but are insecure or unwilling.

 Delegating. This style gives low emphasis to the task and getting the task done,

and low emphasis to relationships and people. The leader identifies the problem

or objective, but the subordinates are given the responsibility for carrying out

their tasks so that the problem is resolved or the objective is achieved. This form

of leadership style is well-suited to employees with a high degree of

competence. They know what to do and have the motivation to do it.

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Critics of situational theory argue that not enough attention is given to cultural

differences, and how the culture of the work group also affects the most suitable

leadership style. Another criticism, which is also a criticism of trait theory, is that no

allowance is made for differences in the gender of leaders. Some theorists argue that

successful female leaders are often more caring and sensitive than successful male

leaders. The situation alone does not determine what leadership style is best.

Activity based leadership theories

These theories state that it is what a manager does that makes him (or her) a good

leader. Adair’s action-centred leadership theory suggests that a leader has to give

attention to task needs, individual needs and group needs. An effective leader is one

who can give appropriate attention to each of the three factors – which might be in

conflict.

1.3 Transactional and transformational leadership

Burns (1977) made a distinction between transactional and transformational

leadership.

 Transactional leaders ‘approach their followers with an eye to trading one thing

for another.’

 Transformational leaders seek to appeal to the better nature of their followers,

change them for the better and ‘move them toward higher and more universal

needs and purposes’. A transformational leader is an individual who seeks to

change people

The main differences between transactional and transformational leaders are set out

below.

Transactional leader Transformational leader

Recognises what an employee wants from work

and tries to ensure that the employee gets what

he wants provided that his performance justifies it.

Raises the level of awareness of an employee

about the significance of what the employee’s

work should be trying to achieve, and also

makes the employee more aware of ways of

how these achievements should be reached.

Exchanges rewards for the employee’s effort (and

performance).

Encourages the individual to put self-interest to

one side for the sake of the team and the entity

as a whole.

Responds to the employee’s immediate self-

interests, if this will ensure that the work gets

done.

The leader transforms the employee into

someone who wants more from work. The

employee is encouraged to move towards the

highest levels of the Maslow hierarchy of needs.

1.4 The leader as a strategic visionary

Some writers on management and leadership have argued that the traditional views

on effective leadership are not appropriate for ‘learning organisations’.

Chapter 16: Leadership and human resources management

A learning organisation is an entity in which individuals are continually learning

and finding new ways to help the entity achieve its objectives. Individuals in a

learning organisation are capable of innovative thinking. They are also able to see

the ‘bigger picture’ and understand what the entity is trying to achieve.

Their ability to innovate and change comes from their commitment to perform well

in their work and to continue learning.

Peter Senge (1990) has argued that leaders in a learning organisation are ‘strategic

visionaries’. They have a clear vision about what the entity is trying to achieve, and

they are able to convey their vision to the people that they work with. Leaders who

are strategic visionaries are able to get other people to ‘understand complexity,

clarify vision and improve shared mental models – that is, they are responsible for

learning.’

A leader with strategic vision:

 helps other people to understand the purpose of their work and gives them a

vision of what they are trying to achieve

 enables others to improve their learning continually so that they can deal

constructively with all the problems they face in their work

 encourages other people to share the vision, and work towards its achievement.

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Human resources management

 The importance ofhumanresourcemanagement

 The objectivesofhumanresourcestrategy

 Human resourceplanning

2 Human resources management

2.1 The importance of human resource management

Human resources are a key resource. The success of a business entity depends on

the skills and experience of its human resources. A critical success factor for a

business entity is to have sufficient human resources with the necessary skills. Top-

quality performance comes from recruiting the best people, using them effectively

and giving them an interest in their work performance. Operational and strategic

success therefore depends on:

 recruiting suitable employees and developing their skills and knowledge

 managing employees effectively, and

 motivating employees to perform well, and better.

The following diagram shows how five aspects of human resource management are

closely related:

 Recruitment and selection procedures should ensure that enough individuals are

employed by an entity and that these individuals have the actual or potential

skills and knowledge to perform well.

 The performance of employees in their work is monitored and measured

through performance appraisal.

 Performance appraisal should be used to assess what is required to improve the

individual’s performance, through training, new work experiences or other

forms of personal development.

 Performance appraisal might also be used as a basis for rewarding employees.

Rewarding good performance is seen as one way of motivating employees to

achieve planning targets or improve their work performance.

 Taken together, recruitment and selection, training and development and

reward systems should all result in better performance from the entity’s human

resources.

Employee development

Selection

Performance

Appraisal

Rewards

Chapter 16: Leadership and human resources management

This diagram is based on a model for human resources management that was

developed by Fombrun, Tichy and Devanna (1984).

