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444 10 26
Business
Management
Editor
Prof.Dr. Güneş Nezire ZEYTİNOĞLU
Authors
1, 2
CHAPTER 3
CHAPTER 4
CHAPTER 5
CHAPTER 6
CHAPTER 7
CHAPTER 8
CHAPTER
Assoc.Prof.Dr. Emre DEMİRCİ
Prof.Dr. Cemil ULUKAN
Prof.Dr. Demet VAROĞLU
Assoc.Prof.Dr. Umut KOÇ
Assoc.Prof.Dr. Vichuda POLATOĞLU
Prof.Dr. Güneş ZEYTİNOĞLU
Prof.Dr. Saime ÖNCE
T.C. ANADOLU UNIVERSITY PUBLICATION NO: 3674
OPEN EDUCATION FACULTY PUBLICATION NO: 2499
Copyright © 2017 by Anadolu University
All rights reserved.
This publication is designed and produced based on “Distance Teaching” techniques. No part of this
book may be reproduced or stored in a retrieval system, or transmitted in any form or by any means
of mechanical, electronic, photocopy, magnetic tape, or otherwise, without the written permission of
Anadolu University.
Instructional Designer
Lecturer Dr. Mediha Tezcan
Graphic and Cover Design
Prof.Dr. Halit Turgay Ünalan
Graphic Designers
Ayşegül Dibek
Gülşah Karabulut
Hilal Özcan
Typesetting and Composition
Gözde Soysever
Süreyya Çelik
Orgül Kıraç
Yasin Özkır
Handan Atman
Murat Tambova
Beyhan Demircioğlu
BUSINESS MANAGEMENT
E-ISBN
978-975-06-3111-5
All rights of this book belong to Anadolu University.
Eskişehir, Republic of Turkey, January 2019
3189-0-0-0-1902-V01
Contents
CHAPTER 1
Fundamentals
of Management
THE CONCEPT OF MANAGEMENT .....................
FUNCTIONS OF MANAGEMENT ........................
Planning .........................................................
Organizing .....................................................
Leading/Directing .........................................
Controlling .....................................................
MANAGERS AND ORGANIZATIONAL
RESOURCES ............................................................
TYPES OF MANAGERS ..........................................
Vertical Classification ...................................
Lateral Classification .....................................
ROLES OF MANAGERS ..........................................
Interpersonal Roles .......................................
Informational Roles ......................................
Decisional Roles ............................................
MANAGERIAL SKILLS ............................................
CURRENT ISSUES IN MANAGEMENT ................
Globalization .................................................
Technological Changes .................................
Innovation .....................................................
Diversity in the Workforce ..........................
Ethics and Social Responsibility ...................
CHAPTER 2
CHAPTER 3
3
4
5
5
6
6
7
9
9
11
11
11
12
12
13
15
15
16
16
17
17
The History of
Management
Thought
THE EVOLUTION OF MANAGEMENT
THOUGHT ...............................................................
Environmental Forces That Affect
Management Practices .................................
CLASSICAL MANAGEMENT THEORY ..................
Systematic Management Approach ............
Scientific Management Approach ...............
General Administrative
Management .................................................
Bureaucracy Approach .................................
BEHAVIORAL MANAGEMENT THEORY ............
Hawthorne Studies .......................................
Douglas McGregor’s Theory X and
Theory Y .........................................................
QUANTITATIVE MANAGEMENT
APPROACH ..............................................................
SYSTEMS APPROACH ............................................
CONTINGENCY APPROACH .................................
THE NEW MANAGEMENT CONTEXT .................
BUSINESS ENVIRONMENTS ...............................
External Environment ..................................
Internal Environment ...................................
ORGANIZATIONAL CULTURE ..............................
The Concept of Organizational
Culture ...........................................................
Strong Versus Weak Culture ........................
Levels of Organizational Culture .................
Establishing and Maintaining
Organizational Culture .................................
ETHICS IN MANAGEMENT AND
CORPORATE SOCIAL RESPONSIBILITY ...............
Ethics in Management ..................................
Corporate Social Responsibility ...................
CHAPTER 4
29
29
31
31
31
32
33
34
35
37
37
38
40
Management
Environment
51
53
53
59
61
61
62
63
64
66
66
69
Managerial
Planning
and Decision
Making
BASICS OF PLANNING ..........................................
LEVELS OF PLANNING .........................................
Short-Term and Medium-Term
Planning ........................................................
Long-Term Planning ....................................
MANAGERIAL PLANNING PROCESS ...................
Setting Goals .................................................
Identifying Resources ...................................
Determining Action Plans ............................
Implementing Plans and Identifying
Adjustments ..................................................
TYPES OF PLANS ....................................................
Budgets and Budgeting ................................
DECISION-MAKING PROCESS ..............................
Identifying the Decision Situation ..............
Developing Decision Criteria ......................
Generating Alternatives ...............................
Evaluating Alternatives ...............................
Selecting the Best Alternative .....................
Implementing the Decision ..........................
Monitoring and Evaluating Results ............
DECISION MODELS ...............................................
The Rational Model of Decision Making ..............
The Bounded Rationality Model .................
Intuitive Decision Making ............................
81
82
82
83
84
84
86
86
87
87
90
92
92
93
94
95
95
96
96
97
97
98
99
iii
CHAPTER 5
The
Fundamentals
of Strategic
Management
THE FUNDAMENTALS OF STRATEGIC
MANAGEMENT ...................................................... 113
Sustainable Competitive Advantage .............. 113
Strategy and Strategic Management ......... 114
STRATEGIC MANAGEMENT PROCESS:
ANALYSIS ................................................................ 115
Developing Statements of Vision,
Mission, and Values ...................................... 115
STRATEGIC MANAGEMENT PROCESS:
FORMULATION AND IMPLEMENTATION ............. 122
Corporate-Level Strategy ............................. 123
Business-Level Strategy ................................ 127
Functional-Level Strategy ............................ 129
GLOBAL STRATEGY ............................................... 133
CHAPTER 6
Organizational
Design,
Teamwork, and
Organizational
Change
ORGANIZING: TERMS AND DEFINITIONS ............. 143
Importance of Organizing ............................ 143
KEY ELEMENTS IN ORGANIZATIONAL
DESIGN .................................................................... 144
Division of Labor ........................................... 144
Chain of Command ....................................... 145
Span of Control ............................................. 148
Centralization Versus
Decentralization ............................................ 149
Formalization ................................................ 150
Departmentalization .................................... 151
Mechanistic Versus Organic Design ............ 152
ORGANIZATIONAL STRUCTURE ......................... 153
Functional Structures ................................... 153
Divisional Structures ..................................... 153
Matrix Structure ........................................... 155
Virtual Network Structure ........................... 156
Team Structure .............................................. 157
Hybrid Structure ........................................... 158
CONTINGENCY FACTORS AND
ORGANIZATIONAL STRUCTURE ......................... 159
TEAMWORK ........................................................... 161
Team-Definition ............................................ 161
Types of Teams .............................................. 161
Team Composition ........................................ 163
Team Processes ............................................. 164
ORGANIZATIONAL CHANGE ............................... 165
Organizational Change: Terms and
Definitions ..................................................... 165
Types of Change ............................................ 166
Resistance to Change .................................... 167
Managing Change ......................................... 167
iv
CHAPTER 7
Leadership,
Diversity,
and Motivation
THE MEANING AND NATURE OF LEADERSHIP ..... 181
Definition of Leadership ............................... 182
LEADERSHIP AND MANAGEMENT .................... 182
TRADITIONAL APPROACHES TO
LEADERSHIP ........................................................... 184
Traits Approach to Leadership ..................... 184
Behaviorial Approaches to
Leadership ...................................................... 184
CONTINGENCY APPROACHES TO
LEADERSHIP ........................................................... 186
Situational Leadership .................................. 187
Fiedler’s Contingency Model ........................ 188
CONTEMPORARY LEADERSHIP ........................... 189
Leader-Member Exchange Theory
(LMX) ............................................................. 190
Transformational Leadership ....................... 191
LEADING DIVERSITY ............................................. 194
Diversity in the Workplace .......................... 194
Leading Across Cultures ............................... 199
Gender Differences ....................................... 200
MOTIVATION IN THE WORK PLACE .................. 202
PERSPECTIVES ON MOTIVATION ....................... 204
Content Perspectives on Motivation........... 204
Process Perspectives on Motivation............. 207
CHAPTER 8
Managerial
Control
MANAGEMENT AND CONTROL ......................... 223
The Meaning of Control ............................... 223
Internal Control ............................................. 224
Controlling and the Other
Management Functions ............................... 226
THE CONTROL PROCESS ...................................... 228
Establish Standards and Methods to
Measure Performance .................................. 228
Measuring Actual Performance ................... 229
Comparing Actual Performance to Standards .... 230
Taking Corrective Action as Needed ........... 230
TYPES OF MANAGERIAL CONTROL .................... 232
Feedforward Controls ................................... 232
Concurrent Controls ..................................... 233
Feedback Controls ......................................... 233
SCOPE OF CONTROL ............................................. 234
Strategic Control ........................................... 234
Tactical Control ............................................. 235
Operational Control ...................................... 235
THE LEVEL AND FOCUS OF CONTROL
SYSTEMS ................................................................. 236
Organization Level: The Balanced
Scorecard ....................................................... 236
Department Level: Behavior Versus
Outcome Control .......................................... 239
MOST COMMON TOOLS AND TECHNIQUES
FOR CONTROLLING .............................................. 239
Budgetary Controls ...................................... 240
Financial Controls ......................................... 242
Cost-Volume-Profit (CVP) Analysis ............. 245
Activity-Based Costing (ABC) ..................... 247
Just-in-Time Inventory Control ................... 247
Total Quality Management .......................... 247
Preface
Dear reader,
As we approach the third decade of the 21st century,
it is clear that the business environment is becoming
intensely competitive. To survive - but more important
to flourish - businesses must incorporate management
practices that exceed those of their most successful
competitors.
It is a race with a finish line that keeps moving
forward. Economic, technological, political, and
social forces are the engines driving an ever more
complicated business environment. Uncertainty
about the future makes the managing function even
more critical than just a decade ago. Managers
must successfully utilize increasing amounts of
digitized data; work effectively with diversified
teams which at times may span the globe that
require interpersonal and cultural skills; promote
innovation; make informed investment and hiring
decisions; and be prepared to respond quickly to
environmental forces. The external environment in
this new era of business enterprise is no longer just
competitors in the same town, city, region, or even
country. It is all of these and more. It is global. In
other words, the management function is a critical
factor governing success or failure, as it has been
always, but now even more so.
function of management, is explained in the
fourth chapter along with decision making; the
fifth chapter covers strategic management along
with analysis, formulation, and implementation of
strategies for achieving sustainable competitive
advantage; the sixth chapter explains the
organizing function concerned with arranging
and assigning tasks, allocating resources, and
structuring work in order to reach organizational
objectives; the seventh chapter highlights the
basics of the human interaction in organizations
covering leadership, diversity, and motivation; while
the final chapter introduces basic mechanisms of
managerial control which is a critical management
function in organizations.
The chapters and relevantly the contents are
interrelated. Keep this in mind as you move from
one chapter to the next. In this way, you will make
important holistic and analytical connections as to
what constitutes the best management practices.
Moreover, the content of these pages apply to all
business functions.
This book covers both the foundational and up-to-date
topics of management in a lean format and content.
The first chapter describes general management
terms followed by management levels, managerial
roles, and skills as well the most recent concepts such
as innovation and globalization.
To help readers think like managers, the contents
introduced blend theory with practice. Management
processes and concepts are illustrated by real-life
examples with cases from Turkey and other countries.
In addition, key terms are defined and highlighted
throughout the text; readers are challenged by
commentary and test questions; and answers are
provided to check responses. The glossary at the
end provides easy access to important terms and
concepts encountered throughout your reading.
The theory of management is the product of
exhaustive research and an ongoing process
because the practice of management changes from
one set of circumstances to another and opens
new avenues of research for scholars. Therefore,
understanding management in depth requires
its study in the context of present environmental
developments. In this regard, the second chapter
explains the evolution of the management practices
and theory from classical to contemporary times.
This book is designed to be as comprehensive
as possible. It is written and edited by faculty who
are experts in their fields and have international
experience. It is intended to be a good but not
exhaustive source for business students and for
students in other majors who take management
courses. For those readers who are already
managers, we hope that this is your opportunity
to sharpen the tools of your craft with significant
analytical and contextual perspectives.
The rapid advances discussed in the third chapter,
along with globalization and other environmental
forces have created a worldwide marketplace.
Organizational culture as an indication of an
organizational identity is also explained in this
chapter.
Furthermore, we aim to introduce this work as a
useful reference source for all readers.
The remaining chapters in the book are structured
in the context of management functions which are
at the same time critical processes for success:
managerial planning, often called the primary
Enjoy!
The Book Team
Editor
Prof.Dr. Güneş Nezire ZEYTİNOĞLU
v
Chapter 1
Fundamentals of
Management
Learning Outcomes
After completing this chapter, you will be able to:
1
3
5
Define the concept of management.
Explore the efficient use of resources and
different types of managers.
Explain the functions of management.
Discuss the roles of managers and managerial
skills.
Interpret current changes that affect
managerial activities.
Chapter Outline
The Concept of Management
Functions of Management
Managers and Organizational Resources
Types of Managers
Roles of Managers
Managerial Skills
Current Issues in Management
2
2
4
Key Terms
Management
Manager
Globalization
Functions of management
Organizational resources
Roles of managers
Managerial skills
Business Management
Management and managers are integral parts of
all types of organizations. Considering the current
challenges affecting businesses, effective and efficient
execution of managerial functions with highly skilled
managers are of paramount importance for gaining
and maintaining competitive advantage. Many
organizations strive to survive in complex and turbulent
environmental conditions. Survival of the businesses
under these demanding conditions rely mainly on
the skills of their managers. Because managers are
the main actors to assess environmental conditions
and their possible effects. Furthermore, managers
are responsible for adapting their organizations to
these environmental conditions through building
solid strategies. Managers at different levels should be
able to work with others in harmony and motivate
the members of the organization toward achieving
organizational goals. Business managers perform some
fundamental functions such as planning, organizing,
leading/influencing, and controlling. These functions
are also known as the functions of management.
According to Henri Fayol, coordination is the fifth
function of management. But, today it is widely
accepted that the coordination function is embedded
in all management functions as an integral aspect.
Effective execution of these functions by skilled
managers will enable organizations to take solid steps
toward continuously adapting their organizations
to the demands of different variables such as
globalization, technological changes, diversification
of the workforce, and ethics and social responsibility.
In this chapter, we will give a brief understanding of
the basics of management and introduce a foundation
of management mentioned above.
THE CONCEPT OF MANAGEMENT
Management is essentially needed in all types
of organizations regardless of the size and scope
of operations at all organizational levels. Setting
the organizational goals and strategies, building
an organizational structure to enable organization
to effectively and efficiently achieving these goals,
motivating the members of the organization
and leading people to achieve organizational
goals, and finally monitoring and evaluating the
organizational performance are the main activities
within the boundaries of management.
There are various definitions of management,
one of which defines management as “an act
of getting people to work together to achieve
organizational goals through effective and
efficient use of resources”. This brief definition
of management involves all four functions of
management: planning, organizing, leading/
influencing, and controlling. All managerial
activities performed by business managers are
represented in these four functions.
Management is the “act of getting people
work together to achieve organizational
goals through effective and efficient use of
resources”.
Management is perhaps better understood from
a resource-based perspective. Regardless of the
type and size, all organizations utilize four main
resources. These resources are human, financial,
physical, and information. Talent and labor are
included in human resources. Financial resources
refer to the sources of capital used by organization
to finance its current and future operations.
Physical resources are raw materials, offices,
facilities, factories, and machinery/equipment.
Finally, information refers to usable data needed to
make effective managerial decisions.1
Organizations utilize different types of
resources. Managers are responsible for the
effective and efficient use of these resources. Thus,
they combine human, financial, physical, and
information resources effectively and efficiently to
achieve organizational goals. Based on these key
responsibilities of managers, another definition
of management in relation to the former can
be noted as a continuous process of effectively
and efficiently using organizational resources to
achieve organizational goals. Thus, the process
that involves main functions of management is
not a linear process that starts with planning and
ends with controlling. The managerial process
is a cyclical and continuous process whereby
planning as the first function is directly linked
with controlling – the last management function.
3
Fundamentals of Management
FUNCTIONS OF MANAGEMENT
Effectiveness and efficiency are the key concepts
almost in all definitions of management. In brief,
effectiveness is about making the right decisions
and it also involves successful implementation of
these decisions. Effectiveness basically shows an
organization’s performance in achieving pre-set
goals. On the other hand, efficiency is mainly
about how organization uses its valuable resources.
Efficiency refers to not wasting resources when
achieving organizational goals. If an organization
is wasting its resources when trying to achieve
its goals, then the value of achieving the goals
would be diminished. Both effectiveness and
efficiency are the key concepts of management
and successful organizations are those concurrently
effective and efficient in their operations. For
instance, Wal-Mart needs to meet its quarterly
profit objective. However, given the reality of
limited resource, effectiveness alone is not enough.
For giant organizations such as Wal-Mart, small
improvements in efficieny yield huge payoffs.
All managers strive to make decisions to achieve
effectiveness and efficiency. The environmental
Protection Agency (EPA) says:2
As mentioned above, the process of management
has several main functions. Almost a century ago,
French engineer/executive Henri Fayol wrote about
the tasks of managers and the process of management
in his influential book “Administration Industrielle
et Générale – General and Industrial Management”.
Principles written by Fayol are still applicable in today’s
business world. According to Fayol, administrative
actions can lead to various consequences in
organizations. While some administrative acts
can lead the organization to collapse, different
administrative procedures can restore its prosperity.
Fayol claims that the effects of specific administrative
actions on business activities cannot be known with
certainty. However, as an executive, Fayol claims that
he saw both defective and effective ones and based on
his experiences he said:3
“Wal-Mart wants to reduce packaging by
5%, which it estimates will save the company
and its suppliers about $11 billion. About
30% of municipal waste comes from packaging”.
As mentioned above, Fayol’s principles and
his thoughts on administrative theory are still
applicable today albeit he wrote almost a century
ago. In today’s challenging business environment,
it is crucial that business managers should be able
to perform multiple tasks effectively to achieve
organizational goals. Fayol suggests that there are five
administrative functions that should be performed
by business managers: planning, organizing,
commanding, coordinating, and controlling.
These functions are still considered to be the main
functions of management with some slight changes.
One of these changes is that commanding function
is now known as leading/directing or influencing.
Another important change is that coordination is
no longer listed as a separate management function
since it continues to exist as an integral part of each
function (Figure 1.1).
Effectiveness is about making the right
decisions and it also involves successful
execution of these decisions.
Efficiency refers to not wasting resources
when achieving organizational goals.
1
Compare the concepts
effectiveness and efficiency.
4
of
“....the success of an enterprise generally depends
much more on the administrative ability of its
leaders than on their technical ability. Nevertheless,
it is certain that a leader who is a good administrator
but technically mediocre is generally much more
useful to the enterprise than if he were a brilliant
technician but a mediocre administrator.”
Business Management
As mentioned above, a successful manager
effectively performs each and every management
function. Failure in the effective execution of any
function will absolutely lead to organizational
failures in a wider context.
Figure 1.1 Functions of Management
Planning
Controlling
Functions
of
Management
Organizing
Leading/
Directing
Management functions are not a random
listing. Planning, organizing, leading/
directing and controlling are listed in an
order. Each function is followed by the next
one. However, execution of management
functions is not a linear process. All functions
are interrelated and execution of all functions
is a cyclical (continuous) process.
Internet
For additional explanation of all management functions, please visit http://open.lib.umn.edu/
principlesmanagement/chapter/1-5-planning-organizing-leading-and-controlling-2
Planning
Planning is the first function of management. Planning requires an organization to perform certain tasks.
First of these tasks is establishing the organizational goals. Others involve determining the steps necessary
to achieve intended goals, identifying and acquiring the necessary resources required by the organization,
setting up rules, policies, and procedures that regulate the organizational activities, developing solid plans,
and making meaningful estimations regarding the future of the organization.
Planning is considered to be the central management function. Because managers are required to
provide the members of the organization with necessary conditions to get them to work together toward
the achievement of organizational goals. Business managers should also make sure that all employees
understand the organizational goals and actions required to achieve these goals.4 It is also important that
all employees should have an understanding of their roles within the organization and they need to know
what is expected from them to effectively contribute to the organizational success through a joint effort.
Planning, as the first and primary management function, also affects other management functions. Failure
in the planning process leads to inevitable failures in organizing, leading and controlling.
Basic tasks of planning are to establish
organizational goals and determining
necessary steps to achieve intended goals.
Organizing
Organizing is the second management function after
planning. The organizing function involves determining
tasks and jobs, finding and hiring the best possible people
to perform these tasks and jobs, defining the hierarchical
relations within the organization, establishing the line of command, and finally coordinating the efforts of the
employees. Organizing is a function of management related to establishing and maintaining organizational
structures and systems. Such a responsibility is considered by managers as one of the most challenging tasks.
5
Fundamentals of Management
Organizing involves determining tasks
and jobs; finding and hiring best possible
people to perform these tasks and jobs;
defining the hierarchical relations within
the organization; establishing the line of
command; and finally coordinating the
efforts of the employees.
Mintzberg’s managerial roles view organizing
as the effective allocation of organizational
resources. The managers’ role as resource allocators
is very extensive in nature and broadly defined.
The resource allocator role involves all types of
resources including time, funds, equipment,
and workforce. Business managers design the
organizational structure in which people will
be working. Decisions about critical issues such
as which departments are needed and how the
budgeting process will support the allocation of
financial resources to fund these departments are
the parts of organizing function.5
Leading/Directing
The leading function refers to mobilizing
and directing people toward organizational goals.
Motivating the members of the organization,
building a shared vision, communicating
organizational goals to employees, and dealing
with the possible conflicts within the organization
are the main issues covered by the leading function.
The leading function refers to mobilizing and
directing people toward organizational goals.
During the process of leading, managers
articulate a clear vision and furthermore energize and
enable organizational members so they understand
what the organization is aiming to achieve and how
they contribute to this goal. Leadership requires
managers to use their power, personality, influence,
persuasion, and communication skills to coordinate
people and groups so their activities and efforts are
in harmony. The highly motivated workforce is an
outcome of the leading function. Only through
good leadership, employees will offer their best
performance in achieving organizational goals.6
6
The leadership function plays an important
role in today’s challenging environment. Because,
uncertainty, global competition, and diversity
at the workplace are among the main factors
that require managers to have skills in shaping
the organizational culture, communicating
organizational goals within the organization and
enhancing employee motivation.7 It is critical for all
types of organizations to have managers with these
skills if they are to gain and maintain competitive
advantage. The best leaders in Turkey and in the
world are the ones with skills and capacity to seize
opportunities hidden in the ever-changing and
turbulent business environment.
Efficient leaders are those who seize
oppurtunities in turbulent times.
As it will be further discussed in Chapter 3,
leadership behavior reveals itself in various styles
under different conditions. Although personal
traits are important determinants of leadership
behavior, organizational goals, conditions under
which leaders act, resources and other critical
factors shape the leadership process.
Controlling
The controlling function briefly refers
to monitoring and measuring organizational
outcomes. The controlling process compares actual
results with desired results and aims to figure out if
there are any significant gaps. All the actual results
are compared with the standards defined in the
planning phase. In other words, organizational goals
and operational targets serve as a standard through
which an organization measures its performance.
Organizations have numerous goals and targets
that serve as a standard for the controlling process.
Monthly sales targets and acceptable range of daily
defects and waste in the production line are among
many different standards within the organization.
Setting the right goals and establishing solid
standards are crucial for effective monitoring
and evaluation of organizational performance.
Comparing actual performance to desired results
is followed by spotting any significant gaps beyond
Business Management
an acceptable range, exploring possible reasons for
deviation, and finally taking necessary corrective
actions.
Controlling refers to monitoring and
measuring organizational outcomes and
taking corrective actions when necessary.
