Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
Chapter I: Basics and Methods of MANAGEMENT and Business Administration
a) What is MANAGEMENT?
Definition of MANAGEMENT:
Definition of management depends on the region, in Europe, the word “management“ is usually
understood in 2 ways:
•
•
Management in an institutional view represents the body responsible for management:
persons and positions.
Management in a functional view refers to the tasks groups (=functions) in the process of
management
o Person-related tasks (instruments and principles on how to lead people)
o Factual tasks (planning, organizing, control, decision)
Management is a cross-sectional function:
Longitudinal functions: Supply, Production, Sales
Cross-sectional functions: Logistics, Controlling, Management
Logistics
Controlling
Management
Definition as a summary:
MANAGEMENT is target-related shaping, steering and development of the corporation in a factual
and a person-related dimension.
Now we discuss the two perspectives more in detail:
MANAGEMENT as an Institution:
Basic definitions:
Executives = employees with instruction authority
1
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
Managers are executives, engaged in defining and setting the companies targets and are therefore
equipped with necessary competences, especially instruction authority.
What contains instructions authority?
-
Decision authority: possibility of taking decisions without consulting superiors
Disposition authority: to decide about assets, workforce, information
Exercise power (to execute decisions)
Acceptance (necessary to accept the power base)
Company law might help us in defining leadership positions:
Executive Officer (problem: only the top position is defined, but in reality a high number of people in
the company have management positions and tasks).
Studies about “What is a manager doing?” :
-
Spreading of work time:
40% of worktime = communication (meetings, talking, phone calls)
38% of worktime = deskwork (mail, writing, reading) -> the higher the rank of the manager,
the lesser the time spent on deskwork
22% „on the road“: conferences, travel, lunch/dinner…
Studies on Management have also led to the following important results:
-
-
A managerial position implies a very fragmentary rhythm of work:
90 % of the total amount of work is done in segments of less than 10 minutes. So managers
should have a “multi-tasking” ability.
The most important information source is personal talk
The importance of networking is very high
There is a definite necessity of good communication skills
The need of an “acceptable” appearance
b) MANAGEMENT as a function:
1. Personal component:
Leading people: Personal activities and strategies with which the leaders try to influence on
the led in order to motivate them to achieve the companies targets adequately.
2. Factual component:
Management as a function can be divided into certain characteristic tasks groups.
Management therefore can be described as a collection of characteristic activities:
Planning
Controlling
Organizing
Staffing
2
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
Coordinating
Reporting
Budgeting
(…)
or
as a characteristic sequence of activities in a problem solving and decision making processes.
(e.g. described in form of a circular model):
Management as a closed loop control system
After the definition of Management, now we will discuss the business as the object of Business
Administration:
(Excursus: Economic Sciences / Economics / Business Administration)
Business is an organized economic unit in which products and/ or services are produced and/ or sold.
More specifically, a business is a combination of production factors, with which the owners like to
realize their targets.
The task of business administration is to support decisions about measures with which these targets
can be achieved efficiently.
(Excusus: effectiveness / efficiency)
3
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
Distinction between a business and corporation/ company:
Ø Corporations: businesses which are going for profit maximization
Ø Firm: legal term/ name/ form of a company
Examples:
1. Ltd – limited company: U.K., LLC – limited liability company: U.S.A, GmbH –
Gesellschaft mit beschränkter Haftung: Germany, Austria, Switzerland; all three have
the same meaning
2. P.l.c. – public limited company: U.K., Corp. – Corporation: U.S.A., A.G. – Aktiengesellschaft: Germany, Austria, Switzerland; again the same meaning
Classification of Businesses:
1) According to lines of businesses:
Ø
Ø
Ø
Ø
Ø
Ø
Ø
Industry
Trade
Bank
Transportation
Insurance
Hotel – tourism
Other services
2) According to products:
Ø Depending on materials:
- raw materials
- production materials
- production assets
- consumer goods
- recycling goods
Additionally:
Ø Depending on the used process:
- mining
- chemical industry
- machine building
- construction
Ø Depending on the services offered:
- trade
- bank
- insurance
- transportation
- other services
- tourism – hotel
- handcraft
4
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
3) According to the kind of production:
Ø Depending on the production principle:
Mass production:
In mass production, an unlimited amount is produced for an anonymous market and the
planned production time is indefinite. For example: tooth paste, plastic forks, etc.
Serial-/ Batch-Production:
In serial production, either production time or production amount (or both) is limited.
Batch is the amount of products (a series) which is produced in a row before changing the
production capacities for another product batch.
Lot / Charge/ Production:
Lot represents a production with special individual inputs. For example: special wines,
jewelry, collections or special series.