Selection (staffing, recruitment)

Performance appraisal (appraisal of individual performance)

Personal development (development and training)

Rewards (pay and other benefits)

Organisational performance

2.2 The objectives of human resource strategy

A responsibility of the human resource management function is to:

 assess the quantity and quality of human resources currently available,

including numbers and skills

 estimate the quantity and quality of human resources that will be needed in the

future, including numbers and skills

 consider ways of ‘filling the gap’ and ensuring that the entity has the human

resources that it needs.

The objective of a human resources strategy is to ensure that the human resources

are available, as required. (In some cases, it might also be necessary to consider

reducing the numbers of employees whose skills are declining in importance,

through programmes of redundancy or re-training and re-location).

2.3 Human resource planning

A human resource plan consists of a forecast of the human resources that will be

required at a given time in the future, and plans for ensuring that the required

numbers and skills will be available. A plan will typically look forward about three

to five years. Beyond five years, it might be difficult to forecast requirements with

any accuracy or reliability.

There are four main stages in the planning process:

 Studying the corporate objectives of the entity and the strategic objectives of

each division and department. This analysis should then be used to estimate the

likely total size and organisation structure of the entity. Total human resource

numbers should be consistent with the corporate and divisional strategies.

 Demand forecasting. The required numbers and skills of human resources

should be estimated. Estimates of requirements should allow for any expected

changes in technology, including the introduction of labour-saving equipment.

 Assessing current resources. An assessment should be made of the current

human resources, and what might happen to these existing resources each year

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over the forecast period. The assessment should allow for expected ‘wastage

rates’ or labour turnover rates. For some employees, such as trainee accountants,

the estimate might allow for the expected numbers who will pass their

professional examinations and obtain a professional qualification during the

period.

 Preparing policies and plans. The final stage in the planning cycle is to develop

policies and plans to fill the gap between the required numbers and current

forecasts of future human resources.

These plans will include plans for:

 recruitment of new staff

 training and development to improve skills

 performance appraisal, to monitor and control the development of skills

 promotion

 redundancies, where some employees will be surplus to requirements, or re-

training.

The plans should be realistic, and should therefore take into consideration

environmental factors such as:

 changes in population trends, and the total size of the work force in each country

where the entity has its operations

 changes in government policy, such as changes in the retirement age of workers

 changes in the educational system, and the numbers of students going from

school into further education

 the availability of individuals who are trained in a particular skill or vocation

 changing patterns of employment, possibly with increasing numbers of part-

time workers or home workers

 competition for human resources from competitors and other businesses

 trends in sub-contracting and outsourcing

 trends in IT and other technological changes that might affect labour

requirements.

Example

A basic requirement of a human resources plan is to estimate the future number of

employees required for each type of work within the organisation over the planning

period. For each year of the planning period, or taking the planning period as a

whole, estimates for each type of job can be made as follows:

Number Number

Number of employees needed by the end of Year [ ] 1,400

Current number of employees 1,200

Net increase in numbers 200

Estimate of staff turnover in the period

Employees leaving employment (resignation, retirement etc)

(300)

Employees moving to another job in the organisation

(150)

Turnover of employees (450)

Numbers required (total) 650

Fill from internal promotion or training

350

External recruitment (full-time equivalent)

300

Chapter 16: Leadership and human resources management

Plans must then be developed to ensure that sufficient numbers of existing staff are

given suitable training or personal development for promotion, and for the external

recruitment of new full-time and part-time employees to fill the remaining gap.

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Selection and performance appraisal

 Performancemanagement

 Recruitmentandselection

 Performanceappraisal

 Performancemeasurement

3 Selection and performance appraisal

3.1 Performance management

Performance management is the process of creating a work environment in which

people are enabled to perform to the best of their abilities. It begins when a job is

defined and ends when the employee leaves an organisation.

A performance management system includes the following:

 Clear job descriptions, related to the objectives of the organisation.

 Appropriate selection

 Establishing and agreeing performance standards and measures

 Providing the necessary training

 Providing regular feedback on performance and coaching

 Rewarding people for doing well

 Providing a career structure.

3.2 Recruitment and selection

At a strategic level, the plan for recruitment and selection requirements should be

based on the needs of the entity for human resources in order to implement the

entity’s corporate and business strategies. It should recognise the changes in the mix

of skills and experience that will be required from the work force in the future.

Human resource planning has increased in importance for many businesses over

the past two decades because, in some countries (including the UK):

 birth rates have fallen so there is more competition for new people joining the

job market

 individuals are expected to work longer

 jobs are more technically complex, so better people and more training are

needed.

 employees change jobs more frequently, which means that more vacancies have

to be filled

 an increasing proportion of the work force want to work at home and/or part-

time.

ACCA P3 Business Analysis - 2010 - Study text - Emile Woolf Publishing

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