Although controlling is closely linked with all
management functions, the planning function
is central to controlling process. Because all the
standards used in controlling process are the goals
and targets established in the planning process.
An effective controlling process is important
for the organization to achieve desired results.8
Controlling is the last management function.
However, it should be a part of all functions to
prevent potential deviations. Failing to establish a
concurrent controlling approach leads to a snowball
effect and generally results in fatal consequences for
the organization. Thus, managers should view the
controlling process as an on-going and preventive
function.
Managers can use three types of organizational
control in the controlling process. All three
controlling methods enable managers to spot
deviations and fluctuations in the steps toward
organizational goals. The traditional controlling
process is mainly based on feedback obtained from
the business processes and organizational activities.
However, managers should know that problems
can occur at any time during business processes
and receiving only feedback would not be effective
in preventing the problems before they occur in
the process. Organizational control mechanisms
can focus on issues before, during and/or after a
process. These different approaches are known as
feedforward controls, concurrent controls and
feedback controls accordingly.
Feedforward controls are future-oriented
control mechanisms. In other words, they involve
identifying and preventing possible problems before
they occur. Concurrent controls are on-going
control mechanisms. Concurrent control identifies
and prevents problems as they occur. This requires
that all the relevant business processes are monitored
on real-time basis. For example, employees’ on-going
attention during the production process is an example of
concurrent controls. In concurrent control, problems
are solved as they occur so that they do not result in
bigger problems. Finally, feedback controls identify
and solve the problems after they occur. Feedback
controls deal with the outputs of the business
processes and organizational activities. Controlling
occurs after activity is completed. Although the
damage is already done, feedback controls allow
managers to understand the possible causes of
deviations and take necessary corrective actions.
Feedforward control involves identifying
and preventing possible problems before
they occur.
Concurrent control identifies and prevents
problems as they occur.
Feedback controls identify and solve the
problems after they occur.
2
Discuss the relationship between
the controlling and planning
functions.
MANAGERS AND
ORGANIZATIONAL RESOURCES
Managers are important to all types of
organizations. There are several reasons why
they are important. First, organizations need
their managerial skills and abilities more than
ever in these unstable and complex times. Only
the managers who possess required skills will
lead the organization in today’s challenging
environmental conditions. Second, managers
are important for getting things done. If work
within the organization is not being done then it
simply means that the organization is not moving
toward the organizational goals. Finally, managers
do matter to organizations. Because research has
found that the relationship between the employees
and managers is the most important variable in
employee motivation, performance, and loyalty.9
7
Fundamentals of Management
Considering their importance to the
organization, it is necessary to define who managers
are since they are the people who perform the
main functions of management. From a traditional
standpoint, managers use their authority to tell
people what needs to be done and how they would
do it to achieve organizational goals. This brief
definition of managers is simple enough to explain
the differences between managers and employees.
On the other hand, such a simple definition fails to
provide a well-rounded definition for managers in
today’s challenging business environment. Because
managers have to deal with more complex problems
and perform more sophisticated functions. Business
managers are responsible for performing planning,
organizing, leading and controlling functions
effectively and efficiently to achieve organizational
goals. At this point, it is important to understand
that all organizations have goals and business
managers allocate and utilize the organizational
resources effectively and efficiently to achieve
these goals. These organizational resources can be
classified into four groups:
1. Human resources
2. Monetary resources
3. Raw materials
4. Capital resources
Organizational resources can be classified
into four groups: human resources;
monetary resources; raw materials; and
capital resources.
Human resources are the people working
within the organization. The skills they have and
their knowledge of the work are important for
managers. In competitive environments whereby
access to critical knowledge is essential, intellectual
capital is considered as an inseparable part of human
resources. Intellectual capital, as an organizational
resource, adds value to the business and leads to
8
sustainable competitive advantage. Monetary
resources refer to the money used by managers to
purchase goods and services for the organization.
Raw materials are the ingredients used directly in
manufacturing of products. For example, rubber is
a raw material in the production of tires. Businesses
purchase raw materials with its monetary resources.
Capital resources refer to the machinery and
equipment used in the production process.10
Managerial effectiveness is defined as the
manager’s ability to achieve desired results.
Managerial efficiency is the manager’s
ability to manage the business with optimal
utilization of organizational resources.
Managers are responsible for effective and
efficient utilization of these resources in the process
of pursuing organizational goals. In other words,
all business managers strive to achieve managerial
effectiveness and managerial efficiency. Managerial
effectiveness is about the level of achievement of
organizational goals. It shows the manager’s ability
to meet organizational goals. The less deviation
and gap occurs in achieving organizational goals,
the more effective business managers are in
their managerial activities. On the other hand,
managerial efficiency refers to the utilization
of organizational resources during the activities
toward organizational goals. If organizational
resources are wasted or underutilized than the
managerial efficiency is considered to be low. As
mentioned above, organizational resources include
not only raw materials but also human, monetary
and capital resources. Managerial effectiveness and
managerial efficiency cover all these different types
of organizational resources. Organizations must
utilize all these resources optimally and prevent
wastage and underutilization. Figure 1.2 shows
the relationship between managerial effectiveness
and managerial efficiency.
Business Management
EFFECTIVENESS
Figure 1.2 Managerial Effectiveness Versus Managerial Efficiency
LOW
HIGH
Low efficiency and high
effectiveness
High efficiency and high
effectiveness
(High goal attainment, but poor
use of resources)
(High goal attainment and good
use of resources)
Low efficiency and low
effectiveness
High efficiency and low
effectiveness
(Low goal attainment and poor
use of resources)
(Low goal attainment, but good
use of resources)
HIGH
LOW
EFFICIENCY
As seen in Figure 1.2, the main task of
managers is to achieve managerial effectiveness
and managerial efficiency. In the best possible
combination, the organization reaches both
effectiveness and efficiency together. In other words,
the organization meets organizational goals with the
optimal use of resources. Neither effectiveness nor
efficiency is considered to be more important than
the other. They should exist in balance within the
organization. One of the most challenging tasks
of a business manager is to maintain that balance
between effectiveness and efficiency.
Managerial effectiveness and managerial efficiency are
two different but correlated concepts.
Internet
Please read the article on managerial effectiveness published
in Harvard Business Review by Peter F.Drucker: https://
hbr.org/1963/05/managing-for-business-effectiveness.
TYPES OF MANAGERS
There are different types of managers within the organization and each type of manager has
different tasks, jobs, and responsibilities. In other words, managerial positions and expectations from
each managerial position vary based on several conditions. For example, tasks of a manager who leads a
multinational corporation and tasks of a local restaurant manager cannot be identical. Furthermore, each type
of organization, depending on its size, the scope of operations, competitive position, etc., has different
expectations from its managers.
Although there are different approaches to classifying managers, common approaches classify managers
in two categories as vertical classification and lateral classification.
Vertical Classification
One of the most common criteria in determining
There are three main hierarchical levels of
managers’ levels within the organization is their
management: top management, middle
hierarchical position. There are three main hierarchical
management, and first-line management.
levels of management: top management; middle
management; and first-line management.
Top managers possess a high level in the organizational hierarchy. They are mainly responsible for
setting the overall direction of the organization, building extensive strategies, and making sure that
organizational goals are met. Decisions made by top management affect the entire organization. Although
9
Fundamentals of Management
top management titles vary from one organization
to another, titles such as president, chairman/
chairwoman, chief executive officer (CEO),
managing director, executive vice-president are
among the highest-ranking executives in an
organization. In addition to their responsibilities
written above, developing a solid and shared
vision for the organization and building a strong
organizational culture that supports adaptability,
flexibility, entrepreneurship, and innovation are
among their primary responsibilities.
the titles of first-line managers vary depending on the
organization, supervisor, foreman, and section-lead are
among the titles used by first-line managers. They focus
on the rules and procedures necessary for the effective
and efficient production process. First-line managers
are also responsible for providing shop floor employees
with technical support when needed and motivating
their subordinates. They strive for meeting operational
targets with a short time horizon.
Autonomous and self-managing teams
may not require formal managers.
Unlike other levels of managers, top
managers make decisions that affect the
entire organization.
Middle managers are mainly responsible for
the implementation of strategies developed by
top management to achieve desired organizational
goals. Middle managers have a shorter time horizon
compared to top managers and their focus is more
specific and concrete since they are responsible for
the implementation of organizational strategies,
policies, and procedures. Although the titles of
middle managers vary in different organizations,
department managers, and branch managers are
among the common titles of middle managers.
Middle managers are critical for meeting
organizational goals albeit tendencies toward
creating a lean organizational structure, downsizing
and delayering reduce middle management
positions. Such tendencies cause radical shifts in
the responsibilities of middle managers. Middle
managers are not only responsible for the vertical
flow of information, but they are also responsible
for establishing horizontal coordination networks
that allow organization to respond environmental
changes.11
First-line managers are mainly responsible for
managing shop floor employees with no managerial
responsibilities. They supervise daily operations
and make sure that operational-level activities run
flawlessly. From this standpoint, first-line managers
are the type of managers who are directly responsible
for the production of goods and services. Although
10
Although these three types of managers are
categorized under the vertical classification of
managers, it is important to mention a change that
has been observed in the last three decades. In recent
years, the fourth type of manager has emerged in
the vertical classification of managers. This fourth
type of managers is generally titled as team leaders.
The main reason behind the emergence of team
leaders is that organizations are now working more
with autonomous and self-managing teams
in which no formal managers are needed. Team
leaders are mainly responsible for coordinating the
work of a small group of people while acting as a
catalyst or facilitator. Project managers, program
managers, process managers, and task force leaders
are among the titles used for team leader positions.
It is important to note that the term team could also
refer to an executive team. However, such executives
almost never carry the title team leader.12
Team leaders are mainly responsible for
coordinating the work of a small group of
people while acting as a catalyst or facilitator.
3
What are the main responsibilities
of top managers?
Business Management
Lateral Classification
Another classification of managerial positions could be made on lateral basis. In lateral classification,
managerial positions differentiate laterally. One of the subcategories of lateral classification is functional
managers. Functional managers are responsible for supervising the employees and departments engaged
in specific activities. Marketing, finance, human resources, research and development are few examples of
functional divisions. Managers responsible for the activities of such divisions/departments are functional
managers. Another subcategory in lateral classification
of managers is general managers. General managers are
Lateral classification of managerial positions
responsible for the activities of several different groups
are subdivided into two subcategories known
that perform various functions. For example, manager of a
as functional and general managers.
department store is a general manager since she or he manages
several different functions concurrently.13
ROLES OF MANAGERS
The Canadian scholar Henry Mintzberg provided one of the most extensive definitions of the managerial
roles. Mintzberg based his classification of managerial roles on his research regarding how managers spend
their time at work, primarily with regard to the roles they
play within the organization. Mintzberg’s typology of
managerial roles has three major categories: interpersonal,
Mintzberg’s typology of managerial roles
informational, and decisional. According to Mintzberg,
has three major categories: interpersonal,
each category includes specific roles. Figure 1.3 shows ten
informational, and decisional.
major managerial roles for three categories.
Figure 1.3 Classification of Managerial Roles
MANAGERIAL ROLES
INTERPERSONAL
INFORMATIONAL
DECISIONAL
• Figurehead
• Leader
• Liaison
• Monitor
• Disseminator
• Spokesperson
• Entrepreneur
• Disturbance handler
• Resource allocator
• Negotiator
Interpersonal Roles
Interpersonal roles refer to interpersonal relations
and behaviors necessary for effectively managing the
organization. Mintzberg notes that there are three
interpersonal roles and these roles are derived from the
manager’s formal authority granted by the organization.
These three roles are the figurehead role, the leader role,
and the liaison role.
Interpersonal roles refer to interpersonal
relations and behaviors necessary for
effectively managing the organization.
The figurehead role
The figurehead role of managers emphasizes that the organization is represented by the managers in various
events such as ceremonial activities and other social activities. The figurehead role of managers is very important
for the organization since it affects organization’s relations with its external environment and its image in the
society.
11
Fundamentals of Management
The leader role
This role refers to influencing or directing people
within the organization toward organizational
goals. Formal authority is granted to the managers
over the works of others. Leadership behavior exists
in the organization as long as the managers use
this authority to mobilize people toward meeting
organizational goals.
The liaison role
The liaison role refers to the manager’s
communication with individuals and organizations
outside the formal chain of command. This
communication is not limited to other managers
within the organization but also other external
actors such as customers, suppliers, government
officials and managers in other organizations.
Relations in this context are lateral rather than
vertical. For example, one of the most important
tasks that managers have is to maintain integration
between the division (s)he is managing and other
divisions within the organization. These efforts are
also considered within the context of the liaison
role.14
Informational Roles
Mintzberg notes that another type of managerial
role is the informational roles. These roles include
gathering information and conveying relevant
information to internal and external stakeholders.
There are three informational roles: the monitor
role, the disseminator role, and the spokesperson
role.
Informational roles include gathering
information and conveying relevant information
to internal and external stakeholders.
The monitor role
This role involves extensively seeking and
gathering information through which a manager
can understand the developments crucial for the
organization and the environment. It should be
noted that performing the monitor role is now
sophisticated and demanding more than ever.
Because managers are exposed to enormous amount
12
of data and information flowing from many
different resources such as the Internet, customers,
suppliers, and other relevant stakeholders. One of
the challenges in the monitor role is to determine
which data and information are necessary and
useful for the organization and which are not.
The disseminator role
A manager is not only a receiver of information.
Managers also send information to relevant parties.
According to the disseminator role, managers share
the information they gathered with the members
and units within the organization. A manager who
learns about the organization’s plans for his or her
department and shares this information with his or
her subordinates is an example of the disseminator
role.
The spokesperson role
Managers are sometimes requested to represent
their views on the divisions they manage. Such
representation can occur at different levels
within the organization. While middle managers
represent their views on their departments, top
managers are called upon to represent the entire
organization. Another possible difference between
the spokesperson roles of middle and top managers
is that while middle managers generally represent
their departments within the organization, top
managers represent the entire organization to the
external actors. All these representation activities,
whether internal or external, are considered within
the context of the spokesperson role.
Decisional Roles
Decisional roles are critical for making
decisions that affect organization partially or as
a whole. Business managers possess authority
and responsibility to make decisions. There are
four decisional roles: the entrepreneurial role, the
disturbance handler role, the resource allocator
role, and the negotiator role.
Decisional roles are critical for making
decisions that affect organization partially or as
a whole.
Business Management
The entrepreneurial role
One of the most important tasks of a manager is
to initiate the change efforts within the organization
and effectively lead this process. Managing the
change process, finding solutions for possible
problems, generating new ideas, building an
organizational culture that encourages employees
to come up with new ideas, and evaluating and
implementing innovative ideas are considered in
the domain of the entrepreneurial role of managers.
The disturbance handler role
It is inevitable that there will be conflictions
within the organization due to many possible
reasons. The disturbance handler role is needed
when conflicts occur. Managers are required to
manage conflicts effectively. Because unresolved
conflicts eventually lead to poor performance
at individual and organizational level. Effective
handling of the conflicts within the organization
reveals the administrative skills of the managers.
The resource allocator role
An effective manager utilizes the organizational
resources effectively and efficiently. It is also the
manager’s responsibility to decide how these
resources will be distributed among different
units and divisions. Allocation of funds, assigning
individuals to most relevant positions, and
effective/efficient use of organizational resources
are some exemplary parts of the resource
allocator role. Failure in the resources allocator
role not only diminishes the overall performance
of the business but also leads to conflicts between
individuals, groups, and departments.
The negotiator role
Managers are often required to make
accommodations with other departments
(middle managers) or with other organizations
(top managers). The negotiator role does not
only refer to accommodations with suppliers,
customers, government institutions, and industrial
unions. Managers also act as negotiators within
the organization. Getting individuals and
departments to work for meeting organizational
goals also requires good negotiating skills.
4
Discuss why the entrepreneurial
role is important for the business.
MANAGERIAL SKILLS
Although the managerial roles are important, it
is also crucial to note that the skills of the managers
also contribute to the organizational performance.
Because different roles of management would
be performed best only when supported with
managerial skills. One of the most well-known
studies with regard to the managerial skills was
published in Harvard Business Review in 1955.
The article authored by Robert L.Katz was titled
“Skills of an Effective Administrator”. Katz noted
that managers must possess three critical skill sets
to optimize managerial performance.15
A skill is an ability either to perform some specific
behavioral task or the ability to perform some
specific cognitive process that is functionally
related to some particular task.
A skill is an ability either to perform some
specific behavioral task or the ability to perform
some specific cognitive process that is functionally
related to some particular task. For example,
making a sales presentation, operating a forklift,
and negotiating with the stakeholders are among
the behavioral tasks that require certain physical
capacities. On the other hand, representing
problems, implementing solutions, and evaluating
performance are the examples of cognitive processes
that require certain cognitive capacities. Katz
rejected the understanding that the core managerial
skills are not inborn personality traits. He noted
that these skills can be and should be developed
in managers. Based on this argumentation, Katz
proposed a typology that includes three types
of managerial skills: technical, human, and
conceptual.16 Although these skills are interrelated,
Katz suggested that each skill set should be studied
separately. Because, while technical skills are more
important for first-line managers, conceptual skills
13
Fundamentals of Management
are more important for top managers. It is important to note that the human skills are equally important
for all management levels. Figure 1.4 shows the relationship between different management levels and the
skill sets they should have.
Top
Management
Middle
Management
CONCEPTUAL
SKILLS
HUMAN
SKILLS
TECHNICAL
SKILLS
Figure 1.4 Managerial Skills at
Different Levels of Management
First-line
Management
As seen in Figure 1.4, Katz’s typology does not
claim that top managers do not possess technical
skills or first-line managers do not possess conceptual
skills. Different levels of management must possess
all three skill sets albeit at different levels. While top
managers must possess a mix of skill sets in which
conceptual skills are dominant, technical skills are
more dominant for first-line managers.
Technical, human, and conceptual skills
are together parts of a larger skill set. Each
management level must possess a different
composition of this larger skill set.
Technical skills identify manager’s ability to
use necessary knowledge, methods, techniques,
and equipment to perform certain tasks. Technical
skills could have been acquired through training,
experience, and education.17 In brief, technical skills
are the skills necessary for performing a specific
task. For example, a supervisor, who oversees a process
that requires using certain machinery and equipment,
must know how these different equipment work.
Technical skills identify manager’s ability to use
necessary knowledge, methods, techniques, and
equipment to perform certain tasks.
14
Human skills refer to a manager’s ability to
communicate with other people, develop healthy
relationships, support employee development,
manage conflicts, and enhance motivation. Human
skills are crucial skills for all managers since they
achieve organizational goals through joint efforts
of the people. A manager who lacks human skills
will most likely to fail in getting people to work
together for meeting the organizational goals.
Human skills are a manager’s ability to
communicate with other people.
Conceptual skills refer to manager’s ability to see
the big picture, develop solid plans, use sophisticated
information, identify problems, and find strategic
and operational solutions to these problems.18 From
this standpoint, mainly top managers must possess
conceptual skills. A manager with good conceptual
skills possesses a holistic view of the organization.
Such a view will enable manager to make solid
strategic decisions.
Conceptual skills refer to manager’s ability to
see the big picture.
There are other managerial skills in addition to the
typology discussed above. There are also many other
typologies of managerial skills and these typologies
consist of various skills. It is not convenient to consider
all these different skills and skill sets in this chapter.
Business Management
However, with regard to different definitions and typologies, it could be argued that some managerial skills are
common in all considerations. Some of these common skills are shown in Table 1.1.
Table 1.1 Examples of Managerial Skills
Managing human capital
Using purposeful networking
Inspiring commitment
Managing decision-making processes
Managing change processes
Managing strategy and innovation
Defining tasks and getting things done
Logistics and technology management
Facilitating the psychological and social context of the work
Source: Robbins, S. P. & Coulter, M. (2011). Management. Prentice Hall, p.13.
Employees who are aiming to be a part of the management team
should continuously improve and upgrade their skills. Developing
and improving managerial skills are integral parts of these efforts.19
It is obvious that it is not realistic to expect that a single individual
would possess all these skills. On the other hand, the more skills an
individual possesses and the more individual strives to improve them,
the more likely a successful outcome in a managerial position.
5
Discuss if top managers possess
technical skills according to
Katz’s typology.
CURRENT ISSUES IN MANAGEMENT
As mentioned above, management and managers play a more important role in today’s challenging
conditions. Recent changes in the environment caused the business environment to become more
unstable, sophisticated, and competitive than before. These changes are so influential that the concepts of
management and managers had to be redefined. Although there are many on-going discussions with regard
to the areas where these changes are more influential, this chapter focuses on globalization, technologic
changes, diversification of the workforce, and ethics and social responsibility.
Globalization
Businesses today are more exposed to the effects of
Globalization is the reduction of most
globalization. Many businesses now operate beyond their
barriers– physical and non-physical–between
domestic borders. It is important to note that demand
nations.
became global, offering worldwide business opportunities.
As a response to the changing nature of demand, businesses
started to expand their operations at international scale. Globalization refers to the reduction of most business
barriers. Barriers, in the context of globalization, are both physical and non-physical. Physical barriers include
borders between the countries and economic/commercial borders. Reduction of these physical barriers allowed
the mutual transfer of products/services, investments, capital, technology, and workforce between countries.
On the other hand, globalization is also about the reduction of non-physical barriers. Cultural differences
and values are among the non-physical barriers that became less obstructive with the rise of globalization.
While creating new possibilities and opportunities for businesses, globalization also leads to the
sophistication of managerial activities. Gathering information solely about the local and domestic environment
is not enough anymore. Managers today are required to monitor developments at a global scale. Failing to
examine global environmental conditions, ignoring recent changes, and focusing only on the immediate
business environment are among the main reasons why businesses fail to acquire and maintain competitive
advantage. Such businesses will most likely to perform poorly in the market and cease to exist over time.
15
Fundamentals of Management
Technological Changes
Technologic changes have strong impacts on
how organizations are designed and how business
Globalization does not only refer to the
reduction of physical barriers such as the
boundaries between countries. It also
refers to the reduction of non-physical
barriers such as culture and values.
processes run. New technologies offer new
possibilities and opportunities to businesses. The
recent changes in information and communication
technologies have affected the business models in
a radical way. Among these changes, increasing
use of the Internet technologies in businesses and
revolutions in information technologies play the
most important roles in the evolution of the existing
business models. The main effects of the Internet
on businesses can be mentioned as follows:20
• Fast access to quality information – anytime and anywhere.
• The Internet became an integral part of almost all business functions. While in some
cases, it serves as a marketplace, in other
cases it serves as a factor that changes the
structure of the traditional distribution chain. The Internet facilitated the globalization
and allowed managers to monitor competitors, suppliers, and customers regardless of
their geographical location. Concepts such
as e-management, e-business, home office, and social media strategies resulted in
reconsideration of management functions
and decision-making processes.
• Effective development of new products and
services.
On the other hand, it is important to note
that these advantages could easily turn into
disadvantages. For example, recent developments in
information and communication technologies
(ICT) resulted in exponential increases in the amount
of available data and information. Thus, managers
today have to deal with enormous amount of
information when making decisions. Information
overload could potentially hinder decision-making
16
processes. Because managers must be able to
determine which data or information is accurate
and reliable if they are to make sound decisions.
However, these judgmental skills are not easy to
build for managers.
It is not sufficient to understand how to
use these technologies to benefit from them.
In other words, having the latest technologies
and employing the people who are capable of
using these technologies do not guarantee a high
organizational performance. Managers should
make the best call about which technologies are the
most appropriate options for the business in a given
situation. Spending funds for the technologies that
are not needed by the organization simply means
wasting organizational resources. Thus, technology
investment strategies must be carefully formulated
and implemented.
ICT cause managers to deal with vast
amount of data and information.