Charge production is characterized by a voluntary or technically necessary interruption of the
production flow; for example: the production number on medicine packages allows an
identification so that if something is wrong, they can just take that charge off the market.
Single production:
Single production describes the production of a unique product defined by the special needs
of one customer. Houses, energy plants and special machine tools are good examples of this
type of production.
Ø Depending on production organization
The first basic organizational type of production is based on the principle to locate technically
similar production steps in the same place.
It is called shop production.
For example: small metal working company:
Shop Production
DRILLING
2
5
SURFACE/
CLEANING
WELDING
3
STORAGE
6
1
4
CUSTOMER
PAINT-SHOP
7
5
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
Cons of Shop Production
ü
The disadvantages of shop production are many. To begin with, multiple transport and
storage processes take place, due to the need of storage in between every two steps of the
production; if one of the production steps takes more time, the area before the station gets
overcrowded because of things which have to be stored in waiting mode. Also, the process and
material flow is chaotic due to the large amount of jobs, thus things get lost and a lot of coordination
is necessary. The main disadvantage is the fact that this type of production doesn’t help us to fill/
harmonize the production capacity in an optimal way, which leads to higher costs per piece.
Pros of Shop Production
ü
The main advantage is flexibility. Mostly any order can be fulfilled with the same equipmentsetup. And as always flexibility increases costs (see above).
ü
Shop manufacturing is the most appropriate, if flexibility is very important: like for single
production.
The next basic organizational type is the line production
Continuous production/ Line production
STORAGE
WELDING
1
DRILLING
2
WELDING
3
4
STORAGE
SURFACE
5
CUSTOMER
PAINT-SHOP
7
6
SURFACE
As in the case of the surface cleaning stations from this example, if one step of the process takes
longer, we can balance the continuous flow of goods by adding parallel stations of the same type so
that there will be no bottlenecks in Production which will cause higher throughput time and
necessary buffer stocks.
Cons of continuous production/ line production
ü
The main disadvantage of continuous production is its lack of flexibility. In case of the need to
produce a new product, the necessary adjustments are substantial and need more time and effort
than in shop production.
6
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
Pros of continuous production / Assembly line
ü
The advantages of continuous production include exact delivery dates due to better
plannable throughput times, a very high capacity use, short throughput times and therefore a high
cost efficiency.
ü
This type of production organization is typical for cost-sensitive production, like mass production.
(Excursus: basic structure of costs)
The third basic organizational type is the Group or Island production:
Group manufacturing is designed to bring pros of other organizational forms together by avoiding
their negative aspects.
Island Manufacturing implies the combination of different productions steps such as welding or
drilling in one technical production unit (island) represented by a machine (the production cell). In
this case, you hand over the input material and construction data to the production island.
e.g.: https://youtu.be/LKRKie_5dAM
Group manufacturing refers to the combination of several work steps to a self-organized team.
(e.g.: Porsche engine manufacturing)
4) According to the production factor:
Ø Work intensive:
The work intensive type of production needs a proper work preparation to prevent time
waste. Fixed / variable costs depend on the used payment system and can vary broadly.
Ø Capital intensive:
The capital-intensive type of production needs good use of invested capital (i.e. automation
technology), high fixed costs but low variable costs can be found. High capacity utilization
(ideal: 24/7) has to be achieved.
Ø Material intensive:
The material intensive type of production needs well organized supply structures and
intensive control of used input material and production to avoid theft / loss / spoilage.
5) According to the size of the company:
Ø Small
Ø Medium
Ø Large
The criteria according to which the size of the company is evaluated are manifold.
Criteria could be:
- asset value
- production outcome
- amount of employees
- turnover
- profit
- value adding
7
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
Classification of Business Administration:
1) General Business Administration
General Business Administration deals with problems which can occur in all kind of
companies and industrial sectors such as accounting + taxation, which is needed comparably
in all companies.
2) Special Business Administration Classifications:
For example:
Ø Industry – Business Administration
Ø Trade – Business Administration
Ø Bank – Business Administration
Deals with a special object:
It is classified according to the
institutional structure of BA
or
Ø
Ø
Ø
Ø
Ø
Ø
Ø
Ø
Ø
Ø
Ø
Management
Controlling
Auditing
Finance
Investment
Logistic
Supply
Marketing
Quality
Production
Maintenance
Deals with the performed process.
It is classified according to the
functional structure of BA
8
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
b) Basic Methods of Management Science: Modeling
A.
Types of Models
Models are used for reducing complexity and to gain knowledge.
- reductive models (abstraction to gain knowledge)
- constructive models (building of ideal types)
Categories according to the level of statement:
a) description model (pure description of what is being modeled)
b) explanation models (a) plus hypothesis about principles)
c) decision models (b) plus mechanisms to choose efficient alternatives)
Information as an input for models can be:
•
Deterministic
Deterministic input implies that the information is secure; for example: Newton’s law of
gravity.
