MIDLANDS STATE UNIVERSITY

FACULTY OF COMMERCE

DEPARTMENT OF BANKING AND FINANCE

Name: Edwin Nyamutamba

Reg Number: R091225c

Attendance Type: Parallel

Programme: Banking and Finance

Level 4.2

Module: Strategic Management

Module Code: BM 405

Lecturer: Mr. Mhonde

Assignment Question;

Performance of an organisation has nothing to do with the environment within

which the business is carried out. Discuss
Hambrick and Mason (1984) asserts in their Upper Echelon theory that organisational outcomes,
strategic choices and performance levels are partially predicted by the managerial background
and characteristics. It is against these qualities that the theory states that the performance of an
organisation has nothing to do with the environment within which the organisation is carried out
but it is the management that matters.

Locally the importance of the upper echelons characteristics was witnessed in the collapse of
ENG Capital which led to amendments in the Banking Act to incorporate strict requirement for
one to be in top management of a banking institution. Nyasha Watyoka and Gilbert Muponda the
key anchorman in the rise of ENG Capital and also its failure were very young and inexperienced
at 28 and 29 years respectively. Regulators rightly observed that there are certain qualities that
might come with age which are key to the survival of a banking institution and to its
performance, like age, and experience in the industry

The personal characteristics of the members of the top management play a far more important
role than expected. Firms either consciously or unconsciously acknowledge the working of the
Upper Echelon Theory and use it to structure their business policies. The case of the collapse of
Royal Bank Is a case of failed management. Though the majority of Banks in the Zimbabwean
financial sector are still struggling, they are more able to survive by coming up with new
interesting products to offer the market whereas Royal Bank was numb and silent in the market.
The Bank had only a few branches in rural areas where activity is low and only a few branches in
the commercially vibrant cities, with only one branch in Harare (which was on the first floor
where it is not even marketable). No branches in Mutare, Gweru or Masvingo. In that scenario
failure was inevitable and this can only be attributed to failure in top management. Certain
management characteristics are thought of to influence the way the top management make their
decisions and key to the performance of an organisation which include;

Level of Education

Irungu (2007), academic qualification translate to more creative solutions hence affect decision
making positively. Education also indicates a person’s knowledge and skill base and the level of
education of the CEO or top management is positively related to receptivity to innovation. In the
Zimbabwean context, for one to hold an executive or top management post, he should have
certain qualifications as stipulated in the Baking Regulations 2000 and Banking Act. This
indicates that the Reserve Bank of Zimbabwe and all regulators rightly observe the working of
the Upper Echelon Theory that management determines the performance of an organisation. In
cases of change the organisation should have the suitable candidate to adapt to the new
opportunities that are being brought by the change, for example, Telone management is often
blamed for the organisation’s poor performance post dollarization and the telecommunications
industry bubble for failing to change their policies. Telone had very high tariffs and most
individual and corporate clients ran away to use pre-paid cellular phones which are more
manageable and offered favourable rates. As a result of failure to change and adopt to the new
challenges the company is failing. This scenario supports the working of the Upper Echelon
Theory because failure in management led to failure in the organisation in an environment that is
offering better opportunities and fortunes to telecommunication companies.

Age of top executives

Child (1974) asserts that, younger executives appear to be associated with corporate growth as
compared to their older counterparties. Young executives therefore are exposed to corporate
bubbles that could lead to the collapse of the organisation as witnessed in the case of ENG
Capital. ENG was for a long time until its collapse the most significantly growing company on
the Zimbabwe Stock Exchange (ZSE) and its stock rising sharply. Older executive tend to be
more risk averse, and Vroom and Pahl (1971) conclude that young managers have been found to
have more favourable attitudes towards risk taking. The ENG collapse was as a result of young
executives taking on too much risk which is not sanctioned by Zimbabwean financial sector laws
hence their eventual collapse. The lessons from the ENG collapse are that the age of the top
executives is a very important characteristic in the way they make their decision and eventually
the performance of an organisation. In turn the Law now stipulates that to hold a seat on the
Board of Directors of a banking institution one has to be over 35 years of age.