Innovation
One of the most influential topics in management
is innovation. The structure of competition in many
industries reveals that the life cycle of the organizations
that fail to differentiate themselves through offering
value-added products and services is constantly
shrinking. Organizations that lack innovative skills fail
to adapt to demanding environmental conditions.21
In the last three decades, rules of competition have
changed dramatically and previous parameters of
competition such as production capacity, quality, cost
control, flexibility, and speed have become insufficient
to help businesses to survive in the long term. Although
these competitive parameters are not totally obsolete,
another challenging parameter – innovation – has
dominated the business world today. It should be
noted that organizations should build competencies
and capabilities to innovate constantly and innovation
should not be seen as a one-time action. Businesses
should constantly innovate their products/services,
processes and organizational structures for a long-term
survival. Considering the fact that many innovations
are imitated or replaced by the rivals within several
months, organizations cannot rely on one single
innovation.22
Business Management
The Oslo Manual (OECD, 2005) defines
innovation as;“…Implementation of a new or
significantly improved product (good or service),
or process, a new marketing method, or a new
organizational method in business practices, workplace
organization or external relations.”
Businesses benefit from innovation.
engineers with the required motivation to innovate
successfully, possibly leading to new products or
services.23
Internet
For the comparative analysis of innovation
performance in European countries and regions,
please visit https://ec.europa.eu/growth/industry/
innovation/facts-figures/scoreboards_en.
Diversity in the Workforce
Businesses today must re-consider their
products and services as well as their structures and
strategies. In other words, organizations should
focus on what they do and how and why they
do it. Business managers must understand that
the machinery, equipment, facilities, and other
physical resources are not the major driving forces
behind competitive advantage anymore. Thus,
they must invest in improving organizational and
individual creativity. Unleashing creativity within
the individuals and establishing organizational
systems and structures to benefit from their
cognitive skills will enable organization to deliver
high value-added products and services.
A short travel back in time reveals how innovation
and change are important for companies. Only
one of the 12 biggest US companies in the early
1900s still exists as an independent company today
and that company is General Electric. The others
ceased to exist as an independent entities. General
Electric’s current CEO Jeffrey Immelt shifted
GE’s focus from growing through acquisitions
to constant technological innovation. Individual
creativity and conceptual thinking are two major
inputs of innovation and thus, as mentioned
above, entrepreneurial spirit and creativity must
be encouraged within the organization. At 3M,
engineers are allowed to spend as much as 15 percent
of their time on their projects of their own design.
3M believes that this flexibility will provide the
Diversity is closely linked with globalization
and it affects the social side of the organization. Fair
and equal treatment in the workplace is an ethical
and legal responsibility for managers. Because, due
to globalization, managers work with people of
different cultural, ethnic, and racial backgrounds.
Since management is about getting people to work
together toward meeting the organizational goals,
managers must strictly avoid discriminating among
the members of the organization.
Correspondingly, all human resources policies
and procedures in place must support fair and
equal treatment to all employees. Otherwise, the
organization will face legal consequences and fail
to establish a sense of loyalty among employees.24
Organizations should seek ways to benefit from the
diversity in the workplace. Bringing different skills,
mindsets and qualifications together in an effective
way enables organization to break through the rigid
and ordinary practices within the organization.
Effective management of diversity in the workplace
contributes to organizational success. Details of
work place diversity will be discussed in Chapter 7.
Ethics and Social Responsibility
Business managers make decisions under
pressure. This pressure is mainly related with
competitive factors such as sales, production, and
market share. Managers sometimes face ethical
dilemmas when making decisions. Thus, ethics and
social responsibility are two issues that managers
must take into consideration when managing
the organization. It is obviously unacceptable
and illegal for businesses to engage in unlawful
17
Fundamentals of Management
activities or undertaking managerial practices in favor of an interest group while neglecting and even
damaging the welfare of a larger group. It is important to note that no cause can justify such illegitimate
and unlawful acts. Ethics refers to code of moral principles that set standards of conduct for what is “good”
and “right” as opposed to “bad” and “wrong”.25 Because of
corporate scandals such as Enron and WorldCom, consumers
have justified concerns about whether corporations comply
with ethical obligations. Managers should formulate and
Internet
implement decisions that will not cause stakeholders
For the philosophical foundations of business
to develop concerns about the ethical status of the
ethics, you can visit the link: https://plato.
organization. Otherwise, it is inevitable to have negative
stanford.edu/entries/ethics-business/
and unfavorable judgments and beliefs toward managers
and the organization.
It is also important to note that social responsibility since it ultimately leads to improved odds of
long-term survival for the organization. Social responsibility refers to the belief that businesses have a
responsibility to conduct their affairs ethically to benefit both employees and the larger society. Although
there are costs associated with acting in a socially responsible manner, benefits of social responsibility are
greater than the costs. First, acting is a socially responsible manner contributes to organization’s image in the
society. Furthermore, such organizations will be less likely
to have problems with its stakeholders with regard to the
utilization of organizational resources. Socially responsible
Social responsibility refers to the belief that
organizations will be more likely to build customer loyalty
businesses have a responsibility to conduct their
much easier than those do not act socially responsible.
affairs ethically to benefit both employees and
Finally, relevant research shows that socially responsible
the larger society.
organizations have better financial performance and they
are in much better position in attracting skilled labor.26
Profit maximization and corporate social responsibility used to be regarded as leading to opposing
policies. However, in today’s business environment, both doing good and doing well are emphasized
together. The Coca-Cola Company has set up about 70 charitable projects to provide clean water in 40
countries. Through this project, the Coca-Cola Company is planning to help 1.2 billion people without access
to safe drinking water. The company is building structures to “harvest” rainwater in India, expanding the
municipal water supply in Mali, and delivering water purification systems and storage urns to Kenya. These
projects are aimed at improving the company’s image since there are many accusations toward the Coca-Cola
Company that it is using too much of the world’s water supply. Through these projects, the company identified
water-shortage as a strategic risk and contributed to water conservation for the good of both the society and
the company.27
One of the major challenges managers face when trying to comply
with the principles of social responsibility is that different stakeholders
have different and even conflicting expectations. A successful manager
establishes and maintains a balance in meeting different and sometimes
6
conflicting expectations of stakeholders. Sound management of Discuss the differences between
stakeholders require good prioritization of these expectations and take innovation and invention.
necessary actions. See Chapter 3 for the details of corporate social
responsibility in business organizations.
In this chapter, we aimed to make a brief introduction to management within the framework of terms
and definitions. The following chapters will cover the details of management and organizational structuring
including strategic and behaviorial aspects.
18
Business Management
Further Reading
Do You Really Want to Be a Manager?
Is management for you? Most people
consider becoming a manager to be a positive,
forward-looking career move. Indeed, life as a
manager offers appealing aspects. But it also holds
many challenges, and not everyone will be happy
and fulfilled in a management position. Here
are some of the issues that would-be managers
should consider before deciding they want to
pursue a management career:
1. The increased workload. It isn’t unusual for
managers to work 70–80 hours per week, and
some work even longer hours. A manager’s
job always starts before a shift and ends hours
after the shift is over. When Ray Sarnacki
was promoted to manager at an aerospace
company, he found himself frustrated by
the incessant travel, endless paperwork, and
crowded meeting schedule. Eventually, he
left the job and found happiness in a position
earning about one-fifth of his peak managerial
salary.
2. The challenge of supervising former peers.
This issue can be one of the toughest for
new managers. They frequently struggle to
find the right approach. Some try too hard
to remain “one of the gang,” and others
assert their authority too harshly. In almost
all cases, the transition from a peer-to-peer
relationship to a manager-to-subordinate
one is challenging and stressful.
3. The headache of responsibility for other people.
A lot of people get into management because
they like the idea of having power, but the
reality is that many managers feel overwhelmed
by the responsibility of hiring, supervising, and
disciplining others. Laura Kelso, who today
thrives on the fast pace and responsibility of
being a manager, says that the first time she had
to fire someone, she agonized for weeks over
how to do it.
4. New managers often are astonished at the
amount of time it takes to handle “people
problems.” Kelly Cannell, who quit her job
as a manager, puts it this way: “What’s the
big deal [about managing people]? The big
deal is that people are human….To be a good
manager, you have to mentor them, listen to
their problems, counsel them, and at the end
of the day, you still have your own work on
your plate…. Don’t take the responsibility
lightly, because no matter what you think,
managing people isn’t easy.”
5. Being caught in the middle. Except for those
in the top echelons, managers find themselves
acting as a backstop, caught between upper
management and the workforce. Even
when managers disagree with the decisions
of top executives, they are responsible for
implementing them.
For some people, the frustrations of
management are not worth it. For others,
management is a fulfilling and satisfying career
choice and the emotional rewards can be great.
One key to being happy as a manager may be to
carefully evaluate whether you can answer yes to
the question, “Do I really want to be a manager?”
Source: Daft, R. L. & Marcic, D. (2009).
Understanding Management (6th ed.). South-Western
Cengage Learning.
19
Fundamentals of Management
In Practice
What Every Manager Should Know About
Being The Boss
All too often, people confuse leadership and
management. They require similar qualities – both
a technical and an interpersonal acumen – but
they aren’t synonymous. The fact is, not everyone
who’s put in a management role is a good fit
and, more often than not, that quickly becomes
evident in their results. Managers who become the
best leaders are those who not only have technical
expertise but also possess the ability to inspire
others toward a common goal. And unfortunately,
many companies thrust people into roles for which
they may be ill-prepared or not well suited.
Only you can truly know your strengths,
which is why it’s essential to take an honest
inventory of your core skills and decide if a
management role is right for you. From my
experience, there are a few considerations you’ll
want to make as you assess your readiness:
Understand and solve problems other than
your own
One of the business leaders I admire most,
an old boss of mine, once told me that in order
for me to be able to do what he asked of me,
I needed to understand both his and his boss’s
problems. This is one of the first lessons you
learn as a manager – your job is no longer to
solve only what’s in front of you, but to also help
solve the problems of the senior leaders who
organizationally are positioned above you.
20
Keeping this approach in mind as you develop
your management style will make it easier to get a
seat at the table, putting you in a better position
to talk about the business at a strategic level and
with a more robust understanding of its issues
Become Familiar with Emotional
Intelligence
Successfully working at a management level
requires emotional intelligence: the skills that enable
you to recognize emotions, put them in context and
use them to guide behavior. Tapping into this can be
a powerful tool for maintaining engaged employees.
Learn to lead, not direct
I find leading people to be much more effective
than trying to manage everything they do. For
this reason, the servant-leader model of leadership
is my aspiration: inspiring others to follow while
empowering them to develop and perform at the
highest level possible. Given the challenges we face in
a global economy, we need to consider how proper
leadership can create an engaged workforce, as that
will be one of our most important sustained economic
differences. And this transcends all industries: an
inspired workforce is an engaged workforce and an
engaged workforce achieves better results. Successful
managers will be the ones who remove themselves
from tactical work to set a vision and inspire their
team. While they share power and responsibility,
they’re also the people their teams want to follow.
Source: Schmidt, K. T. (14.06.2017). http://
fortune.com/2016/06/14/managementadvice/?iid=sr-link7
Business Management
LO 1
Defining the concept of
management
LO 2
Summary
Management is essentially needed in all types of organizations regardless of size and scope of operations
at all organizational levels. Setting the organizational goals and strategies, building an organizational
structure to enable organization to effectively and efficiently achieving these goals, motivating the
members of the organization and leading people to achieve organizational goals, and finally monitoring
and evaluating the organizational performance are the main activities within the boundaries of
management. Although there are many definitions of management, one widely known definition
defines management as “an act of getting people work together to achieve organizational goals through
effective and efficient use of resources”. This brief definition of management involves all four functions
of management: Planning, organizing, leading/influencing and controlling. All managerial activities
performed by business managers are represented in these four functions. Managers are responsible for
the effective and efficient use of these resources. Managers combine human, financial, physical and
information resources effectively and efficiently to achieve organizational goals.
Explaining the functions of
management
The process of management has several main functions. Planning is the first function of management.
Planning requires organization to perform certain tasks. First of these tasks is establishing the
organizational goals. Others involve determining the steps necessary to achieve intended goals,
identifying and acquiring the necessary resources required by the organization, setting up rules,
policies, and procedures that regulate the organizational activities, developing solid plans, and make
meaningful estimations regarding the future of the organization. The organizing function involves
determining tasks and jobs, finding and hiring best possible people to perform these tasks and jobs,
defining the hierarchical relations within the organization, establishing the line of command, and finally
coordinating the efforts of the employees. The leading function refers to mobilizing and directing
people toward organizational goals. Motivating the members of the organization, building a shared
vision, communicating organizational goals to employees and dealing with the possible conflicts within
the organization are the issues covered by the leading function. Controlling briefly refers to monitoring
and measuring organizational outcomes. The controlling process compares actual results with desired
results and aims to figure out if there are any significant gaps. Exploring possible reasons for deviation
and taking corrective actions are in the domain of controlling function.
21
Fundamentals of Management
LO 3
Exploring the efficient use of
resources and different types of
managers
Summary
Business managers allocate and utilize the organizational resources effectively and efficiently to achieve
these goals. These organizational resources can be classified into four groups: human resources,
monetary resources, raw materials, and capital resources. Managers are responsible for effective and
efficient utilization of these resources in the process of pursuing organizational goals. In other words,
all business managers strive to achieve managerial effectiveness and managerial efficiency. Managerial
effectiveness is about the level of achievement of organizational goals. It shows the manager’s ability
to meet organizational goals. On the other hand, managerial efficiency refers to the utilization of
organizational resources during the activities toward organizational goals. If organizational resources
are wasted or underutilized than the managerial efficiency is considered to be low. In the best possible
combination, the organization reaches both effectiveness and efficiency together.
Although there are different approaches to classifying managers, common approaches classify managers
in two categories as vertical classification and lateral classification. One of the most common criteria in
determining managers’ levels within the organization is their hierarchical position. There are three main
levels of management in vertical classification: Top management, middle management, and first-line
management. Lateral classification of managerial positions is subdivided into two subcategories known as
functional and general managers.
LO 4
Discussing the roles of managers
and managerial skills
The Canadian scholar Henry Mintzberg provided one of the most extensive definitions of the managerial
roles. Interpersonal roles refer to interpersonal relations and behaviors necessary for effectively managing
the organization. Mintzberg notes that there are three interpersonal roles and these roles are derived
from the manager’s formal authority granted by the organization. These three roles are the figurehead
role, the leader role, and the liaison role. Mintzberg notes that another type of managerial roles is the
informational roles. There are three types of informational roles: the monitor role, the disseminator
role, and the spokesperson role. Finally, decisional roles refer to the manager’s requirement for making
decisions that affect an organization partially or as a whole. Business managers possess authority and
responsibility to make decisions. There are four decisional roles: the entrepreneurial role, the disturbance
handler role, the resource allocator role, and the negotiator role. Although the managerial roles are
important, it is also crucial to note that the skills of the managers also contribute to the organizational
performance.
22
Business Management
LO 5
Interpreting current changes that
affect managerial activities
Summary
Management and managers play a more important role in today’s challenging conditions. Recent
changes in the environment the business environment to become more unstable, sophisticated,
and competitive than before. These changes are so influential that the concepts of management and
managers had to be redefined. Globalization refers to the reduction of barriers significantly. Barriers,
in the context of globalization, are both physical and nonphysical. Examples of physical barriers include
borders between the countries and economic/commercial borders. On the other hand, globalization is
also about the reduction of nonphysical barriers. Cultural differences and values are among the nonphysical barriers that became vague with the rise of globalization. Technological changes have strong
impact on how organizations are designed and how business processes run. New technologies offer
new possibilities and opportunities to businesses. Especially, the recent changes in information and
communication technologies affected the business models in a radical way. In addition to technologic
changes, innovation is one of the most influential topics in management today. Organizations that
lack innovative capabilities fail to adapt to demanding environmental conditions. Diversity is closely
linked with globalization and it affects the social side of the organization. Fair and equal treatment in the
workplace is an ethical and legal responsibility for managers. Finally, ethics and social responsibility
are two issues that managers must take into consideration when managing the organization.
23
Fundamentals of Management
1
Test yourself
Which of the following is not a function of
management?
a. Feedback
c. Controlling
e. Leading
b. Planning
d. Organizing
2
Which of the following is one of the physical
resources?
a. Workforce
b. Capital
c. Data
d. Raw materials
e. Information
3
6
Which of the following is not one of the main
resources managers use to achieve organizational
goals?
a. Databases
c. Monetary resources
e. Capital resources
b. Human resources
d. Raw materials
7
Which of the following is a category of lateral
classifications of managers?
a. Top managers
b. Middle manager
c. Department manager
d. Supervisor
e. Functional manager
“Making the right decisions and successfully
implementing them” is the definition of
_____________.
Which of the following is one of the
decisional roles of a manager?
a. Efficiency
b. Planning
c. Controlling
d. Effectiveness
e. Leadership
a. The monitor role
b. The entrepreneurial role
c. The disseminator role
d. The spokesperson role
e. The liaison role
4
9
Which of the following is a function of
planning?
a. Hiring people based on the job requirements.
b. Creating departments and units.
c. Determining necessary steps to achieve
organizational goals.
d. Getting people work together to meet
organizational goals.
e. Taking necessary corrective actions to fix
deviations.
8
Which of the following roles refers to
manager’s communication with individuals
and organizations outside the formal chain of
command?
a. The spokesperson role
b. The leader role
c. The monitor role
d. The liaison role
e. The entrepreneurial role
10
5
Which of the following is not an effect of
Internet on businesses?
a. Organizing – Planning – Controlling – Leading
b. Leading – Planning – Organizing – Controlling
c. Planning – Leading – Organizing – Controlling
d. Planning – Controlling – Organizing - Leading
e. Planning – Organizing – Leading – Controlling
a. Fast access to information – anytime and
anywhere
b. The emergence of virtual markets
c. Extension of traditional distribution channel
d. Increasing speed of globalization
e. Faster development of new products and
services
Which of the following lists the functions of
management respectively?
24
Business Management
If your answer is incorrect, review “Functions
of Management”.
6. a
If your answer is incorrect, review “Managers
and Organizational Resource”.
2. d
If your answer is incorrect, review “The
Concept of Management”.
7. e
If your answer is incorrect, review “Types of
Managers”.
3. d
If your answer is incorrect, review “The
Concept of Management”.
8. b
If your answer is incorrect, review “Roles of
Managers”.
4. c
If your answer is incorrect, review “Functions
of Management”.
9. d
If your answer is incorrect, review “Roles of
Managers”.
5. e
If your answer is incorrect, review “Functions
of Management”.
10. c
If your answer is incorrect, review “Current
Issues in Management”.
Suggested answers for “Your turn”
Compare the concepts of effectiveness and efficiency.
your turn 1
Effectiveness and efficiency are the key concepts almost in all definitions of
management. In brief, effectiveness is about making the right decisions and it
also involves the successful implementation of these decisions. Effectiveness
basically shows the organization’s performance in achieving pre-set goals.
On the other hand, efficiency is mainly about how the organization uses its
valuable resources. Efficiency refers to not wasting resources when achieving
organizational goals. If an organization is wasting its resources when trying to
achieve its goals, then the value of achieving the goals would be diminished.
Discuss the relationship between the controlling and
planning functions.
your turn 2
Answers for “Test yourself”
1. a
Although controlling is closely linked with all management functions, planning
function is central to controlling process. Because all the standards used in the
controlling process are the goals and targets established in the planning process.
An effective controlling process is important for the organization to achieve
desired results. The process that involves main functions of management is
not a linear process that starts with planning and ends with controlling. The
managerial process is a cyclical and continuous process whereby planning as
the first function is directly linked with controlling – the last management
function.
25
Fundamentals of Management
Suggested answers for “Your turn”
What are the main responsibilities of top managers?
your turn 3
Top managers possess a high level in the organizational hierarchy. They
are mainly responsible for setting the overall direction of the organization,
building extensive strategies and making sure that organizational goals are met.
Decisions made by top management affect the entire organization. Although
top management titles vary from one organization to another, titles such as
president, chairman/chairwoman, chief executive officer (CEO), managing
director, executive vice-president are among the highest-ranking executives in
an organization. In addition to their responsibilities written above, developing a
solid and shared vision for the organization and building a strong organizational
culture that supports adaptability, flexibility, entrepreneurship, and innovation
are among their primary responsibilities.
Discuss why the entrepreneurial role is important for the
business.
your turn 4
One of the most important tasks of a manager is to initiate the change efforts
within the organization and effectively lead this process. Managing the
change process, finding solutions for possible problems, generating new ideas,
building an organizational culture that encourages employees to come up with
new ideas, and evaluating and implementing innovative ideas are considered
in the domain of entrepreneurial role of managers. These tasks are important
especially in the current unstable and sophisticated business environment.
Survival of the organization basically depends on the organization’s ability to
adapt itself to ever-changing environment. The entrepreneurial role supports
the adaptive capacity of the organization.
Discuss if top managers possess technical skills
according to Katz’s typology.
your turn 5
Katz’s typology does not claim that top managers do not possess technical
skills or first-line managers do not possess conceptual skills. Different levels
of management must possess all three skill sets albeit at different levels. While
top managers must possess a mix of skill sets in which conceptual skills are
dominant, technical skills are more important for first-line managers.
Discuss the differences between innovation and
invention.
your turn 6
26
Innovation is a process that involves conceptual thinking, invention and
commercialization. An innovation must deliver some level of commercial
value. On the other hand, inventions do not have to be commercialized.
Actually, in many industrial cases, individuals/organizations who invented
specific products/services are different than those who commercialized them.
Inventions turn into innovations only when they deliver commercial value.
Business Management
endnotes
1
Griffin, R. (2012). Management. South-Western
Cengage Learning, p. 5.
15
Katz, R. L. (1955). Skills of an effective administrator.
Harvard Business Review, 33(1), pp. 33-42.
2
Kreitner, R. (2008). Management, South-Western
College Publication, p. 7.
16
3
Wren, D. A. (1995). Henri Fayol: Learning from
experience. Journal of Management History, 1(3),
pp. 5-12 (10).
Peterson, T. O. & Van Fleet, D. D. (2004). The
ongoing legacy of RL Katz: An updated typology
of management skills. Management Decision,
42(10), pp. 1297-1308 (1298).
4
Koontz, H. (2010). Essentials of Management.
McGraw-Hill Education, p. 77.
5
Dyck, B. & Neubert, M. (2008). Management:
Current Practices and New Directions. SouthWestern Cengage Learning, p. 8.
6
Jones, G. R. & George, J. M. (2015). Contemporary
Management (9th ed.). McGraw-Hill Education,
p. 10.
7
Samson, D. & Daft, R. (2012). Management. SouthWestern Cengage Learning, p. 14.
Srinivasulu, R. (2013). Role of management
in today’s changing world environment and
emerging challenges of organizational behaviour.
International Journal of Pharmaceutical Sciences
and Business Management, 1(1), pp. 72-81 (75).
8
Robbins, S. P. & Coulter, M. (2011). Management.
Prentice Hall, pp. 4-5.
9
Certo, S. C. & Certo, S. T. (2011). Modern
Management: Concepts and Skills. New Prentice
Hall, p. 9.
10
Daft, R. (2008).
Publishing, p. 14.
11
Management.
Thompson
DuBrin, A. J. (2011). Essentials of Management.
South-Western College Publishing, p. 7
12
Daft, op. cit., pp. 15-16.
13
Hitt, M. A., Black, J. S., & Porter, L. W. (2012).
Management. Prentice Hall, p. 14.
14
17
Dongre, P., Raut, S., & Dhamani, F. (2013).
Sustaining
and
thriving
multinational
corporates in third world countries. DMIETR
International Journal on Human Resource
Management, 3, pp. 18-24 (29).
Clarke, G. A. (2009). An essay on leadership,
especially through South African and New Zealand
cultural lenses. International Journal of Leadership
in Education, 12(2), pp. 209-216 (214).
18
Robbins & Coulter, op. cit., p.13.
19
Bateman, T. & Snell, S. (2012). M: Management.
McGraw-Hill Education, p. 17.
20
21
Özdemir, A. A. & Demirci, A. E. (2012). Impact
of social capital on radical innovation efforts of
the organizations. Ege Academic Review, 1(12),
pp. 53-66 (53).