Everything related to the past is secure, because it has happened already.
•
Stochastic
Stochastic input implies that possible end conditions and their probabilities are known. An
example for this is the Roulette game.
•
Game theoretical
Game theoretical input implies if end conditions are known but not the probability. An
example for this is poker, a game with strategically acting opponents, just like on the market,
where probabilities are not known but the end result is either winning or losing.
Depending on the inclusion of time in models:
•
The static model implies no time lapse. Everything happens immediately.
•
dynamic model:
In a dynamic model, minimum two parts of the model are related to different periods.
For example: Xt1 = f (Pt0 )
9
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
B. Elements (of models)
1.
Target system
- Which targets are important for a decision unit?
for example: Profit of external accounting
- What is the relationship between different targets?
for example: calculation of the profit of external accounting:
g = profit
p = sales price
x = sales/ production volume
v = supply good
q = supply good price
L = liquidity level
M = Budget
- According to which rules the decision maker is looking for the best alternative?
for example: profit g = max or liquidity L = Lo
2.
Restrictions
for example: Vi * Qi <= M
(which means that you cannot buy more supply goods than your budget allows).
Whether an element serves in the model as goal, restriction or decision-making criteria depends on
the model definition.
3.
Variables, Stationary Values and Parameters
Parameters are values, which are set only from time to time.
•
Measuring accuracy
for example: What is the sales plan for the future?
=> “I don’t know” would rate on a nominal scale
=> “more than last year” is quantitative but unspecific, it is based on the ordinal scale
=> “23.548” is quantitative and specific, it is based on the cardinal scale
10
Prof. Dr. Henrik Janzen
•
Business Administration I
(BBA, 1. Sem.)
Classification of variables
- action variables (can be set freely by the decision taker
for example: Sales price; amount of production or storage; number of shifts in production)
- expectation values (cannot be set, only influenced by action variables)
for examples: annual profit
- data
for example: macro-economic situation
- exogenous variables (values coming from the environment)
- endogenous variables (values coming from the model)
Example:
X = f (p)
= > X is endogenous; p is exogenous
- point-of-time related values (details in chapter d)
Point-of-time related values can be found e.g. in the balance sheet. They define the value of a
variable in a distinct moment.
- period related values
Period related values can be found e.g. in managerial accounting and profit and loss
accounting and unlike point of time values they represent moves, variations.
A period related value is always defined by min. two point of time related values, it shows their
difference.
c) Rational Choice in a Corporation
A.
Principle of Rationality and the “Economic Principle”
The principle of rationality – which means to behave rational - is the basis for theoretical
business administration (practice is often different!)
To operationalize rationality, the “economic principle” gives three
sub-principles for rational decision taking:
1) reach a fixed target with minimum cost (Minimum Principle)
2) maximize the target with given budget (Maximum Principle)
There is no “Minimax” Principle (!) because there is no possibility for control (Taxi example)
11
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
3) If there are only fixed decision alternatives in a decision situation (fixed as well in benefit
and in costs): choose the alternative with the best benefit/ cost relation)
Minimum and maximum principle are both valuable perspectives for a company so they are
used often in a sequential manner:
1. Step: Management asks departments: “With given budget, what will be your maximum
performance?”
2. Step: “If we take that performance level as target, what would be the cost minimum
to reach it?”
B.
Real Target Systems and their Elements
Example for a target system:
Between targets, three types of relations are possible:
Ø Positive / complementary
Between upper and lower targets, always a positive relation is necessary.
Lower targets are therefore a measure for reaching upper targets.
Ø Negative / competitive
Negative relation implies, that the fulfillment of one target influences inversely proportional
the fulfillment of another.
For example, the maximizations of market share and market price. If the market price grows,
the market share will decrease and the other way around.
Ø Neutral
Neutral relations exist between targets which are not correlated in any way one with each
other. Example: the avoidance of waste in the production process and the maximization of
market price.
12
Prof. Dr. Henrik Janzen
C.
Business Administration I
(BBA, 1. Sem.)
Problems of the Target “Profit Maximization”
Profit as a single target is not realistic because companies have to fulfil numerous other targets:
e.g. ethical, legal, ecologic, social …
Also, other business targets, like market share, reputation, customer satisfaction have to be
integrated
Also, restrictions must be fulfilled, like liquidity, capacity, legal issues (e.g. liability) …
Another problem of profit:
Profit is not a clear target!