Child (1974) also purports that younger executives are more driven by innovation as compared to
their senior counterparties. POSB is a clear example of an old management driven company and
it was the last bank to computerise their systems years after all the other banking institutions had
computerised.
Financial position

The relationship between stock ownership of top executive and corporate performance has been
studied and findings by Hay and Morris (1979) conclude that owner managed firms do not
outperform firms that are managed by non-owners. Non-owner executives derive their entire
livelihood from the organisation and thus are dependent on its continuing health. Simply because
of bonuses and other incentive compensation plans, their income often varies with corporate
performance and they also run the risk of being fired if firm performance falls off, a risk that
owner managers do not face. A clear example is that of the recent collapses in the Banking
sector. Three of the four failed banks had a major problem of major shareholders being actively
participating in their affairs, that is, Interfin Bank under Mr. Farai Rwodzi, Renaissance under
Mr. P. Timba and Royal Bank under Mr. J Mzwimbi and Mr. D. Simba.

On the contrary, Hannan and Freeman (1977) and the institutional theory by DiMaggio and
Powell (1983) asserts that executives have little effect because organisations are exceedingly
inertial, swept along by external forces and constrained by a host of conventions and norms.
Similar to that the Critical Schools asserts that, it is the environment that matters and not the
management.

There are things that occur in the external environment that affect the way a business operates
both positively and negatively. There are 2 types of driving forces, internal which are generally
under the control of management or company while external driving forces are those things
which are beyond the control of the company. External environment driving forces can bury a
business in not appropriately dealt with therefore an organisation must adapt to this environment
or it ceases to exist. The critical school therefore rightly observes that, it is the environment that
matters not its management. This was witnessed in the recent Global financial crisis of 2007-
2009. Back home this was evidenced by the poor performance and collapse of most companies
since 2003 to date when the economy started contracting due to harsh external factors beyond the
management’s control.

External environment may pose significant threats or in some cases herald openings and
opportunities for an organisation. An organisation is directly affected by events happening in the
environment that it is supposed to be functioning in, for example, Telone was negatively affected
by growth in the cellular telecommunications industry. Telkom of South Africa having seen the
opportunities in the cellular telecoms industry established its own network 8ta and it is
increasingly gaining market share against rivals MTN, Vodacom and CellC. This is an indication
that changes in the external environment are also an opportunity to an organisation. The external
environment therefore provides the paradigm, and the most essential factor that shapes the
organisation and its eventual performance. Any organisation that easily adapts to the
environment essentially survives and the ones that do not are the ones that are eliminated in the
competition.

Political environment

The political environment has a major impact on the organisations’s marketability and
international strategic partnering capabilities, for example through sanctions imposed on a
country. In the tourism sector political violence may deter tourists from visiting your country and
its tourist attractions no matter how good they are or the management’s effectiveness. The period
2000-2009 soon after the aggressive land reform programme and political violence that followed
in the years, the tourism sector saw a major decrease in the number of tourists visiting the
country. This significantly affected players in the tourism sector.

Technological environment

Technological changes are a very key element especially in this technology era. Any new
development may render an organisation’s processes and systems obsolete if it is not quick to
adapt to the new changes. To move forward, it is essential to keep updating an organisation on a
reiterative basis. Netone was the last telecoms company to offer mobile internet services and this
saw a major decrease in their market share with most clients keen for mobile internet services
which were already being offered by Telecel and Econet.

Social Environment

The social environment and the ethical leanings of the individuals responsible for an
organisation’s functioning and the ergonomic leanings with the external environment define an
organisations’s charter and its modus operandi.
Economic Environment

The economic environment is a key element which lays the platform on which the business is
carried out. Changes in the economic environment have a direct influence and are of paramount
importance to the survival of an organisation. Changes in the monetary regime have a direct
influence on any organisation and this is a key factor outside the control of an organisation’s
management. Changes from the current multiple currency system to Zimdollars can result in a
major loss of confidence in the financial sector and cripple the banking system leading to its
collapse. Such a scenario is outside the management’s control and a key variable to the wary of.
For banking institution changes in interest rates can have a major impact on the organisation’s
performance and the same applies for level of inflation. Level of disposable income is another
economic factor that affects the organisation’s performance especially when producing luxury
goods.