Demirci, A. E. (2013). Strategic representation of
an abstract reality: Spiraling relations between
organizational culture and innovativeness. Journal
of Management and Strategy, 4(3), pp. 39-55 (39).
22
Certo & Certo, op. cit., p. 147.
23
Jones, G. & George, J. (2015). Contemporary
Management. McGraw-Hill Education, p. 24.
24
Schermerhorn, J. R. (2011). Exploring Management.
Wiley, p. 20.
25
Gomez-Meija, L. R. & Balkin, D. (2011).
Management. Prentice Hall, p. 79.
26
Bateman & Snell, op. cit., p. 85.
27
27
Chapter 2
The History of
Management Thought
Learning Outcomes
After completing this chapter, you will be able to:
1
3
5
Understand the evolution and historical
foundations of management.
Explain the behavioral management theory.
Interpret the systems approach.
Chapter Outline
The Evolution of Management Thought
Classical Management Theory
Behavioral Management Theory
Quantitative Management Approach
The Systems Approach
Contingency Approach
28
2
4
6
Identifying the foundations of classical
management thought.
Explain the quantitative management approach.
Interpret the contingency approach.
Key Terms
Evolution of management
Classical management theory
Behavioral management theory
Quantitative management approach
Systems approach
Contingency approach
Business Management
The most effective way to understand organizations is to study the evolution of management
approaches and practices in the last century. However, such a claim does not necessarily mean that there
were no management practices prior to the 20th century. Management practices are as old as the history of
humankind. Thus, it is possible to find the traces of various management practices throughout the history.
Nevertheless, economic, political, social, and technological changes that occurred in the last hundred years
have led to a more systematic approach to management. As a result of these changes, management and
managers became central issues in business and economics. Moreover, the complexity of organizations
and managerial activities have soared tremendously. Systematic analysis and assessment of these changes
and developments help us to better understand today’s organizations, environmental conditions, and
managerial paradigms. As Byron, the early 19th century English poet said;
“The best prophet of the future is the past”.
The history of management thought is generally considered synonymously with the theories of
management. This chapter aims to shed light on how management thought was shaped by various
environmental conditions throughout history. It should be noted that each theory of management should
be studied in consideration of the dynamics in the relevant time period.
THE EVOLUTION OF MANAGEMENT THOUGHT
It is important to study management from a historical standpoint if we want to have a better understanding
of the current issues in management. The history of management thought does not refer to a chronological
listing of events. The appropriate approach to study the history of management should be developing an
understanding of the impact of environmental forces
that affect organizations. Such a historical perspective is a
Organizations and their practices are
way to achieve strategic thinking, see the big picture, and
shaped by social, political, economic, and
improve conceptual skills. Thus, analysis of social, political,
technological forces.
economic, and technological forces that affect management
practices over time serves as a good starting point.1
Environmental Forces That Affect Management Practices
Social forces refer to macro factors within social, cultural, and historical context. All these macro
factors have a direct impact on organizations.2 Values, attitudes, beliefs, and all requirements of the
people within the society in which the organization operates can be considered as the elements of social
forces. Furthermore, social forces are important for the organizations since they regulate the relations
between individuals in a society. Social perceptions are among the major social forces that affect
organizations. Social perceptions can potentially shape the consumption patterns and how organizations
are seen in a given society. For example, increasing problems of obesity have resulted in perceptual changes in
the society regarding nutrition habits. While such perceptional changes brought opportunities for some
organizations, for some others, such changes meant devastation.
Political forces refer to the affects of political and legal institutions on organizations and individuals.
They result from political and legal developments within the society and significantly affect managerial
practices. Such developments in the political and legal structure of the society offer both opportunities
and threats by establishing constraints for operations of the organizations.3 For example, legal changes
related to the information and communication technologies industry will directly affect the operations
of businesses in this industry. Political forces are among the major factors that shape the competitive
structure in an economy.
Economic forces refer to the factors that determine the nature of the economic conditions in which
businesses operate. Unemployment rates, fiscal policies and legislations, inflation rates, interest rates, and
general economic conditions such as crises, stagnation, and recession are among the major economic factors.
Changes regarding these factors directly affect the operations of the organizations and thus, managers
29
The History of Management Thought
must carefully and constantly monitor the changes
in these factors. For example, while a possible decline
in disposable income negatively affects the demand for
certain products and services, it may have no impact
on some others. Similarly, changes in the interest rates
directly affect the borrowing strategies.
Technological forces refer to the innovations
and changes in technology that can potentially
affect the business processes. Changes in
technology are constant and faster than ever. In the
management literature, technology is considered
to be one of the main pillars of an organization.
From the organizational standpoint, the
technology could be defined as “the machinery,
equipment, and methods used for transforming
inputs into outputs”. Technology enables
organizations to perform their business processes
faster, more efficiently, and more effectively.
Thus, organizations that adapt to these changes
faster and build better technology strategies will
most likely to have a competitive advantage over
the others. Technologies emerging within or
outside the industry are also important for the
businesses when relevant. Because such emerging
technologies can offer both opportunities and
threats. For example, if the knowledge base of an
organization becomes obsolete because of an emerging
technology, then the organization will perceive this
new technology as a fatal threat. Business managers
should monitor all relevant technological changes
closely since such changes may have major impacts
on business operations.
Managerial practices can be traced
throughout the history of humankind.
It is important to build an understanding of
the conditions in which businesses operate in order
to understand the evolution of the management
thought. Paradigms, theories, and approaches in
different phases of the evolution of the management
thought were shaped by the forces discussed above.
It is not possible to imagine an evolution process
independent of these environmental forces. All
management theories and practices throughout the
history of management thought were developed
as a response to social, political, economic, and
30
technological changes. When these different
practices are studied from a historical perspective,
few major theories and approaches become
apparent for further investigation. These theories
and approaches are dominant at different levels in
different periods.
All management theories and practices
throughout the history of management
thought were developed as a response to social,
political, economic, and technological changes.
In the beginning of the 20th century,
management practices and approaches were
much different than those of today. Managerial
practices can be traced throughout the history
of humankind. The oldest known practices date
back to 8,000-3,000 BCE. The extant ancient
Sumerian documents contain commercial records
and they also prove that the Sumerians used these
records to manage information as we do today.
Similarly, construction of the pyramids in Egypt
required effective execution of all management
functions.4
Today’s managers strive to solve sophisticated
business problems by effectively and efficiently
using scarce resources. A manager’s success is
defined based on his/her performance in making
the best possible decisions that enable organization
to achieve its goals. Expectations from managers
also evolved over time. Performance criteria for a
manager today are much more different than those
in the past. Because the environmental conditions
in which business managers perform have
changed radically in time. In this chapter, major
management theories and approaches in different
periods of the history of management thought will
be explained.
1
Explain the major forces that affect managerial
practices.
Business Management
CLASSICAL MANAGEMENT
THEORY
The classical period extended from the midst
of the 19th century through the early 1950s.
The classical management theory involves
several approaches: systematic management,
scientific management, bureaucracy, and general
administrative management.
The classical management theory involves
several approaches: systematic management,
scientific management, bureaucracy, and
general administrative management.
Systematic Management Approach
During the 19th century, business growth
in the United States and the United Kingdom
was centered on manufacturing. In the same
period, economists like Adam Smith believed
that the management of businesses was chaotic
and thus, supported businesses with their ideas
to systematize their operations. During the 19th
century, most organizational tasks were subdivided
and performed by the specialized workforce.
On the other hand, lack of coordination was
causing frequent problems and breakdowns
of the manufacturing process. The systematic
management approach attempted to build
specific procedures and processes to systematize
organizational activities and ensure coordination.
The systematic management approach focused on
operational economy, adequate staffing, inventory
management that meets customer requirements,
and organizational control. According to the
systematic management approach, these goals can
be achieved through:
1. Careful definition of tasks and
responsibilities,
2. Standardized methods for performing these
tasks,
3. Effective means of gathering, sharing, and
analyzing information,
4. Systems such as cost accounting, wage
management, and production control to
enhance organizational coordination and
communication.
The systematic management approach
is an attempt to build specific procedures
and processes to systematize organizational
activities and ensure coordination.
The systematic management approach has an
internal focus. Because responding to the radically
increasing demand brought about by the industrial
revolution was the main concern for the managers. In
addition, lack of governmental constraints on business
practices and unorganized labor caused managers to
focus more on internal issues of the organization.
However, although the focus was on internal issues,
managers were much less oriented toward people.
Obviously, the systematic management approach
was far from offering solutions to all managerial
problems. On the other hand, the systematic
management approach raised managers’ awareness
about their tasks and responsibilities.5
The systematic management approach focused
on operational economy, adequate staffing,
inventory management that meets customer
requirements, and organizational control.
Scientific Management Approach
The roots of the scientific management approach
can be traced back to the early 20th century.
Increasing number of factories and growing
industries led to the emergence of important
managerial problems. Productivity was the major
issue brought about by the industrialization.
A closer look at the major parameters of the
period reveals that few issues were of paramount
importance. For example, relative growth in the size
of businesses, relatively better access to funds, and
shortage in labor supply were among the prominent
characteristics of the period. Especially, shortage in
the labor supply led business managers to look for
ways to use their workforce more efficiently. The
scientific management approach was an outcome
of these efforts. Frederick W.Taylor (1856-1915),
Frank Gilbreth (1868-1924), Lillian Gilbreth
(1878-1972), Henry Gantt (1861-1919), and
Harrington Emerson (1853-1931) are the leading
names of the scientific management approach.
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The History of Management Thought
Frederick W.Taylor, also known as the father of
scientific management, was the pioneer in the scientific
The scientific management approach
management approach. When he first started working
focused on the methods to use workforce
for the Midvale Steel in Philadelphia, he figured that the
more efficiently and finding the best way to
workers were performing their tasks much slower than
solve organizational problems.
they normally could, therefore causing inefficiency. Taylor
studied all the aspects of the tasks of the steel workers and
he determined how much each worker should produce. Taylor also designed the most efficient way to
perform specific tasks and finally, established a piece-based wage system. Thus, instead of paying equal
wages to workers, he increased the wages for those who met or exceeded their production goals. After
quitting his job at Midvale, Taylor started working for Bethlehem Steel. At Bethlehem Steel, Taylor
analyzed the process of loading on freight cars and developed more efficient ways to perform loading/
unloading process. His ideas radically increased the efficiency at Bethlehem Steel. As a result of his work
at Bethlehem Steel, he developed the basic principles and ideas of management that he called “the scientific
management”. Figure 2.1 shows the phases of the system suggested by Taylor.6 As in the ideas of the
other representatives of the classical management theory, Taylor also looked for the best way to increase
managerial efficiency and productivity. Although his model was widely criticized, Taylor made important
contributions to the history of the management thought.
Figure 2.1 Phases of the Scientific Management
Develop a science for
each element of the job
to replace old
rule-of-thumb methods
1
Scientifically select
employees and then
train them to do the job
as described in step 1
2
Supervise employees
to make sure they follow
the prescribed methods
for performing their jobs
3
4
Continue to plan the
work, but use workers to
get the work done
Source: Griffin, R. (2012). Management. South-Western Cengage Learning, p.35.
In the same period, Frank and Lillian Gilbreth
were the other important names in the scientific
management approach. Many scholars agree that
the Gilbreths were in direct competition with Taylor
and his circle. Conflicts between Taylor and the
Gilbreths were mainly caused by the professional
jealousy and disputes. Consequences of these
conflicts were personal hostility and fragmentation
of the Taylor circle. However, the competition
between Taylor and the Gilbreths contributed to
the evolution of the management thought.7
Following the footsteps of Taylor, Frank and
Lillian Gilbreth introduced time and motion
studies. While Taylor’s focus was on time studies,
Frank and Lillian Gilbreth focused mainly on
motion studies. The Gilbreths used a stopwatch and
a motion picture camera to analyze the motions of
the workers. Their goal was to improve workplace
efficiency. Frank and Lillian Gilbreth filmed the
worker when performing a specific task and they
then watched the recording frame by frame. After
carefully analyzing the films, they looked for better
32
ways to perform each step to ensure that all the
steps of a task could be performed more efficiently
with less time and effort.8
2
Explain the main objectives of the scientific
management approach.
General Administrative Management
Although considered within the classical
management theory, general administrative
management approach was different from the other
classical theories. While systematic and scientific
management focused on tasks and labor efficiency,
general administrative management approach
focused on organizational management. French
industrialist and mining engineer Henri Fayol
(1841-1925) was the leading name in the general
administrative management approach. Fayol played
Business Management
an important role in the history of management thought.
He identified five managerial functions namely, planning,
Unlike the limited focus of systematic and
organizing, commanding, coordinating, and controlling.
scientific management approaches, general
According to Fayol, there are six activities directly involved
administrative management approach focuses
with industrial projects.9
on the whole organizational management.
1. Technical: Activities related to production,
2. Commercial: Activities related to buying, selling, and exchange,
3. Financial: Activities related to search for, and optimum use of capital,
4. Security: Activities related to securing property and individuals,
5. Accounting: Activities related to quantitative/statistical analysis,
6. Managerial: Activities related to planning, organizing, commanding, coordinating, and controlling.
Fayol’s model was a step beyond Taylor’s hierarchical system. Commanding function continued to
operate efficiently and effectively with the support of coordination and control methods. Finally, Fayol
suggested that the department heads and other relevant
people must meet on a regular basis in order to improve
coordination within the organization. In addition to these
Fayol’s general principles of management are
contributions, Fayol introduced 14 principles many of
still applicable today.
which are applicable even today. Fayol called these “the
general principles of management” (Table 2.1).
Table 2.1 Fayol’s General Principles of Management
Fayol’s General Principles of Management
Division of work
Centralization
Authority and responsibility
Line of authority
Discipline
Order
Unity of command
Equity
Unity of direction
Stability of tenure of personnel
Subordination of individual interests to the general interest
Initiative
Remuneration of personnel
Esprit de corps
Fayol suggested that the general principles of management were not strictly limited to 14 principles and
organizations can add new principles to the list when necessary. In other words, Fayol’s general principles
of management are flexible and adaptable.10
Bureaucracy Approach
The last approach in the classical management theory is the
bureaucracy approach introduced by the German sociologist Max
Weber’s ideal bureaucracy laid
Weber (1864-1920). Although Weber lived and worked at the same
the foundations for contemporary
time as Fayol and Taylor, his contributions to the management
organization theory.
thought were not recognized until some years had passed. Weber’s
most important work was not translated into English until 1947.
Weber’s ideal bureaucracy laid the foundations for contemporary organization theory. Bureaucracy refers
to a rational set of principles for structuring organization in the most effective and efficient manner.11
Weber identified the basic principles of his theory of ideal bureaucracy as well as the advantages of these
principles for the organization. Principles and advantages of Weber’s ideal bureaucracy are as follows:
33
The History of Management Thought
1. Division of labor: Jobs are broken down into
well-defined tasks. Thus, employees know
what the organization expects from them.
Specialization in particular tasks is also an
outcome of division of labor.
2. Authority of hierarchy: Positions in the
organization are defined by well-rounded
reporting relations. In other words, effective
supervision of lower level positions by
higher ones is a function of hierarchy. The
hierarchical relations define who reports
to whom within the organization. Welldefined hierarchy enables an organization
to establish accountability of actions and an
effective coordination system.
3. Formal selection: All employees are selected
and promoted through formal procedures
based on performance and qualifications.
Both the organization and the employees
benefit from a formal selection system
based on merit.
4. Career orientation: Employees not only
pursue organizational but also individual
goals. They want to excel in their
professional career. Tasks and jobs would
be carried out with a higher performance
through hiring career-oriented people.
5. Formal framework of rules: Written rules and
regulations specifying the desired behaviors
from the employees enhance coordination
and ensure uniformity in practices. Formal
rules and other control mechanism
associated with employee performance
improve managerial effectiveness and
efficiency.
6. Impersonality: Rules, sanctions, and other
control mechanisms are uniformly applied
regardless of individual identities. In other
words, everyone in the organization is
subject to the rules. Thus, it is possible
for an organization to establish a structure
independent of individual personalities.
Moreover, subordinates are protected
against possible abuse of supervisors.
As mentioned before, the bureaucracy
approach laid foundations for the contemporary
organization theories. Weber referred ideal
34
bureaucracy as a both rational and efficient
approach.12 On the other hand, it is important to
note that the advantages of bureaucracy approach
are only possible when the bureaucracy is not
understood as an ineffective set of procedures and
policies.
The starting point of the classical
management theory was to introduce
methods to improve productivity within the
organization and find the best way or the best
solution to tackle organizational problems.
The classical management theory provided a
foundation for the contemporary management
theories. It should also be noted that many
principles of the classical management theory
are still applicable in current management
practices. The starting point of the classical
management theory was to introduce methods
to improve productivity within the organization
and find the best way or the best solution
to tackle organizational problems. However,
classical management theory failed to take
environmental forces and human behavior into
consideration. Environmental dynamics in which
the organization operates was completely ignored.
Similarly, employees were seen as a simple factor
of production whose only function was to comply
with the supervisors’ orders.
3
Discuss the possible downsides of the bureaucracy
approach.
BEHAVIORAL MANAGEMENT
THEORY
Behavioral management theory focused
on how managers should behave to motivate
employees, encourage them to perform better,
and improve their loyalty to the organization and
its goals. Mary Parker Follett (1868-1933) was
the leading name in the behavioral management
theory. The majority of Follett’s work was
Business Management
about the way managers should behave toward
employees. Follett’s studies revealed her concerns
about Taylor’s approach since she thought that
Taylor’s model was ignoring the human side of
the organization. Unlike the classical management
theory’s mechanical perspective on humans, Follett
suggested that the employees can contribute to
the job analysis and work development processes.
Because, according to Follett, workers know the
most about their jobs. Follett, in contrast with
the general ideas in her time, proposed that the
authority should go with knowledge and thus,
claimed that workers with relevant knowledge and
skills, rather than managers, should be in control
of their work processes. In this case, managers
should behave as facilitators, not as supervisors.
Follett was also a pioneer in the idea of crossfunctioning; members of different departments
working together in cross-functional teams to
accomplish specific goals – an approach that is
increasingly used today. From this standpoint,
it could be argued that Follett’s ideas were very
radical for her time.13
4
Discuss Follett’s arguments against Taylor’s model.
Hawthorne Studies
The Hawthrone studies were conducted from
1924 to 1932 at the Western Electric Company
in Chicago led by Elton Mayo, a scholar from
Harvard Business School. Elton Mayo was an
Australian sociologist. He worked as a professor
of industrial research at Harvard Business School.
The Hawthorne Studies were initially started to
confirm or test the main assumptions of the
classical management theory. Experiments were
basically designed to analyze the relationship
between productivity and work settings. Early
experiments studied the effects of workplace
illumination on employee productivity from
1924 to 1927. These experiments were followed
by relay assembly test experiments. Early
experiments on workplace illumination and
employee productivity produced unexpected
results and, in contrast with the expectations
of the researchers, no significant relationship
was found between two variables. Furthermore,
increasing productivity in the low light settings
puzzled the researchers. Such results made
researchers think of other possible factors that
directly affect productivity.
The Hawthorne Studies were initially started
to confirm or test the main assumptions of
the classical management theory. Experiments
were basically designed to analyze the
relationship between productivity and work
settings.
Airplane view of Hawthorne Works (1925)
Source: https://www.library.hbs.edu/hc/hawthorne/big/wehe_001.html
35
The History of Management Thought
A measurement from the illumination experiments in 1926
Source: www.library.hbs.edu/hc/hawthorne/big/wehe_032.html
In the second part of the experiments, researchers studied other variables related with the work settings.
Working hours, break times, incentives, and free lunches/beverages were among the variables considered
in the experiments. As a result of these experiments, researchers found that the improvements in given
variables increased the employee outputs and motivation. Furthermore, strong social ties were established
among the members of the test group. They developed a sense of belongings due to the feelings of stability,
recognition, and safety.
Hawthorne test group in relay assembly test room (1930)
Source: https://www.library.hbs.edu/hc/hawthorne/big/wehe_131.html
36
Business Management
The purpose of the next experiment was to
shed light on how payment incentives would
affect productivity. However, while researchers
hypothesized that the payment incentives would
increase productivity, surprisingly productivity
decreased. Instead, researchers found that group
pressure, norms, acceptance, and safety were
more influential on productivity than payment
incentives. Detailed observation of the test group
also revealed the existence of informal groups
within the formal group. Norms developed within
the informal groups enforced workers to act
accordingly. These results showed that workers
were more responsive to the social bonds than to
the incentives and control mechanisms of formal
management.
The Hawthorne studies revealed the
significance of psychological and social factors in
the workplace. Findings of the Hawthorne studies
had a major impact on the management studies.
About his research, Elton Mayo noted (http://www.
library.hbs.edu/hc/hawthorne/04.html#four):
“So long as commerce specializes in business
methods which take no account of human nature
and social motives, so long may we expect strikes
and sabotage to be the ordinary accompaniment of
industry.”
The Hawthorne studies revealed the
significance of psychological and social
factors in the workplace.
The Hawthorne studies brought about a
new insight about the relationship between
productivity and work settings put forward by
the classical management theory. Experiments
revealed that social and psychological factors
play an important role in achieving productivity
in the workplace. The Hawthorne studies laid
the foundation for the behavioral management
approach that focuses more on the human side of
the organization.
Douglas McGregor’s Theory X and
Theory Y
Another leading name in the behavioral
management theory was Douglas McGregor.
Influenced by the Hawthorne studies and Maslow’s
theory of human needs, McGregor introduced
theories of X and Y. In his classic book “The
Human Side of Enterprise”, McGregor suggested
that managers should give more attention to the
social and self-actualizing needs of the employees.
McGregor’s theory was based on two opposing
views. He called the negative set of employee
behaviors and attitudes as Theory X and positive
ones as Theory Y.14 Theory X assumes that
people dislike work. Thus, they can only be
managed through close supervision and imminent
punishment. Theory X suggests that people prefer
not to take any responsibilities and initiative.
Typical employees resist change and show no
ambition toward their jobs. Theory X requires
a more autocratic and controlling management
approach. In contrast, Theory Y assumes that
employees are willing to work and have the skills to
direct themselves. Besides, they are willing to take
responsibilities and initiatives. According to Theory
Y, employees prefer to have control over their jobs
rather than controlled by the managers. They are
self-motivated and creative. Theory Y requires a
more democratic and participative management
approach.
QUANTITATIVE MANAGEMENT
APPROACH
Formation of operations research teams to
solve sophisticated military problems during the
World War II and their solutions to these problems
paved the way for the quantitative approach
to management after the war. The quantitative
approach to management refers to a perspective
on management that emphasizes use of a group of
methods in managerial decision making, based on
the scientific method. Today, quantitative approach
is mainly represented by management science and
operations research. Statistics, linear programming,
network analysis, decision trees, and computer
simulations are among the quantitative tools and
37
The History of Management Thought
methods adopted by the quantitative management
approach. Decisions regarding inventory control,
plant-site locations, quality control, and many
other decisions require objective information.
Quantitative tools and methods can be used
effectively in making such decisions.
Quantitative approach to management
helped managers to solve business problems
that cannot be solved by common sense and
the rule of thumb alone.
Frederick W. Taylor’s model provided the
foundation for the quantitative management
approach. However, as mentioned above, military
problems and the formation of operations research
teams to tackle these problems during the World
War II provided the impetus for the modern-day
quantitative approach. The bombing of enemy
targets, effective conduct of naval warfare, and
efficient movement of troops from one battlefront
to another were among the problems tackled by
the operations research teams. After the World
War II, quantitative tools and methods used for
military purposes found fertile ground in peacetime industry. Emerging computer technologies
provided support for these changes. Quantitative
approach to management helped managers to
solve business problems that cannot be solved by
common sense and the rule of thumb alone. For
example, management science tools and methods are
used to make forecasts that take into account hundreds
of different factors at once. On the other hand,
there are weaknesses of quantitative management
approach. In many cases, quantitative techniques
produce less reliable results than expected.