There are 3 different types of profit:
1. profit of cash flow accounting:
= incoming payments – outgoing payments
2. profit of financial/ external accounting:
= revenues / turnover – expenses
3. profit of internal / managerial / cost accounting:
= benefit – costs
Relation of the three:
1
2
3
Often companies do not have the necessary information to calculate profit due to a lack of
accounting systems. Therefore companies often use alternative measures (Which are easier to
calculate) as a substitute for calculation profit.
13
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
Example: turnover (x * p )
Hypothesis: if turnover is maximized, also profit is maximized.
Let’s check now, whether this hypothesis is acceptable:
Profit g = turnover or benefit ( p * x ) – costs or expenses
Costs K = Kf + Kv
K f = fixed cost (not changing with changing production volume)
(e.g.: salary of the security for a production plant)
K v = variable costs (changing with production volume)
= k v* x
Now, we assume linear functions for turnover and costs (and therefore for profit):
T = p*x
K = Costs
T = turnover
profit-zone
K= Kf + kv * x
loss-zone
Kf
xBE
x
Total costs K = KF (fixed costs ) + kV (variable costs per piece ) * X ( production volume )
If the cost function is linear, the break-even point ( XBE ) indicates the production amount, where the
turnover just covers the total cost. Smaller sales volumes result in losses, larger ones in profit as
indicated.
So, we can conclude, that higher turnover leads to higher profit (or lesser loss before XBE).
Therefore, with linear cost and turnover functions we can use turnover as a substitute for profit.
Now we assume non-linear costs:
E.g.: the average fuel consumption of a car depends on the use of its engine capacity
(which is visible and measurable by average speed):
14
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
average fuel
consumption
(i.e.
)
capacity with
least average fuel
consumption
max. enginge
capacity
If we transfer this effect in the total cost function (by the function of the variable costs), we will see
the following result:
K= Kf + K(x)
loss-zone
T = p*x
K = Costs
T = turnover
profit-zone
loss-zone
xBE1
X(Gmax) xBE2
Here we see two break even points. The second marks the beginning of another loss zone. X ( GMAX )
shows the production/ sales volume which realizes highest profit. With additional turnover, the profit
will go down!
So, we can conclude, that higher turnover does not lead automatically to higher profits.
Therefore, with non-linear costs (or turnover) functions we cannot use turnover as a substitute for
profit.
15
Prof. Dr. Henrik Janzen
D.
Business Administration I
(BBA, 1. Sem.)
Profit / Return on Investment / Efficiency / Productivity
Profit
Like learned in the chapter before: There are 3 different terms of Profit!
Profit/ Capital Ratio:
Indicates the necessary investment and therefore the capital lock-up for achieving the profit. In
another interpretation, it shows the internal “interest” on the invested capital.
By the owner
equity capital
ð profit
capital
credit capital
by third party (debtors)
Profit/ Capital Ratio (equity capital):
ð profit
equity capital
Profit/ Capital Ratio of total capital:
Return on Investment: (American term):
profit
Ø invested capital
16
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
invested
capital
100
½*100
= 50
average
Invested capital
time
=> average invested capital is half of the original invested capital by linear depreciation.
Sales profitability
profit
turnover
(is a special term of profit / capital ratios because turnover is not a capital term; but in companies the
term is often used in that category)
Cost effectiveness
Gives a measure for the grade of efficiency, the company has achieved in their operations
planned costs
actual costs
Problem: for exact calculation, two managerial accounting-systems are necessary:
-
plan cost accounting
actual cost accounting
Therefore, in practice: as a substitute and for easier calculation:
is used. But this shows something different! Market effects can spoil the information of the measure
(example)
Productivity
Due to the missing monetary measure, a simple productivity has to be defined for every input factor.
Most common are:
17
Prof. Dr. Henrik Janzen
Business Administration I
(BBA, 1. Sem.)
labour productivity
machine productivity
energy productivity
d)
Basic Terms of Business Administration
A.
Point of Time-Related Values (Assets)
They give an overview over inventory values at a given point of time and are mostly found in
the balance sheet.
Balance Sheet
Assets:
Liabilities:
Fixed Assets
Equity Capital
Floating Assets
Credit Capital
Loss
Profit
Use of Capital
Source of Capital
18
Prof. Dr. Henrik Janzen
B.
Business Administration I
(BBA, 1. Sem.)
Period-Related Current-Values
Goods and monetary flows during the work in a company.
These values show the difference between two related point of time values.
Example:
stock volume at 8.12 ., 12.00
= 60
stock volume at 10.12., 12.00 = 50
=> 10 pieces were used
Positive and negative period-related current values can be found in the different profit and
loss accounting systems:
e)
The Production Factors (Overview)
From the view of economics as a science, the production factors are: labor, land and capital.
From the view of business administration as a science, production factors are material, labor,
machines capital and MANAGEMENT (indirect production factor)
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