Ecological Factors

Depending on the nature of business, ecological factors have different impacts and implications.
Transport systems are also an important factor, for example, the collapse of NRZ effectiveness
over the years had an impact on many companies who burn coal in Hwange and want it railed to
their respective sites. Such a drawback has a major impact organisational performance because
hiring a truck is more costly to companies and in turn reduces their profit margins. Profit margins
are a key instrument in measuring the performance of an organisation thus transport system
inefficiencies can affect company’s performance.

The task environment, that is according to Porters 5 forces also play an important role in
bringing out the importance of external forces in the performance of an organisation. Porter
identified 5 forces that act together to determine the nature of competition within an industry and
these environmental factors affect the organisation’s performance and viability.

Threat of new entrants to an industry has a major impact because this would definitely result in a
decrease in market share of the organisation. Rivalry will thus intensify thus forcing the
company to adapt to the new changes and come up new products to beat competition. Decreases
in the firm’s market share translate to reduced profit margins.
Bargaining power of customers can have a significant effect on the organisation’s performance
because powerful customers are able to exert pressure to drive down prices or increase the
required quality for the same price and therefore reduce industry profits.

The coming in of a substitute product in a different industry but crucially satisfying the same
customer needs is a major factor that can affect the organisation’s performance. If there are
credible substitutes to a firm’s product, they will limit the price that can be charged and will
reduce profits.

The degree of competitive rivalry as in the Zimbabwean insurance industry will encourage
businesses to engage in price wars through competitive price reductions, investment in
innovation and intensive promotion in sales promotion and higher spending on advertising.

Porters identified threats or factors that would push a company’s costs up in an effort to remain
competitive and thereby reducing its profit margins. The performance of an organisation is
generally measured by its profitability and ability to compete in the ever changing environment
thus Porters’ task environment is important in predicting the way forward and in making
strategic decisions.

In Conclusion, both views are conditionally valid depending on how much managerial discretion
or latitude of action exists. Hambrick and Finkelstein (2007) argue that, discretion exist when
there is a great deal of means-ends ambiguity, that is, when there are multiple plausible
alternatives. Discretion therefore emanates from environmental conditions, for example, industry
growth, firm organisational factors (for example, a weak Board) and from the executive himself
or herself (for example, tolerance of ambiguity). The implication of managerial discretion for
upper echelons theory are straight forward and profound, upper echelons offers good predictions
of organisational outcomes in direct proportion to how much managerial discretion exists. If a
great deal of discretion is lacking, executive characteristics do not much matter.

Therefore both the management and environment are critical in the performance of an
organisation in this ever changing environment.
REFERENCES

Child J (1972) Organizational Structure, Environments and Performance: The Role of

Strategic Choice. Sociology. J.(6).

DiMaggio, P. J., & Powell, W. W. 1983. The iron cage revisited: Institutional isomorphism
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Hambrick D (2007). Upper Echelons Theory: An Update. Aca. Manage. Rev. 32(2): 334–343.

Hambrick D, Mason P, (1984). Upper Echelons Theory: The Organization as a Reflection of

its Top Managers. Aca. Manage. Rev. 9(2): 193–343

Hambrick, D. C., & Finkelstein, S. 1987. Managerial discretion: A bridge between polar views
of organizational outcomes. Research in Organizational Behavior, 9: 369–406.

Hannan MT and Freeman JH (1977). The Population Ecology of Organizations. American

Journal of Sociology, Issue 82, pp. 929-964.

Irungu SM (2007). Effects of Top Management Team on performance of Publicly Quoted

Companies in Kenya. Doctorate thesis of the University of Nairobi.