Although the approach itself uses dependable
tools and methods, much of the data used for
forecasts are based on human estimations that in
return makes quantitative management approach
unreliable in some cases.15
Starting from the late 1960s and early 1970s
economies and businesses operating within those
economies became more sophisticated. Furthermore,
effects of competition and environment on
organizations became more evident and influential.
These developments called for a more holistic view
of organizations. Search for a more holistic view
resulted in the systems approach.
38
SYSTEMS APPROACH
A system basically refers to a structure of
interrelated parts. Systems transform inputs
into outputs to achieve specific goals. All
open systems have five main aspects: inputs,
transforming process, outputs, environment, and
feedback. From the organizational standpoint,
raw materials, human resources, financial
resources, and information resources are a few
examples of inputs. These inputs are used by the
organization to produce outputs (products and
services). Transforming process refers to the use
of technologies to transform inputs into outputs.
Outputs refer to the products and services offered
by the organization. As mentioned before,
environment refers to the political, economic,
social, and technological forces.
A system basically refers to a structure of
interrelated parts. Systems transform inputs
into outputs to achieve specific goals.
It is important to note that the systems approach
is radically different compared to the previous
approaches. Because classical management theory
overlooked the human side of the organization as
well the environmental forces. Similarly, although
it focused on the human side of the organization,
the behavioral management approach failed
to notice the effects of the environmental
forces. However, with the introduction of the
systems approach, a new page in the history of
management thought was opened. Instead of
focusing on certain aspects of the organizations,
the systems approach focused on the entire
organization as a whole. Furthermore, the systems
approach showed that management practices do
not occur within a closed circle and organizations
are directly affected by the environmental forces.
It is also important to note that the relationship
between the organization and its environment
is reciprocal. In other words, organizations can
also affect their environments. In the systems
approach, there are several key concepts such as
open and closed system, entropy and negative
entropy, synergy, and interdependence between
the subsystems.
Business Management
All open systems have five main aspects: inputs,
transforming process, outputs, environment,
and feedback.
Open and closed systems: The systems
approach suggests that there are two types of
systems, namely, open and closed systems. Closed
systems are self-contained entities and thus they
are not affected by the changes occurring in its
external environment. On the other hand, open
systems depend on the external environment in
order to survive. According to the systems theory,
some mechanical systems are considered as closed
systems while organizations as well as all organic
systems are open systems. For example, a person or
an animal cannot survive without interacting with
the external environment. Similarly, different types
of organizations need input from the environment to
process their functions.
Entropy refers to the system’s tendency to go
into a decline and die.
Synergy means that the whole is greater than
the sum of its parts.
Entropy and negative entropy: Entropy
is a common quality of both open and closed
systems. Entropy refers to the system’s tendency
to go into a decline and die. No system is capable
of stopping entropy. In other words, entropy
can be slowed down but can never be stopped
completely. Organizations are open systems and
managers strive to resist entropy by establishing
an effective and efficient management system. All
attempts and efforts to slow entropy down are
known as negative entropy. Negative entropy is
very important for business survival. Rapid and
constant changes in the environmental forces are
the main cause of entropy. As a negative entropy
attempt, businesses align their goals and strategies
with the environmental conditions. Negative
entropy is one of the most important qualities of
open systems.
Synergy and interdependence between
subsystems: Synergy basically means that
the whole is greater than the sum of its parts.
Synergy, as a key concept in the systems theory,
is also important for managers. Because synergy
emphasizes the value of working together in
collaboration to achieve organizational goals.
Managers strive to cultivate market, cost,
technology, and management synergies when
making strategic decisions. Mergers, acquisitions,
new product development, process improvement,
and technology development decisions are few
examples of such strategic decisions that require
high levels of synergy within the organization.
However, it is not realistic to claim that the
managers can achieve synergy in all four areas
(market, cost, technology, and management) at
once. Nonetheless, strategies are more likely to be
realistic and effective when all four synergy areas
are taken into consideration.16
Synergy also emphasizes the interdependence
between the subsystems. The idea of unity and
integrity sheds light on the nature of the mutual
relations between subsystems. Because parts of
the systems cannot behave independently. Any
problem that occurs in a subsystem affects the
system as a whole. Such strong ties between the
subsystems is a solid proof of interdependence.
For example, an organization is a system and
departments are the subsystems. Any problems
that might occur in of those departments will
affect the entire organization. Poor marketing
decisions, breakdowns in production, delays in
the supply chain, or poor hiring decisions are
actually departmental issues. However, each of
these problems directly affects the organization
as a whole. For example, a poor decision regarding
the raw materials will directly affect production.
Problems in production will have a negative impact
on marketing and sales that in return hinders
organization to achieve its goals.
5
Explain the relationship between negative entropy
and organizational change efforts.
39
The History of Management Thought
CONTINGENCY APPROACH
In contrast to the classical management theory’s search for the best way to solve organizational
problems, the contingency approach rejects the idea that there is a best way or a solution for all
organizational problems. According to the contingency approach, managerial practices are shaped by
contingent and situational circumstances. Actually, this approach emphasized an “if-then” relationships.
In other words, “if ” a contingent variable exists, “then” a manager would most likely to act accordingly.
For example, if a manager is responsible for a group of inexperienced subordinates, then, according to the
contingency approach, the manager should lead this group in a different way than if the subordinates were
experienced. In general, this approach attempts to outline the conditions and situations in which
various management tools and techniques have the best chance of success.17 An important advantage
of the contingency approach is that it enables managers to analyze specific and situational issues
before making their decisions. Basically, organizational structures and control mechanisms managers
choose depend on the characteristics of the environment
in which the organization operates. According to
In contrast to the classical management theory’s
the contingency approach, the characteristics of the
search for the best way to solve organizational
environment directly affect an organization’s ability to
problems, the contingency approach rejects
obtain resources. It should be noted that how managers
the idea that there is a best way or a solution
design the organizational hierarchy, choose the control
for all organizational problems.
mechanism, and lead their employees are contingent on
the characteristics of the organizational environment.18
Also see Chapter 7 for situational approach to management.
One major issue with the contingency approach is that
it is often used as an excuse for not being able to gather
formal knowledge about management. In other words, if
Organizational structures and control
management practices are shaped by the contingent or
mechanisms’ managers choose depend on the
situational factors, then why study management theories?
characteristics of the environment in which
One possible answer to this question is that formal
the organization operates.
management studies help managers to decide which factors
should be taken into consideration in a given situation.19
In this chapter, we studied the evolution of the management thought. Various environmental conditions
in different times directly affected how businesses are managed. It should be noted that, from the classical
management theory to the contingency approach, the focus of the management practices had shifted
throughout the history of management. On the other hand, assuming that the management theories
and practices introduced in the early 20th century are not applicable or influential anymore is a false
argument. A successful manager knows how management practices and approaches evolved in time. Such
a knowledge on management helps managers to adopt the most appropriate approach when dealing with
organizational problems.
40
Business Management
In Practice
Three 19th-Century Management Ideas to Ditch
in 2016 (Only the most relevant parts of the article
are included. The full article can be reached through
the web link provided at the end of the article.)
People who are frustrated at work sometimes
say “I’m trying my best to pull my leadership
team into the 21st century!” but in reality, the
ideas that hold most organizations back are
not twentieth-century ideas. The traditional
workplace still runs on a nineteenth-century
model. Everything we have become familiar with
in a traditional, hierarchical organization comes
from the same, Machine Age mindset:
1. The idea that a big boss sits atop the
organization and supervises smaller and
smaller bosses all the way down
2. The understanding that rewards and
punishments are used to keep people in line
(as though they were animals rather than
people)
3. The notion that the higher-ups set policies
that govern everyone else, even though the
higher-ups have less opportunity than anyone
else to experience life on the ground
4. The concept that new ideas are designed at the
top of the organization and implemented at
the bottom
5. The fear of pushing bad news up the ladder
6. The reluctance to speak up, even about
important topics, for fear that somebody
might decide to shoot the messenger
7. The over-reliance on standard procedures and
under-valuing of individual or team know-how
and instinct
8. The obsession with measurement and
evaluation
9. The understanding that missing out on a
business opportunity out of risk aversion is
better than trying something that fails
10. The fantasy that white-collar work can be
divided into neat, tidy job descriptions that
won’t overlap or conflict with one another, and
11. The delusion that people will bring their best
ideas and their most heartfelt energy to work
simply because they get a paycheck.
These crusty ideas are everywhere. In our bodies
we know they bear little resemblance to reality, but
we trudge onward without questioning them. We’re
afraid to speak up. We rationalize the foolish decisions
we see around us at work. “Oh well,” we say. “It’s not
my company. It’s not my problem!” Here are three
outdated management ideas to ditch in 2016.
First idea to ditch: People can do their jobs
without information on the other parts of
the organization, the company’s goals or its
challenges and opportunities.
Whoever said “knowledge is power”
was certainly right, but knowledge in your
organization is only powerful when you spread
it around. Hoarding news and insight because
you don’t want to share the power of your inside
information is the height of foolishness. When
you keep information to yourself, you sow the
seeds of your own professional self-destruction
and you weaken your organization, too. There is
no benefit to keeping your employees in the dark
about the company’s plans, the priorities of the
other functions, challenges that are holding your
organization back or trends in your industry that
might affect you. The more conversation you can
stimulate about these weighty topics, the better!
Second idea to ditch: People work hard
because they get paid.
People don’t work hard because they get
paid. They invest their brains and heart in their
work when it speaks to them -- when they can
put their own creative stamp on their work.
It’s easy enough to build latitude into every job
description, but fear often keeps managers from
giving any decision-making power away.
Third idea to ditch: Forecasts, budgets, and
policies make a business successful.
There is nothing in the structure of business
that can make a business fly. The structure of
business is useless by itself. The structure is
pointless without vision and passion. As soon as
any job loses its spark, the job becomes harder to
do. Forecasts and budgets are great tools, except in
the hands of fearful managers who think that the
tools of business are a substitute for human energy
and conviction. Unless there is trust on the team
and a shared vision that respects everyone in the
group, do not expect anything exciting to happen.
Source: https://www.forbes.com/sites/lizryan/2016/
01/04/three-19th-century-management-ideasto-ditch-in-2016/#5679e0436148
41
The History of Management Thought
Further Reading
The Next Tech Revolution: Busting Bureaucracy
(Only the most relevant part of the article is included.
Full article can be reached through the web link
provided at the end of the article.)
Over the past 20 years, nothing has
transformed business as thoroughly or as
frequently as information technology. In the
first wave, advances in IT prompted many
companies to revamp their operating models. In
Wave 2, the growing power of the Web provoked
a fundamental rethink of business models.
And over the next few years, Wave 3 will yield
a broad-based and long overdue revolution in
management models.
Wave 3: New Management Models
I’m betting that the next IT-enabled
revolution will upend old management models
-- the structures and processes organizations use
to plan, prioritize, allocate, coordinate, measure,
hire, and reward. The fact is, the biggest drag on
performance in most companies isn’t a sclerotic
supply chain or an insufficiently webby business
model. Rather, it’s a management model that
empowers the few while disempowering the
many; one that favors efficiency over every
other business goal and conformity over every
other virtue; one that makes organizations less
adaptable, innovative, and inspiring than they
could be and, increasingly, will need to be.
The basic architecture of large-scale human
coordination hasn’t changed much since Moses
led the Israelites out of Egypt. Ask an engineer
at Google, a branch manager at Credit Suisse,
a nurse in Britain’s National Health Service, a
priest serving the poor in a Rio favela, a guard
in Shanghai’s Hongkou Detention Center, or an
Emirates Airline pilot to draw a picture of their
organization, and you’ll probably get a rendering
of the familiar pyramid.
In one form or another, this has been one
of humanity’s most enduring social structures.
Formal hierarchy is simple and scalable. Its clear
lines of authority, cascading goals, and tight
supervision facilitate the efficient aggregation
42
of human effort. It provided the scaffolding for
Caesar’s army and Henry Ford’s automotive
empire, and it is still the backbone of just about
every enterprise on the planet.
In contemporary organizations, this
universal architecture is complemented by a
clutch of key management processes: strategic
planning, capital budgeting, financial reporting,
performance management, recruitment, training
and development, product development, project
management, knowledge management, risk
management, and so on. There’s a name for this
mash-up of military command structures and
industrial management: bureaucracy.
A hundred years ago, the German sociologist
Max Weber celebrated bureaucracy as being
“superior to any other [organizational] form in
precision, in stability, in the stringency of its
discipline, and in its reliability,” and he was right.
Bureaucracy was a major advance in solving
the problem of efficiency at scale. If you have a
couple of cars in the garage, a digital device in
every pocket, and don’t spend 80% of your time
growing your own food, you owe a huge debt to
those early management pioneers who laid the
groundwork for the modern industrial enterprise.
But when the goal is anything other than
efficiency -- when it’s adaptability, or innovation,
or encouraging human potential -- bureaucracy
turns out to be an almost insurmountable
impediment. Bureaucracies, by their very nature,
are inertial, incremental and uninspiring. That’s
a problem because today operational efficiency is
just the price of entry; a necessary, but far from
sufficient, condition for competitive success.
In a business world where customers
are omnipotent, where barriers to entry are
crumbling, where incumbent advantages are
fleeting, and where employees, like citizens, flee
authoritarian regimes, efficiency isn’t anywhere
near enough.
Source: http://fortune.com/2014/03/10/the-nexttech-revolution-busting-bureaucracy/?iid=sr-link1
Business Management
LO 1
Understanding the evolution
and historical foundations of
management
LO 2
Summary
Management approaches and practices evolved radically throughout the history. For example, management
practices in the early 1900s are much more different than those of today. Scientific management practices
date back to the late 19th century. Nonetheless, it is not possible to determine when and where the first
management practices took place. Traces of the various management practices were found in all phases
of the history of the humankind. Sumerians, Egyptians, Chinese, Greek, Venetians, and many other
civilizations are known to have primitive variations of modern-day management practices.
Identifying the foundations
of the classical management
thought
The classical period extended from the midst of the 19th century through the early 1950s. The
classical management theory involves several approaches: systematic management approach, scientific
management approach, bureaucracy approach, and general administrative management approach.
The systematic management approach attempted to build specific procedures and processes to
systematize organizational activities and ensure coordination. The systematic management approach
focused on operational economy, adequate staffing, inventory management that meets customer
requirements, and organizational control.
The scientific management approach focused specifically on productivity issues. This approach
attempted to introduce scientific tools and methods to monitor all aspects of the tasks and jobs within
the organization. The scientific management approach also emphasized the role of control mechanisms
and established straight definitions for the roles of the managers and employees.
While systematic and scientific management approaches focused on tasks and labor efficiency, general
administrative management approach focused on the whole organizational management. Henri Fayol,
the leading name in the general administrative management approach, introduced five managerial
functions, classified main activities involved with industrial projects, and identified 14 general principles
for effective management.
Finally, the bureaucracy approach laid the foundations for contemporary organization theory and
defined a rational set of principles for structuring organization in the most effective and efficient way.
LO 3
Explaining the behavioral
management theory
Behavioral management theory focuses on how managers should behave to motivate employees and
encourage them to perform better and improve their loyalty to the organization and its goals. Mary
Parker Follett was the leading name in the behavioral management theory. Follett’s studies revealed her
concerns about Taylor’s approach since she thought that Taylor’s model was ignoring the human side of
the organization. Unlike the classical management theory’s mechanical perspective on human, Follett
suggested that the employees can contribute to the job analysis and work development processes. In
the same period, The Hawthrone studies were conducted from 1924 to 1932 at the Western Electric
Company in Chicago. The Hawthorne studies revealed the significance of psychological and social factors
in the workplace.
Another important study in the behavioral management theory was McGregor’s Theory X and Theory
Y. Theory X suggests that people prefer not to take any responsibilities and initiative. Theory X requires
a more autocratic and controlling management approach. In contrast, Theory Y assumes that employees
are willing to work and have the skills to direct themselves. Theory Y requires a more democratic and
participative management approach.
The behavioral management theory was criticized for not taking the external environment into
consideration.
43
The History of Management Thought
LO 4
Explaining the quantitative
management approach
Summary
Quantitative approach to management refers to a perspective on management that emphasizes use
of a group of methods in managerial decision making, based on the scientific method. Formation of
operations research teams to solve sophisticated military problems during the World War II and their
solutions to these problems paved the way for the quantitative approach to management after the war.
Statistics, linear programming, network analysis, decision trees, and computer simulations are among
the quantitative tools and methods adopted by the quantitative management approach. Quantitative
approach to management helped managers to solve business problems that cannot be solved by common
sense and the rule of thumb alone.
LO 5
Interpreting the systems
approach
A system refers to an entity of interrelated parts. Systems transform inputs into outputs to achieve
specific goals. In the systems approach, there are several key concepts such as open and closed system,
entropy and negative entropy, synergy, and interdependence between the subsystems. Closed systems
are self-contained entities and thus they are not affected by the changes occurring in its external
environment. On the other hand, open systems depend on the external environment in order to
survive. Entropy is a common quality of both open and closed systems. Entropy refers to the system’s
tendency to go into a decline and die. All attempts and efforts to slow entropy down are known as
negative entropy. Synergy basically means that the whole is greater than the sum of its parts. Finally,
parts of a system cannot behave independently. Any problem that occurs in a subsystem affects the
system as a whole. The systems approach showed that the management practices do not occur within a
closed circle and organizations are directly affected by the environmental forces. It is also important to
note that the relationship between the organization and its environment is reciprocal. In other words,
organizations can also affect their environments.
LO 6
Interpreting the contingency
approach
In contrast to the classical management theory’s search for the best way to solve organizational problems,
contingency approach rejects the idea that there is a best way or a solution for all organizational
problems. According to the contingency approach, managerial practices are shaped by contingent and
situational circumstances. Actually, this approach emphasized an “if-then” relationships. In other words,
“if ” a contingent variable exists, “then” a manager would most likely to act accordingly. The external
environment is of paramount importance for the contingency approach. Because organizational structures
and control mechanisms managers choose depend on the characteristics of the environment in which
the organization operates. One major issue with the contingency approach is that it is often used as an
excuse for not being able to gather formal knowledge about management. In other words, if management
practices are shaped by the contingent or situational factors, then why study management theories? One
possible answer to this question is that formal management studies help managers to decide which factors
should be taken into consideration in a given situation.
44
Business Management
1
Which of the following is not among the
social forces that affect organizations?
b. Values
d. Beliefs
2 Which of the following is an approach in the
classical management theory?
a. Marketing
c. Security
e. Managerial
b. Technical
d. Accounting
7 Which of the following introduced the ideal
bureaucracy approach?
a. The contingency approach
b. The systems approach
c. The quantitative management approach
d. The general administrative management
approach
e. The behavioral management approach
a. Frederick W.Taylor
b. Frank and Lillian Gilbreth
c. Henri Fayol
d. Mary Parker Follett
e. Max Weber
3
8
Which of the following is NOT among the
measures taken by the systematic management
approach in order to achieve organizational goals?
a. Careful definition of tasks and responsibilities
b. Effective means of gathering, sharing, and
analyzing information
c. Establishing a cost accounting system
d. Introducing flexible methods for performing
tasks
e. Establishing a wage management system
4
Which of the following is a leading name in
the scientific management approach?
a. Mary Parker Follett
b. Adam Smith
c. Frederick W.Taylor
d. Douglas McGregor
e. Ludwig von Bertalanffy
5 Which of the following is a contribution of
Frank and Lillian Gilbreth to the management
thought?
a. Employee training and development
b. Viewing organization as a system
c. Emphasis on constant monitoring of
competitors
d. Emphasis on the external environment of the
organization
e. Time and motion studies
Test yourself
a. Legal and political issues
c. Attitudes
e. Social perceptions
6 Which of the following is not one of the
activities involved with the industrial projects
according to Fayol?
Which of the following is among the findings
of the Hawthorne studies?
a. Steps of the tasks should be measured on a time
basis.
b. Social and psychological factors should be
taken into consideration.
c. The external environment should be taken into
consideration.
d. Employees are motivated only by economic
incentives.
e. Managers should strictly follow the command
chain.
9 Which of the following is not among the
main aspects of an open system?
a. Input
b. Transformation process
c. Output
d. Coordination
e. Environment
10
Which of the following refers to system’s
tendency to decline and die?
a. Synergy
b. Interdependence
c. Entropy
d. Negative entropy
e. Feedback
45
1. a
If your answer is incorrect, review “Evolution
of the Management Thought”.
6. a
If your answer is incorrect, review “The General
Administrative Management Approach”.
2. d
If your answer is incorrect, review “The
Classical Management Theory”.
7. e
If your answer is incorrect, review “The
Bureaucracy Approach”.
3. d
If your answer is incorrect, review “The
Systematic Management Approach”.
8. b
If your answer is incorrect, review “The
Hawthorne Studies”.
4. c
If your answer is incorrect, review “The
Scientific Management Approach”.
9. d
If your answer is incorrect, review “The
Systems Approach”.
5. e
If your answer is incorrect, review “The
Scientific Management Approach”.
10. c
If your answer is incorrect, review “Entropy
and Negative Entropy”.
Suggested answers for “Your turn”
Answers for “Test yourself”
The History of Management Thought
Explain the major forces that affect managerial
practices.
your turn 1
Organizations are affected by the political, economic, social, and
technological forces. Political forces refer to the effects of the political and
legal institutions on organizations and individuals. They result from political
and legal developments within the society and significantly affect managerial
practices. Economic forces refer to the factors that determine the nature of
the economic conditions in which businesses operate. Unemployment rates,
fiscal policies and legislations, inflation rates, interest rates, and general
economic conditions such as crisis, stagnation, and recession are among the
major economic factors. Social forces refer to macro factors within social,
cultural, and historical context. All these macro factors have a direct impact
on organizations. Values, attitudes, beliefs, and all requirements of the people
within the society in which the organization operates can be considered as
the aspects of social forces. Technological forces refer to the innovations and
changes in technology that can potentially affect the business processes. All
management theories and practices throughout the history of management
thought were developed as a response to social, political, economic, and
technological changes..
Explain the main objectives of the scientific
management approach.
your turn 2
46
The scientific management approach mainly focused on productivity within
the organization and methods to use workforce more efficiently. Reducing
waste in production, improving production methods and processes,
optimizing tasks, and finding the best way to solve all organizational problems
were among the primary issues in the scientific management approach.
Business Management
Discuss the possible downsides of the
bureaucracy approach.
Suggested answers for “Your turn”
your turn 3
In our daily language, bureaucracy is generally used within a negative context.
However, bureaucracy is a must in order to establish a formal organizational
structure and maintain order in organizational activities. Bureaucracy
causes problems within the organization only when it is poorly designed.
Ineffective bureaucratic practices lead to wastage of organizational resources,
inefficient processes, lack of loyalty among employees, and failure to adapt to
environmental changes. Furthermore, lack of flexibility in plans, policies, and
procedures hinders innovation and creativity. People within the organization
are seen as a machine rather than a social and psychological entity. Finally,
these possible drawbacks may cause resistance toward all change efforts.
Discuss Follett’s argument against Taylor’s
model.
your turn 4
Taylor, as the founder of the scientific management approach, only focused
on improving productivity and finding the best way to solve organizational
problems. Thus, Taylor’s approach to management ignored the human side of
the organization. The majority of Follett’s work was about the way managers
should behave toward employees. Follett’s studies revealed her concerns about
Taylor’s approach. Unlike the classical management theory’s mechanical
perspective on human, Follett suggested that the employees can contribute
to the job analysis and work development processes. Because, according to
Follett, workers know the most about their jobs. Follett, in contrast with
the general ideas in her time, proposed that the authority should go with
knowledge and thus, claimed that workers with relevant knowledge and skills,
rather than managers, should be in control of their work processes. In this
case, managers should behave as facilitators, not as supervisors. Follett was also
a pioneer in the idea of cross-functioning; members of different departments
working together in cross-functional teams to accomplish specific goals – an
approach that is increasingly used today.
Explain the relationship between negative
entropy and organizational change efforts.
your turn 5
Entropy refers to the organization’s tendency to go into a decline and die. All
attempts and efforts to slow entropy down are known as negative entropy.
Rapid and constant changes in the environmental forces are the main cause of
entropy. Although entropy is inevitable, open systems resist entropy and take
all the necessary measures to slow it down. As a negative entropy attempt,
organizations strive to adapt themselves to the changing environmental
conditions. Misalignment between the organization and its environment
accelerates entropy. Thus, all organizational attempts to ensure and maintain
this alignment can be considered as negative entropy.
47
The History of Management Thought
endnotes
Daft, R. (2012). Management (10th ed.). SouthWestern Cengage Learning, p. 34.
1
Shavinina, L. (2007). Early development of entrepreneurial
giftedness. ASAC, 28(21), pp. 178-186 (178).
Fells, M. J. (2000). Fayol stands the test of time.
Journal of Management History, 6(8), pp. 345-360
(345).
10
2
Hill, C. W. L. & Jones, G. R. (2011). Essentials of
Strategic Management. South-Western Cengage
Learning Custom Pub., p. 75.
3
Griffin, op. cit., p. 36.
11
Wren, D. A. & Bedeian, A. G. (2008). The Evolution
of Management Thought (6th ed.). Wiley, p. 232.
12
Jones, G. & George, J. (2015). Contemporary
Management. McGraw-Hill Education, p. 46.
13
Williams, C. (2014). MGMT 7. South-Western
College Pub., p. 23.
14
Bateman, T. & Snell, S. (2012). M: Management.
McGraw-Hill Education, p. 28.
15
Griffin, R. (2012). Management. South-Western
Cengage Learning, p. 35.
16
4
Schermerhorn, J. R. (2011). Exploring Management.
Wiley, p. 42.
5
DuBrin, A. J. (2011). Essentials of Management.
South-Western College Publishing, p. 25.
6
Price, M. P. (2003). Frank and Lillian Gilbreth and
the motion study controversy, 1907-1930. Wood,
M.C & Wood, J.C., In Frank and Lillian Gilbreth:
Critical Evaluations in Business and Management,
Vol. II, 455-47, Routledge Taylor & Francis
Group, p. 58.
Kreitner, R. (2008). Management. South-Western
College Pub., p. 182.
7
Gomez-Meija, L. R. & Balkin, D. (2011).
Management. Prentice Hall, p. 15.
8
Pindur, W., Rogers, S. E., & Suk Kim, P. (1995). The
history of management: A global perspective. Journal
of Management History, 1(1), pp. 59-77 (62).
9
48
Certo, S. C. & Certo, S. T. (2011). Modern
Management: Concepts and Skills. Prentice Hall,
p. 38.
17
Jones & George, op. cit., p. 42.
18
DuBrin, op. cit., p. 27.
19
Chapter 3
Management
Environment
Learning Outcomes
After completing this chapter, you will be able to:
1
3
5
Develop an understanding of the new
management context and its relevant environment.
Explain the dimensions of organizational
culture in business organizations.
Compare different types of business
environments with each other.
Discuss the role and practice of ethics in
management.
Explain the concept and types of corporate
social responsibility.
Chapter Outline
The New Management Context
Business Environments
Organizational Culture
Ethics in Management and
Corporate Social Responsibility
50
2
4
Key Terms
Organizational environment
External environment
Internal environment
General environment
Task environment
Organizational culture
Managerial ethics
Corporate social responsibility
Business Management
Consider that gasoline and diesel prices have
risen significantly just in one night because of a
serious regional conflict between two major oil
producers in the Middle East. If this situation is
prolonged and if you drive a car, you may very
well experience lasting economic consequences.
You may have to drive your car less. If you cannot
do that, you probably will change your buying
behavior along with millions of other consumers to
compensate for the increase in fuel prices (e.g. less
eating out, less cultural and social activities, shorter
vacations). While you try to adjust your budget to
these new conditions, many businesses may also
be affected by cuts in spending. Managers might
downsize by firing some employees, even shut down
their operations. Restaurants, entertainment centers,
bus lines and commercial airlines may be among the
businesses that will be adversely affected.
A similar situation can also be experienced
due to unusual increases in exchange rates. The
declining demand for imported goods that became
more costly, will initially impact businesses that
sell or distribute these products followed by related
sectors. Of course, the opposite can be the case.
For instance, a sharp decline in foreign exchange
rates and inflation rates may lead to the revival
of an export dependent economy, by an increase
in disposable income, and eventually an increase
in the sales of goods and services. In parallel, to
increase sales businesses will, in turn, increase their
productive capacity and employ more workers. All
these examples demonstrate that businesses are
integrated in their environment and changes that
take place in the environment directly influence
business. This emphasizes the importance of
studying business in an environmental context.
The purpose of this chapter is to discuss the
key elements of the managerial environment.
After briefly describing the new management
context which shapes its environment, dimensions
of the internal and external environment will
be examined. The following part discusses the
organizational culture as an important internal
environmental element. The last part of the unit is
devoted to business ethics and social responsibility
issues as critical elements of today’s management
environment.
THE NEW MANAGEMENT
CONTEXT
Today’s economic and business conditions
make a manager’s job challenging. For at least the
last two decades, we have witnessed an enormous
transformation of the business environment.
For example, The World-Wide-Web, the Internet,
supercomputers, the rise of social media, the power
of personal computers, the phenomenal and complex
capacities of smart phones, the new world of cloud
computing, and the rapid shift to data driven business
operations. All of this is encapsulated by faster, cheaper
computer chips and endless strands of algorithms
to satisfy almost every human need and desire for
connectivity in personal and professional lives. Today’s
world is very different from 20 years ago; so is the
new management context. Then, what are its main
characteristics and what are the main drivers that
shape this new management context?
The last two decades witnessed an enormous
transformation of the business environment.
Some authors claim that the world has
turned into a global marketplace with the rise
of globalization. The accuracy of this analogy is
witnessed by more transparent trade borders and
the increase in the circulation of people and capital.
Turkey, among other nations, has production facilities
in China and investments in many countries around
the world.
Change itself has taken place in almost every
aspect of business life. It is the most persistent,
pervasive, and powerful challenge that managers
confront in emerging market nations and the
industrialized world. For most managers, not
changing is an unlikely option. Rapid technological
advances in a highly competitive global environment
force managers at all levels to adapt quickly to the
far-reaching impacts of technology’s transformative
power.1 Moreover, the organizational environment
has changed radically in concert with the advent of
new business practices.2
For example, digital capabilities enable
organizations to outsource their peripheral functions,
such as call center operations, certain practices
in payroll services, employee assessment, training
51
Management Environment
programs, catering, procurement, and security are
less costly and more efficient. Many organizations
are involved in inter-organizational networks,
taking advantage of other firms’ capabilities and
competencies. This implies a sizeable extension of
the responsibilities of the managers that outsource
business functions.
With the of the digital revolution, many new industries
have emerged, often referred to as knowledge intensive
industries, where high tech firms compete such as Google,
Facebook, Twitter, and Microsoft. In these companies, we
find new organizational forms that challenge the older,
more bureaucratic structures of the past.
One of the global developments is that
employment in organizations in the developed
world are increasingly based on services such
as education, insurance, tourism, and R&D,
rather than goods. Tangible items (e.g. machinery,
computers, household goods, etc.) are being produced
in the developing world. One consequence is that
the nature of work and organizations is changing
rapidly in both kinds of economies. People living
in rural areas of emerging market countries have
become factory workers. Meanwhile, there has
been an explosive growth in knowledge intensive
firms in more advanced economies. Among them
are IT firms, global consultancy firms, law firms,
accounting firms, as well as specialized institutes,
colleges, and universities that produce new knowledge
workers. An increase in knowledge-intensive work
means that organizations have to hire and manage
different kinds of employees who are capable of
working with sophisticated databases, software,
and knowledge management systems.
Companies seek for an innovative workforce with different backgrounds.
The advancements in information and communication technologies enabled employees work as
members of virtual project teams that are networked globally. Doing business in real time may create
instances for cultural blunders and misunderstandings. On the other hand, a global organization means
managing diversity, which is increasingly seen as an asset for organizations. Hence, managers need to
develop appropriate ways of managing people of different national, ethnic, and religious identities, as well
as differences in education, social status, and gender. Also, human resources departments (HRM) need to
know how to meet the challenges that come with a diversified workforce.
The advancements in information and communication technologies enabled employees work as
members of virtual project teams that are networked globally.
In addition to generations X and Y, we are now becoming familiar with the term “Generation Z”.
This latest generation is highly skilled in the use of social media, mobile technology, and computer-driven
environments than earlier generations. Each generation has certain generic characteristics even though
they differ by national cultures. Managers should have the expertise to work with the complexity of
relationships among different generations and minimize conflicts.
All of the examples mentioned above indicate the challenges faced by managers. Work experience is not
enough to be a successful manager. Managers today need to be fully aware of these current and profound
changes. Moreover, they need to be equipped with hard and soft skills and competencies for effectively
managing complex business organizations.
52
Business Management
Managers today need to be fully aware of the
current and profound changes; moreover they
need to be equipped with hard and soft skills
and competencies for effectively managing
complex business organizations.
BUSINESS ENVIRONMENTS
The environment is a broad term, having
different meanings in various contexts. In generic
terms, environment refers to the factors that
influence businesses. Even though it encompasses
virtually all the elements both inside and outside the
organization, we will focus on factors that have critical
importance to the survival and success of a business.
Business environments, which also surround the
environment of management, can be divided into
two broad categories: external environment and
internal environment. You already learned about
the external environment within the content of the
Introduction to Business course. In this section the
internal and external environments are detailed.
External environment affects organizations
indirectly while the internal environment has
a direct impact.
Some managers tend to ignore the factors of
the external environment because they feel they
cannot control them. However, these factors will
affect the degree to which an organization will
be able to accomplish its short- and long-term
goals. For example, interest rates will affect the cost
of using external funds. Of course, it is impossible
to tell the direction of the interest rates for the long
term. Yet, by looking carefully at the leading
indicators of the global and local economy,
and collecting relevant data on a regular basis,
there will be certain measures that can be taken
proactively. Scenario planning is one them.
This is where managers weigh the possibilities
of the alternatives and make plans accordingly.
Now, we can examine the external and internal
environments in detail.
External Environment
Environment refers to the factors that
influence businesses.
Business environments can be divided into
two broad categories: external environment
and internal environment.
The external environment comprises factors
affecting organizations indirectly. What managers
can do to control them is very limited. For
instance, global economic and political conditions,
changes in the demographic characteristics of a society,
and technological changes are beyond the control
of any business manager. On the other hand, the
internal environment has relatively direct impacts
on business operations; and the relationship
between the internal environment and business
operations is mutual. In other words, while
internal environmental factors affect organizations,
they are in turn, affected by the decisions of
managers. For example, by developing plans and
revising processes, managers can regain or maintain
control over internal factors. Similarly, actions like
modifying organizational structures, increasing/
decreasing tangible assets, and hiring/developing
human resources are some of the very basic managerial
activities towards this end.
The external environment includes factors
and forces outside the organization that affect its
performance.3 (See Figure 3.1)
The external environment comprises of
factors affecting organizations indirectly and
what managers can do to control them is
very limited.
Figure 3.1 The External Environment
GENERAL ENVIRONMENT
Political
Global
Economical
TASK ENVIRONMENT
Suppliers
Competitors
Buyers
Complementors
Substitutes
Technological
Sociocultural
53
Management Environment
The external environment has two main
components: general environment and task
environment.
The general environment includes those
factors that might not have a direct impact
on the daily operations of a firm but will
indirectly influence it.
The task environment typically includes
competitors,
suppliers,
and
buyers
(customers or distributors); businesses that
produce substitute products to those sold
in the industry; and businesses that provide
complementary products/services.
The external environment has two main components:
general environment and task environment. The general
environment includes those factors that might not have
a direct impact on the daily operations of a firm but will
indirectly influence it. The general environment includes
political, sociocultural, economic conditions, global and
technological environments. These factors eventually affect
all businesses. The task environment includes factors that
the organization interacts with directly and that have a
direct impact on the organization’s ability to achieve its
goals.4 Elements in the general environment influence the
organization through the medium of the task environment.
The task environment typically includes competitors,
suppliers, and buyers (customers or distributors);
businesses that produce substitute products for those sold
in the industry; and businesses that provide complementary
products/services.5
The general environment
The analysis of the general environment is called
PEST (Political and legal, Economic, Sociocultural, and
Technological factors). Some authors suggest that the The analysis of the general environment is
analysis includes ecological and legal issues separately. In called PEST (Political and legal, Economic,
this case, this analysis is called PESTEL. We also examine Sociocultural, and Technological factors)
the global environment as a part of the general environment analysis.
since it affects virtually every business organization. Let’s
take a closer look at the general environmental factors,
starting from political and legal factors, followed by
economic, sociocultural, technological, and global factors.
Internet
Political and legal factors. One of the critical
For examples of how to conduct PEST analysis, please
aspects of the external environment is the direction and
visit https://www.strategic managementinsight.com/
stability of political factors. Political and legal factors represent
tools/pest-pestel-analysis.html
the law and regulations, not only the home country’s but also
others in today’s global marketplace. Stability of the central
government, legislation on antitrust and fair trade, nationalization and/or privatization approaches, consumer
and environmental protection, foreign trade regulations, customs legislation, health and safety regulations are
among the political factors that businesses should take into account.
The interaction between political and legal factors
and competitive factors of industry is a two-way process.
Governments establish regulations that influence the
The dimensions of the general environment
competitive structure and businesses in an industry that
are political and legal economic, sociocultural,
often want to influence regulations.6
technological, and global factors.
Governments play a critical role in political and legal
issues. Consider a situation where your government has
banned the political and economic relationships entirely with a country in which one of your largest business
partners is located. This will have a critical impact on your company’s future and your company may not be
able to respond defensively. For instance, if a nation of origin is surrounded by countries that have potential for
conflict, businesses need to think strategically about more distant markets.
54
Business Management
Similarly, political entities and interest groups
may affect the local, national, and international
operations. Many companies confront protests
of various interest groups. Environmental issues
especially are at the very heart of the disputes
among interest groups and business firms.
Industry-specific regulators are government
agencies responsible for formulating, interpreting,
and implementing rules to a specific industry.
These rules shape competition in an industry.7 For
example, the Turkish Medicines and Medical Devices
Agency (TMMDA), which is in charge of the quality
of medicines and medical devices, is one of the very
important industry-specific regulators.
Economic factors. The economy influences
directly all the sectors and suppliers, producers
of goods and services, wholesalers and retailers,
nongovernmental organizations operating in
those sectors, people, and even the government.
Economic factors related to the condition and
the direction of the economy are critical ones for
businesses to survive and accomplish their goals.
Among the most important economic elements
are interest rates, inflation, changes in disposable
income, stock market fluctuations, and business
cycle stages.8 These factors effect business firms to
varying degrees.
Among the most important economic
elements are interest rates, inflation,
changes in disposable income, stock market
fluctuations, and business cycle stages.
Business managers develop their short- and longterm plans partly based on economic indicators,
and make strategic decisions such as expanding,
downsizing, undertaking new investments by
analyzing the economic health of the economy.
These indicators include interest rates, inflation
rates, money supply, unemployment rates, foreign
trade figures, payments, budget deficits and
surpluses, gross national product figures, energy
costs and energy resources, wages, net income, and
infrastructure investments
The economy is critical to all sectors.
The economic forces can be better understood
by grouping them into three categories: current
conditions, economic cycles, and structural
changes.9
Current economic conditions: Current
economic conditions are the ones that exist in the
short term. For instance, the current level of inflation
may lead to a rise in the cost of production, which
in turn shrinks profits. Similarly, current interest
rates will determine how expensive or cheaper it is to
borrow funds; current unemployment rates will affect
how easy or difficult it is to find the type of labor that
businesses need.
Economic cycles: Economic activities are
dynamic and occur in cycles. Understanding that
cycles exist and the key factors that move them are
critical for managerial activities such as planning. It
is also important to be aware that specific industry
cycles can be different from the national economic
cycles.
Structural changes: It is critical to know
whether economic changes are temporary or longterm structural changes. Structural changes denote
the changes that significantly effect the dynamics
of the economy now and in the future. For
example, are dropping crude oil prices a temporary
or structural change? If crude oil prices are not likely
to rise over 100 US Dollars in the near future, it
indicates a structural change. Managerial decisions
and business operations should change according
to whether the changes are temporary or structural.
Otherwise, failures resulting from poor decisions
are inevitable.
55
Management Environment
Sociocultural factors. The sociocultural
component is concerned with societal and cultural
factors such as values, attitudes, trends, traditions,
lifestyles, beliefs, tastes, and patterns of behavior.10
Sociocultural factors are shaped by national culture,
religion, education, and ethnic elements. Business
managers should understand and consider different
life styles, values, and norms of the consumers they
serve.
The sociocultural component is concerned
with societal and cultural factors such as
values, attitudes, trends, traditions, lifestyles,
beliefs, tastes, and patterns of behavior.
Lifestyles, values, attitudes, and behaviors
change in time. The demand for products and
services will respond to sociocultural changes. As
individuals in society try to control and adapt to
environmental factors, change in the sociocultural
factors will be unavoidable.
An example of sociocultural factors is migration
from rural regions to cities, from underdeveloped parts
of countries to developed ones. The increase in the
population of a city because of migration leads to the
creation of new consumer groups. They represent new
opportunities for businesses. Moreover, the increasing
participation of women in the workforce is another
sociocultural development. This influences not only the
policies of firms regarding employment, salary, and
human resources, but also leads to new products and
services specifically designed for women.
The age distribution of the population is another
critical sociocultural issue. Some countries worry
about their aging society that may cause them to
lose competitiveness in the future. Governments
develop measures to increase the birth rate. On the
other hand, some countries have relatively younger
populations and faster birth rates. This seems
to be a significant advantage in terms of fueling
the growth potential of a country and forming a
dynamic labor market for the economy. Also, firms
producing goods and services for this consumer
group have much more opportunities. However,
providing the younger generation with education,
employment, and health services represents a
significant challenge.
56
Technological factors. The Cambridge
Dictionary defines the term technology as “the
study and knowledge of the practical, especially
industrial, use of scientific discoveries”.11 Within
the business environment context, technological
forces affect machinery, materials, functions,
methods, and management practices.
Technology is defined as “the study and
knowledge of the practical, especially
industrial, use of scientific discoveries.
Scientific and technological advancements
and innovations have consequences for firms,
products and services, strategies, and competition
approaches. Technological changes represent new
opportunities for businesses; however, they also
may cause firms to cease operations. From the
point of view of customers, it is always good to
have technologies permitting cost-effective and
more efficient products. Yet, businesses consider
any necessary changes in the technologies they
use or employed by rivals as a threat. Companies
not tracking or adapting innovations relevant
to their industry are destined to perish. Many
products and technologies showed up on shelves
for a while and then disappeared. For example,
cassette tapes were replaced by CDs; CDs replaced by
flash drives; analog devices replaced by digital ones.
Similarly, CRT TVs were replaced by LCD TVs.
Markets have been witnessing these kind of changes
for centuries. Today, Internet and nano-technologies
rule the markets. Companies that can see the future
direction of the current and novel technologies will
be able to adapt to the changes more quickly.
Global factors. These factors are outcomes
of changes in international relationships, changes
in nation’s economic, political, and legal systems,
and changes in technology. Today’s managers
recognize that their firms compete in a global and
highly integrated market. They regard the global
environment as a source of opportunities and
threats to which they must respond.12
Business Management
Businesses become integrated through global
partnerships.
local conditions. Even differences in time and
measurement systems may create challenges for
business people. Chapter 7 explains the basics of
managing a diverse workforce.
Managers who are responsible for international
operations must possess a global mindset.
After reviewing the general environment as part
of the external environment, we can focus on the
task environment. As noted earlier, the factors in
the general environment influence the organization
through the medium of the task environment.
Global factors are outcomes of changes
in international relationships, changes in
a nation’s economic, political, and legal
systems, and changes in technology.
Technology, especially transportation and
communication technology (mainly the Internet), has
made it possible to travel to multiple countries in the
same day and to communicate with the most of the
world. Today, not only are diverse cultures interacting
more and more frequently, but customer values are
becoming similar. Through transportation and mass
media communications, more people around the
world observe and desire the same products.13
Global managers must obtain awareness of
other cultures as well as awareness of different
ways of conducting business.
The basic management functions of planning,
organizing, leading, and controlling are the same
whether a company operates domestically or
internationally. But managers will experience
more difficulty and risks when performing these
management functions on a global scale.14 As
a business becomes more global, the managers
must adapt to the challenges of working with
organizations and people from other countries.15
Managers who are responsible for international
operations must possess a global mindset. Among
the critical issues for success in international
settings are awareness of other cultures and beliefs
and respecting them; awareness of different ways
of conducting business; and adapting quickly to
Task environment
The task environment is a set of forces
and conditions that originate with suppliers,
distributors, customers, and competitors; these
forces and conditions affect an organization’s
ability to obtain inputs and produce outputs.16
The task environment is closer to the organization
and includes the sectors that conduct day-to-day
transactions with the organization and directly
influence its basic operations and performance.17
The task environment has relatively more direct
effects on businesses’ performance compared to
the general environment. Generally, elements
that constitute a sector are the elements of the
task environment. A sector in which a business
operates includes the producers of the same kind,
similar, or complementary products or services,
as well as suppliers, distributors, customers, and
labor markets. Companies within a sector may
collaborate and/or compete with each other.
Businesses in many sectors struggle to sell the same
or similar products to the same customer groups.
Let us take a deeper look at the elements of the task
environment.
The task environment is the set of forces
and conditions that originate with suppliers,
distributors, customers, and competitors;
these forces and conditions affect an
organization’s ability to obtain inputs and
produce outputs.
57
Management Environment
Customers. Customers are the individuals
or groups who buy the goods and services that a
business produces.18 Customers can be not only
individuals but also business organizations or
non-government organizations, or institutions.
They can consume the products and services by
themselves or resell them. Resellers are retailers,
wholesalers, industrial or institutional customers.
Businesses monitor and discover the wants and
needs of customers, and create target markets to
serve them better. Keeping track of the changes in
the buying behaviors of customers will help firms, in
turn, to fulfill what customers need. It is important
to know different characteristics of customer groups
for planning and applying marketing functions
effectively and efficiently. Among the criteria used
for defining customer characteristics are age, sex,
marital status, income level, employment, social
status, consumption habits.
Suppliers. These are individuals or
organizations that provide an organization with the
input resources (such as raw materials, component
parts, semi-finished materials, and energy) that it
needs to produce goods and services.19 Businesses
produce according to the orders taken, marketing,
and distribution plans. Therefore, it is critical to
manage the relationships with the suppliers to
maintain the desired level of production complying
with the pre-determined standards. Difficulties
experienced in procurement may even endanger
the survival of the company, depending on the
extent of the problems.
Suppliers are individuals or organizations
providing businesses with inputs such as
raw materials, semi-finished materials, and
energy.
Businesses will have more bargaining power
over suppliers when there are many alternative
suppliers, or vice versa. For most cases, the quality
of the products depend heavily on the features of
the inputs. Therefore, businesses may take over
suppliers or become partners with them to have
more control on inputs.
58
Competitors. Other organizations in the same
industry or type of businesses which provide goods
and services to the same set of customers are referred
to as competitors.20 Each industry is characterized
by specific competitive issues. Competitors pursue
various strategies to capture more market share by
making more sales. Typical strategies include cost
leadership and differentiation.
Other organizations in the same industry or
type of business which provide goods and
services to the same set of customers are
referred to as competitors.
Competition is a powerful tool for improvement and
development.
If there are no significant entry barriers to
a market (e.g. legal restrictions, intensive capital
requirements, special expertise), many firms will
be eager to be in that market, resulting in more
competition among the firms. In this case,
firms should be more careful in formulating
and implementing their competitive strategies.
Attention should be directed towards areas such
as production, marketing, pricing, promotion,
innovation, and distribution along with all the
primary and supportive activities to gain more
customers. Yet, it is not surprising today to witness
firms engaged in intense competition in one sector
and collaboration in others.
Producers of substitute products. As a
task environmental force, substitutes focus on the
extent to which alternative products and services
can substitute for the existing products or services.
Substitution is different from competition.21
Business Management
Substitute products are goods or services that a consumer sees as the same or similar to any other product
or services (for example, a substitute product for glasses is contact lenses, and a substitute service is eye surgery).
As company executives monitor their rivals’ strategies, they
should also pay attention to the effects of substitute products
and the threats they cause. A change in their expectations
Substitute products are goods or services
or attitudes towards a product or service may turn them
that a consumer sees as the same or similar to
to substitute products or services. Hence, producers of
any other product or services.
substitutes should also be in the radar of businesses.
Producers of complementary products. Complementary products and services are the ones that
can be sold separately but that are used together, each creating a demand for the other (for example, TVs and cable
services, computers and operating systems, tea and sugar). A change in the demand of a complementary product
can eventually influence the demand for the other one. So,
if a company produces a complementary product, its control
over its products can be limited. Consider a company producing
Complementary products and services are
RAM (Random Access Memory) for computers. A change in the
the ones that can be sold separately but that
demand of computers, up or down, will affect the sales of RAM
are used together, each creating a demand for
memories. As a result, the company needs to reconsider its sales,
the other.
distribution, and pricing decisions.
As mentioned at the beginning of the chapter,
organizations operate in a mix of external and internal
environmental factors. The internal factors are explained in
the following section.
1
Which process would you apply if your boss
wanted you to do an external analysis of the
company?
Internal Environment
The internal environment constitutes the factors inside
the business that influence the ability of managers to pursue
certain goals.22 The internal environment includes leadership and management styles, organizational
culture, human resources, organizational structures, business assets, financial strength, and operational
and managerial processes. These are environmental factors that directly affect and shape the managerial
decisions and operations in organizations as well as business entities.
Leadership and management. Environmental
uncertainty and rapid changes experienced in virtually
every aspect of business life make the adaptation to the new
Internal environment factors directly affect
circumstances very critical for business survival and success
the managerial and organizational structure.
in competition. It is upper management’s responsibility to
sense the need for adaptation and take proactive measures
towards this end. A strategic perspective is a necessity to deal
with business operations, markets, and goods and services
The internal environment includes
produced. Strong leadership and effective management
leadership
and
management
styles,
practices are needed to accomplish long-term goals in today’s
organizational culture, human resources,
chaotic business environment.
organizational structures, business assets,
financial strength, and operational and
Leadership style and managerial competency in an
managerial processes.
organization have a strong impact over on motivation
and performance of employees and organizational culture.
Today’s uncertain and dynamic environmental characteristics call for transformational leadership and
participative managerial practices for companies. It gives a competitive advantage for businesses that have
managers who are visionary, responsive to employee needs and opinions, encouraging participation in
59
Management Environment
decision-making mechanisms, and contributing to
employees’ personal and professional development.
Organizational culture. You can easily
observe the varieties in stores or office buildings
in terms of layout, appearance, cleanliness,
atmosphere, and uniforms of salespeople.
Moreover, how they welcome and treat customers,
how they communicate with customers and with
each other, and how they present goods or services
are critical factors in their success or failure. Such
organizational characteristics are nothing more
than the reflection of organizational culture
which indicates overall values of work relations
among employees as well as attitudes towards
customers. Organizational culture is one of the
hot topics that managers deal with to direct the
organization towards desired goals. Details will be
revisited in the section below.
Organizational culture indicates overall
values of work relations among employees as
well as attitudes towards customers.
Human resources. In today’s business
world, under the impact of globalization, obtaining
tangible assets such as raw materials, capital,
facilities, machinery, and equipment is relatively
easier. The actual challenge for businesses in terms
of success is to find, recruit, and retain human
resources who have the required qualifications (e.g.
expertise, skills, and capability.). It is very costly to
replace qualified personnel because of extensive
time and money devoted to human resources to
keep them updated and motivated.
Another critical aspect of human resources
is related to the differing general characteristics
of various generations working together in
organizations. Generations X, Y, or Z may have
relatively distinct personalities, habits, and attitudes
because of different social, economic, and technological
and environmental forces they experience as they
grow up. As a result, each generation may see the
world differently and behave differently. Having
different generations in the same work place and
making them work in harmony and peace requires
leadership, managerial skills, and experience.
60
2
Which generation are you? X, Y or Z?
Organizational structure. The organizational
structure of a business typically reflects managerial
layers, lines of authority, rights, and responsibilities
in a firm. It also regulates how the roles, power and
responsibilities are distributed, coordinated and
controlled, and how information flows between
the management layers. In a centralized structure,
decision-making power is concentrated in the
top management, and tight control is exercised
over departments. In a decentralized structure, the
decision- making power is distributed through
various layers, and the departments exercise
different degrees of decision-making power.
Organizational structure of a business
typically reflects the managerial layers, lines of
authority, rights, and responsibilities in a firm.
A dynamic organizational structure enables
business organizations to react to environmental
changes in a timely manner and thus provides a
significant competitive advantage. In most cases,
more hierarchical layers result in a slower decisionmaking process since time elapses while the
information needed for reaching decisions travels
among different layers. Therefore, business firms
undertake reorganization projects to have much
leaner organization structures. See Chapter 6 for
different organizational structures.
Centralized and decentralized organizational
structures reflect opposite managerial approaches.
Business assets. Business assets (such as
buildings, vehicles, raw materials, machinery, cash,
inventory, and equipment) have an important role
in implementing tasks and activities effectively
Business Management
in the internal environment. Businesses having asset advantages can seek opportunities faster and better
compared to their rivals. In addition, when a business has adequate assets, it will be easier to do what is
needed to stay ahead of the competition, such as faster and better fulfillment of customer needs, increasing
production capacity, developing new products and services, allocating more resources into R&D projects,
making investments immediately, and a comprehensive training of human resources.
Operational and managerial processes. A business process denotes a sequential set of
activities to accomplish a specific organizational goal. For example, the procurement process involves steps
such as investigation of appropriate suppliers, selecting suppliers, negotiating with the suppliers regarding price,
delivery, quality, placing the order, and receiving the order. In a typical business organization, there are
many different processes such as product assembly, quality
control, maintenance, accounting transactions, recruitment
of human resources, procurement, and sales.
A business process denotes a sequential
Designing and managing the organizational and
set of activities to accomplish a specific
managerial
processes in a way to increase effectiveness and
organizational goal.
efficiency in the organization is very critical. Processes
having repetitive, unnecessary and illogical steps may cause
longer work times, increased stress and conflicts, low performance and motivation levels among employees,
losses in time and money, longer cycle times, longer delivery times, unsatisfied customers, and deteriorated
financial positions. More and more, businesses are realizing the importance of processes for success in
starting restructuring projects.
Organizations are managed under the integrated impact of external and internal environmental forces.
The environmental factors explained above are in generic terms. It is important to highlight that the impact
of environmental factors on organizations change based on organizational goals. For example, an industrial
company is under impact of the developments in manufacturing technology, while a marketing company is less
likely to be affected.
ORGANIZATIONAL CULTURE
The degree to which organizational goals are accomplished, how employees feel and perceive the
organization, what kind of emotions and motivations they have behind their acts while doing their jobs
and interacting with their superiors, subordinates, and customers is directly related to the organizational
culture. The existence of an organizational culture where employees feel appreciated and motivated will
eventually affect the basic performance indicators in a company such as profitability, efficiency, and
customer satisfaction.
The Concept of Organizational Culture
Bringing production factors together does not guarantee that organizational goals will be attained. We
all know that the environment affects all businesses to varying degrees and organizational success depends
upon the degree to which organizations fulfill environmental demands. For example, a market surrounded
by fast-changing and uncertain conditions calls for high adaptability skills; therefore, organizational culture
should create and maintain a work environment that provides
human resources with appropriate tools and mechanisms
(e.g. policies, delegated authority, training, and pay) that let
Organizational culture is described as the
them adapt and react quickly to the changes in the market.
shared
values, principles, traditions, and
Organizational culture can be a means in accomplishing
ways
of
doing things that influence the way
organizational goals. Therefore, managers approach
organizational members act.
organizational culture actively and make efforts to manage
it in a way to lead the organization towards its goals.
61
Management Environment
Organizational culture is described as the
shared values, principles, traditions, and ways of
doing things that influence the way organizational
members act. These shared values and practices
evolve over time and determine to a large extent
“how things are done around here”.23 Schein
defines organizational culture as “a pattern of
shared basic assumptions that the group learned as
it solved its problems of external adaptation and
internal integration that has worked well enough
to be considered valid and, therefore, to be taught
to new members as the correct way to perceive,
think, and feel in relation to those problems”.24
The culture of an organization consists of several
cultural elements (See Table 3.1). Companies
may employ different types of cultural elements
to create and maintain a certain composition
of organizational culture. Some companies, for
instance, may use symbols and stories of their founders
primarily to infuse the culture while some others try to
promote culture through value systems.
Table 3.1 Cultural Elements
Rites
Planned sets of activities that consolidate various forms of cultural expressions into
one event.
Ceremonial
Several rites connected together.
Ritual
A standardized set of behaviors used to manage anxieties.
Myth
A narrative of imagined events, usually not supported by facts.
Saga
A historical narrative describing the unique accomplishments of a group and its
leaders.
Legend
A handed-down narrative of some wonderful event, usually not supported by facts.
Story
A narrative usually based on true events.
Folktale
A fictional story.
Symbol
Any object, act, event, quality, or relation used to convey meaning.
Language
The manner in which members of a group communicate.
Metaphors
Shorthand of words used to capture a vision or to reinforce old or new values.
Values
Life-directing attitudes that serve as behavioral guidelines .
Belief
An understanding of a particular phenomenon.
Heroes/Heroines
Individuals greatly respected.
Source: Trice, H. M. & Beyer, J. M. (1984). Studying organizational cultures through rites and ceremonials. Academy
of Management Review, 9 (4), p. 655. In David, F. (2011). Strategic Management: Concepts and Cases (14th ed.).
Pearson, p. 97.
Organizational culture can become an effective means to reach organizational goals. For instance, having an
organizational culture emphasizing goals, teamwork, and collaboration among functions will help organizations to
implement strategic management practices effectively. Similarly, an organizational culture encouraging risk taking
and innovativeness can contribute to a company’s competitiveness enormously. On the contrary, an organizational
culture reflected in centralized decision making, authoritarian
management styles, or strict working relationships may jeopardize
the survival of the business by demotivating employees. For the
success of their firms: a) managers should be attentive to Organizational culture as the internal
correctly analyze the external circumstances; b) attempt to
environment factor must support the fit in
obtain the right composition of organizational culture for an
the external environment.
instrumental fit in the business environment.
Strong Versus Weak Culture
The extent to which organizational culture elements are embedded in an organization varies. Strength
of an organizational culture can be characterized by a continuum from strong to weak. Organizations with
62
Business Management
employees who subconsciously know the shared
assumptions; consciously know the values and
beliefs; and behave as expected are called strong
cultures. On the contrary, organizations with many
employees who do not behave as expected are called
as weak cultures.
Organizations with employees who
subconsciously know the shared assumptions;
consciously know the values and beliefs; and
behave as expected are called strong cultures.
Organizations with many employees who
do not behave as expected are called as weak
cultures.
Table 3.2 exhibits the differences between
strong and weak cultures. The primary benefits
of a strong culture include easier communication
and cooperation. Employees who exhibit unity
of direction and consensus are easier to reach.25
Also, in organizations with strong cultures,
employees are more loyal. Strong cultures are
associated with high organizational performance
because organizational values are clear and widely
accepted, employees know what they are supposed
to do and what is expected of them; they can
act quickly to take care of problems. However, a
strong culture also might prevent employees from
trying new approaches especially when conditions
are changing rapidly.26
Table 3.2 Strong Versus Weak Culture
Strong Cultures
Culture conveys consistent messages about what’s
important
Weak Cultures
Values limited to a few people—usually top
management
Culture sends contradictory messages about
what’s important
Most employees can tell stories about company
history or heroes
Employees have little knowledge of company
history or heroes
Employees strongly identify with culture
Strong connection between shared values and
behaviors
Employees have little identification with culture
Little connection between shared values and
behaviors
Values widely shared
Source: Robbins, S. P. & Coulter, M. (2012). Management (11th ed.). Pearson. p. 53.
Levels of Organizational Culture
Some elements of organizational culture can be noticed easily while some others are not. Figure 3.2
exhibits the three levels of organizational culture. In the deepest section of the culture are basic assumptions.
Assumptions are accepted as they are without questioning; they reflect the beliefs concerning human nature
and reality. The middle layer includes values which are principles, standards, and goals. On the surface are
artifacts that anyone can easily observe.
The first step in identifying or analyzing current
organizational culture of a business should be observing
tangible elements such as physical environment, behaviors
Assumptions are accepted as they are withoof employees, company policies, and reward systems.
ut questioning; they reflect the beliefs concerHowever, the larger part of the culture is embedded in
ning human nature and reality. The middle
the organization, not seen with simple observations. To
layer includes values, which are principles,
figure out cultural values and assumptions behind them,
standards, and goals. On the surface are artione should observe the interactions among employees,
facts that anyone can easily observe.
the choices they make, and question their perceptions and
beliefs towards what is right and appropriate.
63
Management Environment
Figure 3.2 Levels of Organizational Culture
Culture that
can be seen
at the
surface level
Visible
1. Artifacts, such as dress,
office layout, symbols, slogans,
ceremonials
Invisible
2. Expressed values, such as “The
Penney idea”, “The HP way”
3. Underlying assumptions and deep
beliefs, such as “people here care
about one another like a family”
Deeper values
and shared
understandings
held by
organization
members
Source: Daft, R.L. & Marcic, D. (2009). Management: The New Workplace
(6th ed.). South-Western, p. 63.
These three levels of organizational culture
are interrelated. For example, in a business firm
an assumption shared by employees can be “product
quality is number one priority in this business.” This
assumption is translated into values, such as “seamless
design”, “near-zero scrap rate” or “100% customer
satisfaction”. These values are then translated into
artifacts, through the actions and policies of managers,
such as “employee of the month trophy”, “best design
awards”, and “comfortably designed meeting rooms
for project teams”.
Establishing and Maintaining
Organizational Culture
Figure 3.3 illustrates how an organization’s
culture is established and maintained. The original
source of the culture usually reflects the vision of
the founders. They can establish the early culture
by articulating a vision of what they want the
organization to be. In addition, the small size of
most new organizations makes it easier to instill
that vision with all organizational members.27
Figure 3.3 Establishing and Maintaining Organizational Culture
Top
Management
Philosophy of
Organization’s
Founders
Selection
Criteria
Organization’s
Culture
Socialization
Source: Robbins, S. P. & Coulter, M. (2012). Management (11th ed.). Pearson. p. 54.
Once the culture is in place, certain organizational practices help maintain it. For instance, during the
employee selection process, managers typically evaluate job candidates not only on the job requirements, but also
on how well they might fit into the organization. At the same time, job candidates find out information
about the organization and determine whether they are comfortable with what they see.28
The actions of top managers also have a major impact on the organization’s culture. Through what they
say and how they behave, top managers establish norms that filter down through the organization and can
have a positive effect on employees’ behaviors. However, as seen in many corporate scandals, the unethical
actions of top managers also can cause some undesirable outcomes. Finally, organizations help employees
adapt to the culture through socialization, a process that helps new employees learn the organization’s way
of doing things. For instance, new employees at Starbucks stores go through 24 hours of intensive training that
64
Business Management
helps turn them into brewing consultants. They learn
company philosophy, company jargon, and even how
to assist customers with decisions about beans, coffee
grounds, and espresso machines.29
Dimensions of organizational culture
Research on organizational culture suggests
following dimensions can be used to identify an
organization’s culture:30
• Outcome orientation: Managers focus on
results or outcomes rather than on how
these outcomes are achieved.
• Attention to detail: Employees are
expected to exhibit precision, analysis, and
attention to detail.
• People orientation: Management decisions
take into account the effects on people in
the organization.
• Team orientation: Work is organized
around teams rather than individuals.
Aggressiveness: Employees are aggressive
and competitive rather than cooperative.
• Stability: Organizational decisions and actions
emphasize maintaining the status quo.
• Innovation and risk taking: Employees
are encouraged to be innovative and to take
risks.
These dimensions range from low to high, the
former is not very typical (low) of the culture,
and the latter is very typical (high) of the culture.
Describing an organization using these dimensions
gives a composite picture of the organization’s
culture. In many organizations, one cultural
dimension often is emphasized and essentially
shapes the organization’s personality and the way
organizational members work.
The following examples exhibit different
organizational cultures created deliberately by the
the managers of those companies. Try to figure
out and compare the emphasized dimension of
organizational cultures given.
•
Examples of Companies with Fantastic Cultures
Zappos: Zappos conducts a cultural fit interview when hiring. The company has deliberately created an
organizational culture and fitting into that culture is the most important factor that managers look for when hiring.
This promotes the culture and happy employees, which ultimately leads to happy customers. Some portions of the
company budget are devoted to employee team building and culture promotion.
Southwest Airlines: Southwest has been in operation for 43 years. The company has managed to communicate
its goals and vision to employees in a way that makes them a part of a unified team. Southwest also gives employees
“permission” to make customers happy, empowering them to do what they need to do to meet that vision. Customers
loyal to Southwest often point to happy and friendly employees who try hard to help.
Twitter: Organizational culture in Twitter provides employees with many benefits and opportunities that
most of other companies cannot afford. Among them are rooftop meetings, friendly coworkers, and a teamoriented environment, free meals at the San Francisco headquarters along with yoga classes and unlimited
vacations for some. Employees cannot stop talking about how they love working with other smart people.
Chevron: Oil and gas companies like Chevron are generally prime targets of especially environmentally
conscious activists and consumers. Yet, employees of Chevron favor their organizational culture a lot. Chevron
shows it cares about employees by providing health and fitness centers on site or through health-club memberships.
Chevron insists employees take regular breaks. Employees compared Chevron with other similar companies
and pointed out “the Chevron way” as being one dedicated to safety, supporting employees and team members
looking out for each other.
Google: Google has been synonymous with its organizational culture for years. Free meals, employee trips
and parties, financial bonuses, open presentations by high-level executives, gyms, a dog-friendly environment,
and so on. Googlers are known to be driven, talented, and among the best of the best. As Google has grown
and the organization has expanded and spread out, keeping a uniform culture has proven difficult between
headquarters and satellite offices, as well as among the different departments within the company.
Source: Patel, S. (August 6, 2015). 10 Examples of companies with fantastic cultures. Entrepreneur. Retrieved
from https://www.entrepreneur.com/article/249174
65
Management Environment
Internet
For examples of enjoyable corporate culture,
visit
http://www.businessinsider.com/25-bestcorporate-cultures-2014-8/#no-25-netapp-1
The elements described above should be
considered in the context of global integration
among organizations of all types. For example,
business organizations differ from one another based
on characteristics such as their individual goals and
values. Yet, organizations operating beyond their
own borders are duty bound to adhere to standards
of conducting business by international bodies among
them OECD and WLO. Therefore, vital elements in
the way of doing business including competition, work
ethics, equality, social responsibility, employee skills,
and use of technology have become more integrated.
3
How do you describe the organizational culture in
your work environment regarding the classification
for organizational cultures?
ETHICS IN MANAGEMENT
AND CORPORATE SOCIAL
RESPONSIBILITY
You may think, “Why bother learning topics
such as business ethics and social responsibility
instead of learning some more important topics
like planning and motivation?” The answer lies in
magazines or newspapers full of corporate scandals
such as: the Wall Street trading scandal, accounting
frauds at AIG, Lehman Brothers, Enron, Parmalat,
Satyam, WorldCom, Tyco, and massive oil spills from
British Petroleum’s offshore drilling rig explosion in
the Gulf of Mexico. They had negative financial and
economic consequences that affected our lives.
Individual or corporate decisions that are
judged to be wrong, either ethically or legally,
cannot only hurt those directly affected by
the decisions but can boomerang to generate
negative publicity, hurt a company’s stock price,
destroy shareholder value, and, as a consequence,
make it difficult for an individual to get future
employment or for a firm to recruit high-quality
employees. In contrast, good managerial ethics and
corporate social responsibility generate significant,
66
positive consequence for employees, customers,
shareholders, and communities.31 One of the ways
of avoiding such negative outcome is to provide
people with awareness and knowledge of business
ethics and social responsibility issues.
Both ethics and social responsibility relate
to the goodness or morality of organizations.
Business ethics is a narrower concept that applies
to the morality of an individual’s decisions and
behaviors32 in business settings. Let us examine
these concepts in detail, starting with ethics in
managerial activities.
Ethics in Management
Ethics is a broad term covering all aspects of
our lives whether business, economic, or political.
Different ethical dimensions are integrated. Business
people strive to combine the best interest of different
parties related to their decisions. Thus understanding
and practicing good business ethics is an important
part of a manager’s job. Ethics is the study of moral
obligation or separating right from wrong. Although
many unethical acts are illegal, others are legal
and issues of legality vary by nation.33 One of the
many reasons ethics is important is that customers,
suppliers, and employees prefer to deal with ethical
companies. A study investigating employees’ opinions
emphasizes that they choose to work for companies with
strong ethical values.34
Ethics is the study of moral obligation or
separating right from wrong.
Ethical problems remain a main concern in
the workplace. Despite an intensified emphasis
on business ethics following scandals earlier this
decade, a significant number of employees say they
still witness questionable workplace behavior such as
lying to employees, engaging in conflicts of interest,
manipulation, stealing, and sexual harassment.35
Managers at all levels are expected to possess
ethical values and more importantly to practice these
values. They are obliged to act as role models both
as individuals and as people who make decisions
that affect the entire organization. Managerial
ethics emphasizes the crucial necessity for ethical
approaches in management practices starting
with the decision-making process. It refers to the
responsibility of managers as suppliers of ethical
values to all stakeholders including employees,
customers, shareholders, and the society.36
Business Management
Managerial ethics emphasizes the crucial necessity for
ethical approach in management practices starting with
the decision-making process.
In work life and in daily life, everyone is
supposed to act ethically. Yet some people do
not. There could be several explanations for this
dilemma: First, there is no worldwide standard of
conduct for business people. Sometimes people
do not realize what they are doing is unethical.
Second, cultural norms and values vary among
countries and even among different regions and
ethnic groups within a country. For example, what
is considered in one country to be a bribe to speed
up services is sometimes considered to be a normal
business practice in another country. Third, some
of these differences may derive from whether
a country’s governance system is rule-based or
relationship-based. Relationship-based countries
tend to be less transparent and have a higher degree
of corruption than do rule-based countries. Fourth,
what is often perceived to be unethical behavior
lies in differences in values between business people
and key stakeholders. Some business people may
believe profit maximization is the key goal of their
firm, whereas concerned interest groups may have
other priorities, such as hiring of minorities and
women or the welfare of their neighborhoods.37
Ethics in decision making
An ethical and socially responsible workplace is
a critical and challenging obligation primarily for
top managers, but a leading concept for managers
of all levels. Thus, they must act as role models for
applying rules of ethics regarding different processes
in their organizations. Managerial decisions have
consequences for parties who are connected to a
decision. Manager’s main responsibility is to make
decisions that balances the benefits of individuals’
and the organization’s.
In any type of decision-making process, ethical
concerns of different nature are involved. Decisions
regarding the ethics content and the consequences
can be grouped as: ethical egoism, utilitarianism,
and altruism.38 Ethical egoism highlights an
egocentric (selfish) approach for making decisions.
A department manager making departmental decisions
based on her/his promotional goals is behaving with
ethical egoism. Utilitarianism is defined as “An
ethical philosophy in which the happiness of the
greatest number of people in the society is considered
the greatest good”.39 A manager or more a leader
with a utilitarian approach considers benefiting
the maximum number of individuals and groups.
As an example we can think of a union leader trying
to negotiate the highest raise in wages for the interest
of as many union members as possible. Altruism,
a step further of utilitarianism and opposite to
ethical egoism, has a focus on benefiting others
at the highest level. A leader, more than a regular
manager, seeks a positive outcome for employees
even if the consequences are contrary to her/his
own interest. Altruist ethics are more attached to
social leaders who seek not their own interest but
only benefiting groups which may be considered as
a rare status. During the independence movement and
the realization of the Republic, Atatürk’s concern was
only the future of the Turkish nation.
Ethical egoism highlights an egocentric (selfish)
approach for making decisions.
Utilitarianism is an ethical philosophy in which the
happiness of the greatest number of people in the
society is considered the greatest good.
Altruism is a step beyond further of utilitarianism
and opposite to ethical egoism, has a focus on
benefiting others at the highest level.
A practical way of improving ethical decisionmaking is to run contemplated decisions through
an ethics test when any hesitation exists. The
ethics test presented below is used at the Center
for Business Ethics at Bentley College as part of
corporate training programs. Decision makers are
taught to ask themselves these questions:40 Is it right?
Is it fair? Who gets hurt? Would you be comfortable if
the details of your decision were reported on the front
page of your local newspaper, on a popular Website
or blog, or through your company’s e-mail system?
Would you tell your child (or young relative) to do it?
How does it smell? This last question is based on a
person’s intuition and common sense. For example,
underpaying many accounts payable by a few dollars
to save money would “smell” bad to a sensible person.
67
Management Environment
Creating an ethical work place
Ethics is related to moral values, acknowledging
what is right and wrong. Individuals who govern
organizations including businesses possess different
moral values based on their background and
personal foundation. A unit manager might be led
by a set of personal moral values entirely different
than the employees. However, it is critical for a
business as well as all other types of organizations to
create a common understanding of ethics through
ethical standards. Such an integrated environment
in an organization helps managers and group
leaders to accomplish certain managerial tasks
more efficiently such as: guide people to certain
type of behaviors and attitudes during processing
tasks; handle ethical dilemmas based on accepted
ethical terms; and maintain a consistent ethical
image in the eyes of all stakeholders.
Ethics is a rising concept in the business world
globally, also in political and economic matters.
Human rights, justice and equality, and social
responsibility as detailed below are some issues
which necessitate implementing ethical rules in the
private and public sector. Thus, managers and leaders
cannot avoid establishing an ethical atmosphere.
Some of ethical practices in organizations are: code
of ethics; chief ethics officer; formal mechanisms for
monitoring ethics; leading by example; training for
implementing ethics and social responsibility; and
support for whistle blowers.41
A Code of ethics declares the values, ethics,
objectives, and responsibilities of the companies.
Code of ethics: Creating, distributing, and
continually improving a company’s code of ethics
and starting ethics programs are among the
important steps managers should take to create an
ethical workplace. A code of ethics declares the
values, ethics, objectives, and responsibilities of the
companies. Codes of ethics commonly address such
issues as conflict of interest, privacy of information,
gift giving, and giving and receiving political
contributions. A well-written code of ethics also
provides guidance to employees concerning how to
deal with ethical situations. Every code of ethics is
unique and reflects company’s philosophy, values,
and business style.42
The following is the Kraft Heinz Company
Employee Code of Conduct. Each heading has a detailed
explanation (For the full document, visit http://www.
kraftheinzcompany.com/ethics-compliance.html).
KRAFT HEINZ COMPANY EMPLOYEE CODE OF CONDUCT
Guiding Principles
•
Compliance with all applicable laws, regulations and Company policies
•
Adherence to Highest Ethical Standards
•
Duty to Speak Up/No Retaliation
RULES
Our People
•
We Prioritize Safety in Our Workplace
•
We Handle Non-Public Information Privately and Confidentially
•
We Do Not Tolerate Discrimination or Harassment
•
We Make Delicious, Safe and High Quality Food
•
We Market and Communicate Responsibly
Our Company and Shareholders
•
We Maintain the Integrity, Accuracy and Reliability of Our Company
•
We Protect and Ensure Proper Use of Company’s Assets
•
We Do Not Use or Disclose Inside Information for Personal Gain
•
We Don’t Take Actions that Conflict or Appear to Conflict with Company’s Best Interests
•
We Do Not Accept Gifts as Company Employees
Our Business Partners and Communities
68
•
We Do Not Tolerate Bribery and Corruption
•
We Comply With Competition and Antitrust Laws
•
We Are a Socially and Environmentally Responsible Company: We Actively Engage In Growing a Better World
Business Management
Another step that companies take to create an ethical workplace is to appoint a chief ethics officer.
The chief ethics officer’s function is to ensure the integration of organizational ethics and values into daily
decisions. They are expected to be objective; understand
the structure of the organization that they work for;
The chief ethics officer’s function in a
communicate clearly and concisely; deal with conflict; and
company is to ensure the integration of
keep silence about confidential matters.
organizational ethics and values into daily
Formal mechanisms for monitoring ethics: Large
decisions.
companies frequently establish ethics committees to help
ensure ethical and socially responsible behavior. Committee
members include a top management representative and other managers throughout the organization. The
committee establishes policies about ethics and social responsibility and may conduct an ethics audit of the
firm’s activities. In addition, committee members might review complaints about violations.43
Extensive communication about ethics and social responsibility: Extensive communication about
the topic strengthens ethical and socially responsible behavior. Top management can speak widely about
the competitive advantages of being ethical and socially responsible. Another successful method is to
discuss ethics and social responsibility issues in small groups. So, the issues stick in the minds of employees.
Leadership by example and ethical role models: One of the most influential approaches to enhancing
ethics and social responsibility is for managers to model the desired ethical behaviors. Leading by example
is particularly useful in encouraging ethical behavior because it provides useful role models. If employees
notice that the management leads ethical behavior, it will prevail.
Encouragement of confrontation about ethical deviations: Unethical behaviors may be minimized if every
employee confronts anyone seen behaving unethically. For example, if one of employees is seen while charging extra
money from customers, other employees should ask for the reason and report it to the management without hesitation. The
same approach encourages workers to ask about the ethical implications of decisions made by others in the firm.
Training programs in ethics and social responsibility: Ethics training programs reinforce the idea that
ethical and socially responsible behavior is both morally right and good for business. The company’s code of
ethics is usually incorporated into the training. Knowledge of
relevant legislation, such as antidiscrimination laws, is essential.
A recent approach is to address ethics issues through e-learning,
A whistle-blower is an employee who
videos, and small-group discussion led by managers.
discloses organizational wrongdoing to
Acceptance of whistle blowers: A whistle blower is an
parties who can take action.
employee who discloses organizational wrongdoing to parties
who can take action. Whistle blowers are often not accepted
and are humiliated by the companies they hope to improve. They may be given poor performance evaluations
and denied further promotions. However, it is important for leaders at all levels to create a comfortable
climate for legitimate whistle-blowing.
Corporate Social Responsibility
Producing and marketing quality products and services at reasonable prices, innovating on a constant
basis, formulating and implementing effective strategies are not enough for sustaining long-term success in
today’s business world. The traditional role of businesses in the society has ended. Intimidated by corporate
scandals and misconducts, consumers now have different perspectives towards business organizations and
look for something more than quality, innovation, and low price.
Many people believe that businesses have an obligation
to care about outside groups affected by an organization.
Corporate social responsibility is the idea
Corporate social responsibility is the idea that firms have
obligations to society beyond their economic obligations to
that firms have obligations to society beyond
owners or stockholders and beyond those prescribed by law
their economic obligations to owners or
or contract.44 Corporate social performance is the extent
stockholders and beyond those prescribed by
to which a firm answers to the demands of its stakeholders
law or contract.
to behave in a socially responsible way. After stakeholders
69
Management Environment
have been satisfied with the returns, they may turn
their attention to the behavior of the corporation
as a good citizen in the community. One way of
measuring social performance is to examine the
company’s annual reports for relevant information
such as contributions to charities, arts, education,
and anti-pollution efforts. Another approach is to
observe how a company responds to social issues by
examining programs in detail.45
Corporate social performance is the extent
to which a firm answers to the demands of its
stakeholders to behave in a socially responsible way.
Views vary regarding the obligations companies
have for social responsibility. There are two
contrasting viewpoints: stockholder viewpoint
and stakeholder viewpoint. The stockholder
viewpoint, the traditional perspective, posits
that business firms are responsible only to their
stockholders. The job of managers is therefore to
satisfy the financial interests of the stockholders. By
doing so, the interests of society will be served in
the long term. Additionally, socially irresponsible
acts ultimately result in poor sales. According to
this viewpoint, corporate social responsibility is
a by-product of profit seeking. The stakeholder
viewpoint contends that firms must be responsible
for the quality of life of the many groups affected
by the firm’s actions. The stakeholder viewpoint
is relevant to the critical elements of today’s
workplace.46 Companies having this perspective may
take action on issues ranging from pollution and
global warming to AIDS, illiteracy, and poverty.
The stockholder viewpoint, the traditional
perspective, posits that business firms are responsible
only to their stockholders.
The stakeholder viewpoint contends that firms
must be responsible for the quality of life of the
many groups affected by the firm’s actions.
Internet
For top Corporate Social Responsibility Initiatives in
2017, please visit https://www.smartrecruiters.com/blog/
top-20-corporate-social-responsibility-initiatives-for-2017/
70
Types of social responsibilities in
business
Carroll proposes that the managers of business
organizations have four responsibilities: economic,
legal, ethical, and philanthropic.47
Economic responsibilities: Producing goods
and services of value to society so that a firm may
repay its creditors and shareholders.
Legal responsibilities: The laws and
regulations that are enacted by governments to
which businesses are expected to conform. For
example, in Turkey, private businesses having more
than 50 employees have to employ disabled people, as
many as 3% of their total employees.
Ethical responsibilities: They are general
beliefs about right/accepted and wrong/unaccepted
behaviors in a society. For example, society generally
expects firms to work with employees and the
community in planning layoffs, even though no law
may require this. People who are affected can get very
upset if an organization’s management fails to act
according to generally prevailing ethical values.
Philanthropic responsibilities: They are
voluntary obligations a business firm assumes.
Among them are contributions, training the
unemployed, and providing day-care centers.
A business firm must first make a profit to
satisfy its economic responsibilities. To continue in
existence, a firm must follow the laws, thus fulfilling
its legal responsibilities. Having satisfied the two
basic responsibilities, a firm should fulfill its social
responsibilities. Social responsibility, therefore,
includes both ethical and philanthropic but not
economic and legal responsibilities. A firm can fulfill
its ethical responsibilities by taking actions that
society tends to value but has not yet put into law.
When ethical responsibilities are satisfied, a firm can
focus on philanthropic responsibilities.48
Some corporate social responsibility initiatives
that companies undertake are:
• Work/Life programs such as flexible work
schedules to help employees lead a more
balanced life and be more satisfied with
their job.
• Community redevelopment projects
which business firms invest resources in
helping to rebuild distressed communities.
• Environmental protection which is
influenced by a major corporate thrust toward
Business Management
ethical and socially responsible behavior calls for business firms and not-for-profit organizations to go
green, to make a deliberate attempt to create a sustainable environment.
Activities in the scope of corporate social responsibility also contribute to becoming a sustainable
organization. A sustainable organization has the ability to meet its present needs without compromising
the ability of future generations to meet their needs. In building a sustainable organization, management
should strive to make the organization sustainable in three areas: the economy, the environment, and society.
In terms of the economy, the sustainable organization focuses on performing behaviors such as minimizing
waste by not overproducing goods and generating a fair
profit for stakeholders. Regarding the environment, the
sustainable organization emphasizes performing behavior
A sustainable organization has the ability to
akin to protecting natural resources like air, water, and land.
meet its present needs without compromising the
In terms of society, the sustainable organization stresses
ability of future generations to meet their needs.
performing behavior such as maintaining the well-being and
protection of the communities in which it does business.49
Corporations and businesses, including those in Turkey increasingly recognize the centrality of ethics
and social responsibility as obligations of good citizenship. Adhering to high ethical standards augments
consumer confidence in the services and products provided by a company. Moreover, knowing that ethics
is an integral part of its management is important for how the company is perceived by its own workforce
and, therefore, is good for morale. Social responsibility projects, much like ethics, communicate positive
messages to the business environment about how companies are being managed. It signals that they exist
not just to make profits. The wellbeing of their communities in which they reside (defined broadly) is an
obligation, especially in terms of addressing serious needs of health and education. And caring for the
sustainability of the natural environment is another facet of good citizenship.
Table 3.3 exhibits some of the voluntary social responsibility projects of Turkish private businesses. Most Turkish
people know about these projects since these companies publicized them effectively.
Table 3.3 Examples of Well-known Voluntary Social Responsibility Projects in Turkey
Project Owner
Project Name
Doğan Media
Group
Dad, Send Me
to School
Turkcell
Snowdrops
Opet
Clean Toilets
Aim and Scope of the Project
The aim of the project was to reenroll girls who have had to
withdraw from school because of economic inadequacy and family
pressure in Turkey. The project also made important contributions to
the brand value of the Milliyet newspaper and Doğan group.
Initiated in 2000, the goal of the project was to provide girls with
equal opportunities in education. The project, in which 10 thousand
girls were granted scholarships each year, was a project that became
independent of the Turkcell brand after the years and was the
subject of National Geographic documentaries.
The aim of the project, which started in 2000, was to raise awareness
about toilet hygiene in the society and raise sensitivity on this
subject. Opet first started its work with its own stations and staff,
then delivered the project to the masses with the trainings and
seminars given to the public in villages and towns and to the
students and teachers in schools
Source: Based on the article Coşkun, O. (2014). Turkey’s Social Responsibility Projects That Become Brands. Retrieved
from http://www.pazarlamasyon.com
The subsequent chapters in this book cover
functions of management which have to be conducted
in the environmental context discussed in this content.
Therefore, keep this augmented perspective in mind as
you move from one chapter to another.
4
Do you think that the social responsibility
activities of businesses are only for the eyes of the
society and the customers?
71
Management Environment
Further Reading
“Dad, Send Me to School” Named Best
Corporate Social Responsibility Project
The “Dad, Send me to School” (BBOG) project
was selected as the most successful social responsibility
project in the eyes of the Turkish public. The project,
which was initiated by the Doğan Group in 2005
and continued by the Aydin Doğan Foundation in
2015, creates equal educational opportunities for
young girls across Turkey.
It has so far built 33 dormitories for girls,
established schools in 12 villages and granted
education scholarships to over 10,000 girls. In
its 10th year, the BBOG project has had over
300,000 individual donors and reached over 35
million Turkish Liras worth of donations.
To date, these collaborations have included
a two-day-long special training session for the
administrators of regional primary boarding schools,
organized jointly with the Turkish Association
of Private Schools, and training seminars for 500
parents in five cities around the theme “My Child
and I,” in conjunction with the Mother and
Child Education Foundation (AÇEV). Moreover,
seminars on hygiene and health, in cooperation
with the Turkish Family Health and Planning
Foundation, and seminars titled “Our Body and
Health,” in cooperation with Eczacıbaşı, were
administered for the girls residing at dormitories.
Source: Hürriyet Daily News (3 March, 2016).
Retrieved from http://www.hurriyetdailynews.
com/dad-send-me-to-school-named-bestcorporate-social-responsibility-project-95964
In Practice
When things get confusing: Is it a matter of economics
or politics? You decide!
As we mentioned in the text, environmental factors influence
businesses a great deal. When you do business internationally risks
are higher compared to domestic markets. Relationships between
countries create both opportunities and threats. Please read the news
item below to see how economics and politics intersect.
The dispute on tomato imports from Turkey to Russia is
not a “political issue” between the countries and it can be solved
soon, Turkey’s ambassador to Russia said on Oct. 6.
“Relations between Russia and Turkey in energy, tourism,
Source: October 06 2017 14:17:00
and construction are strong. Most of the important bans on
agriculture [imports] have been lifted already,” Hüseyin Dirioz
MOSCOW - Anadolu Agency
told state-run Anadolu Agency.
“The investments Russia has made to grow its own tomatoes doesn’t mean that they won’t import tomatoes.
I think they will buy from Turkey again. The market conditions will gradually be opened up,” Dirioz added.
Russian Deputy Prime Minister Arkady Dvorkovich said on Oct. 4 that the country’s Agriculture Ministry
has proposed allowing Turkey to export up to 50,000 tons of its tomatoes to Moscow on an annual basis.
In June, Russian Prime Minister Dmitry Medvedev signed a decree lifting the ban on some Turkish
agricultural imports as well as companies involved in construction, engineering, and tourism, ending
restrictions that followed Ankara’s downing of a Russian fighter jet in 2015.
Following the end of those sanctions, Dvorkovich said only two restrictions - visa-free travel for
Turkish citizens and tomatoes - remain for Ankara.
Dirioz’s remarks came on the sidelines of the Russian Energy Week forum in Moscow, which runs
from Oct. 3 to 7 with the theme “energy for global growth.”
Ambassador to Russia: Turkish
tomatoes not a political issue
Source: Hürriyet Daily News. Retrieved from http://www.hurriyetdailynews.com/turkish-tomatoesnot-a-political-issue-ambassador-to-russia-120462
72
Business Management
LO 1
Developing an understanding of
the new management context
and its relevant environment
LO 2
Summary
Today’s economic and business conditions make a manager’s job challenging. For at least the last two
decades, we have witnessed an enormous transformation of the business environment. Countries
and businesses are closer in economic terms. The advancements in information and communication
technologies enabled employees to work as members of virtual project teams that are networked
globally. Managing diversity is increasingly seen as an asset for organizations. Other than cultural
diversity, managers should have the expertise to work with the complexity of relationships among
different generations and minimize conflicts. Managers today need to be fully aware of these current
and profound changes. Moreover they need to be equipped with hard and soft skills and competencies
for effectively managing complex business organizations.
Comparing different types of
business environments with each
other
Business environments can be divided into two broad categories: external environment and internal
environment. External environment comprises factors affecting organizations indirectly. The external
environment has two main components: general environment and task environment. The general
environment includes the political, sociocultural, economic conditions, technology, natural environment,
etc. These factors affect all the businesses eventually. The task environment typically includes competitors,
suppliers, and buyers (customers or distributors); businesses that produce substitute products to those
sold in the industry; and businesses that provide complements. The internal environment has relatively
direct effects on business operations; and the relationship between the internal environment and the
business operations is mutual. The internal environment includes leadership and management styles,
organizational culture, human resources, organizational structures, business assets, financial strength,
operational and managerial processes.
LO 3
Explaining the dimensions of
organizational culture in business
organizations
Research on organizational culture suggests seven dimensions that can be used to describe an organization’s
culture. In many organizations, one cultural dimension often is emphasized and essentially shapes the
organization’s personality and the way organizational members work. Outcome Orientation: Managers
focus on results or outcomes rather than on how these outcomes are achieved. Attention to Detail:
Employees are expected to exhibit precision, analysis, and attention to detail. People Orientation:
Management decisions take into account the effects on people in the organization. Team Orientation:
Work is organized around teams rather than individuals. Aggressiveness: Employees are aggressive
and competitive rather than cooperative. Stability: Organizational decisions and actions emphasize
maintaining the status quo. Innovation and Risk Taking: Employees are encouraged to be innovative
and to take risks.
73
Management Environment
LO 4
Discussing the role and practice
of ethics in management
Summary
Understanding and practicing good business ethics is an important part of a manager’s job. Ethics is
the study of moral obligation, or separating right from wrong. Although many unethical acts are illegal,
others are legal and issues of legality vary by nation.
Managers at all levels are expected to possess ethical values and more importantly to practice these
values. They are obliged to act as role models both as individuals and as people who make decisions that
affect the entire organization. Managerial ethics emphasizes the crucial necessity for ethical approach
in management practices starting with the decision-making process. It refers to the responsibility of
managers as suppliers of ethical values to all stakeholders including employees, customers, shareholders,
and the society.
LO 5
Explaining the concept and types
of corporate social responsibility
Managers are identified four social responsibilities: economic, legal, ethical, and philanthropic.
Economic responsibilities are producing goods and services of value to society so that the firm may
repay its creditors and shareholders. Legal responsibilities are laws and regulations that are enacted
by governments to which businesses are expected to conform. Ethical responsibilities encompass
how an organization’s management follows the generally held beliefs about behavior in a society. For
example, society generally expects firms, even if it is not requıred by law, to work with the employees
and the community in planning layoffs. The affected people can get very upset if an organization’s
management fails to act according to generally prevailing ethical values. Philanthropic responsibilities
are the voluntary obligations a business firm assumes. Among them are philanthropic contributions,
training the unemployed, and providing day-care centers. Many people believe that businesses have an
obligation to care about outside groups affected by an organization. Corporate social responsibility is the
idea that firms have obligations to society beyond their economic obligations to owners or stockholders
and beyond those prescribed by law or contract. Corporate social performance is the extent to which a
firm answers to the demands of its stakeholders to behave in a socially responsible way.
74
Business Management
1
Business environments can be divided
into two broad categories: ____________ and
____________.
2
The external environment includes the
factors and forces ____________ the organization
that affects its performance.
a. Inside
b. Damaging
c. Outside
d. Helping
e. Threatening
3 Which of the following is not one of the
factors that the general environment includes?
a. Economic
b. Technological
c. Sociocultural
d. Human resources
e. Political
4
The analysis of the general environment is
called____________.
a. Risk analysis
b. Environmental analysis
c. PEST analysis
d. Stakeholder analysis
e. SWOT analysis
5 __________ are individuals or organizations
providing businesses with inputs such as raw
materials, semi-finished materials, and energy.
a. Buyers
b. Logistics companies
c. Wholesalers
d. Retailers
e. Suppliers
A sequential set of activities to accomplish a
specific organizational goal is called.
a. Planning
b. Scheduling
c. Program
d. Business process
e. Management
Test yourself
a. Task environment / General environment
b. Internal environment / Global environment
c. Sustainable environment / General environment
d. External environment / Internal environment
e. Task environment / Close environment
6
7 Organizational culture includes cultural
elements such as the following, except__________.
a. Myth
b. Ethics
c. Folktales
d. Rites
e. Heroes
8
In the deepest section of the organizational
culture are ________.
a. Basic assumptions
b. Artifacts
c. Values
d. Ethics
e. Religion
9 A _________ declares the values, ethics,
objectives, and responsibilities of the companies.
a. Strategic plan
b. Vision statement
c. Mission statement
d. Code of ethics
e. Business plan
10 Which of the following is not among the
responsibilities of business managers regarding
social responsibility?
a. Esthetics
b. Economic
c. Legal
d. Ethical
e. Philanthropic
75
1. d
If your answer is incorrect, review “Business
Environments”.
6. d
If your answer is incorrect, review “The
Internal Environment”.
2. c
If your answer is incorrect, review “Business
Environments”.
7. b
If your answer is incorrect,
“Organizational Culture”.
3. d
If your answer is incorrect, review “The
External Environment”.
8. a
If your answer is incorrect, review “Creating
an Ethical Workplace”.
4. c
If your answer is incorrect, review “The
General Environment”.
9. d
If your answer is incorrect, review “Creating
an Ethical Workplace”.
5. e
If your answer is incorrect, review “The Task
Environment”.
10. a
If your answer is incorrect, review “Types of
Social Responsibilities of Businesses”.
Suggested answers for “Your turn”
Answers for “Test yourself”
Management Environment
review
Which process would you apply if your boss wanted you
to do an external analysis of the company?
your turn 1
It is necessary to show a systematic approach in this regard. First, try to
learn about the general characteristics of the industry in which the business
operates from various sources (Internet, sector publications, international
publications, research company reports, etc.). Then try to compile all the
factors that influence your business. You can then collect these factors under
the headings of political and legal, economic, socio-cultural and demographic,
and finally technological factors. Some of these factors may be more critical
than others. That’s why you should prioritize environmental factors based on
their importance. It may be a good idea to present this data graphically.
Which generation are you? X, Y or Z?
your turn 2
76
People who were born between 1965 and 1979 are called Generation X which
is defined as a being compatible with rules, having a strong sense of belonging,
respectful of authority, loyal, and emphasizing hard work. This generation is
compatible with business life and has high motivation. They work to live.
Generation Y are people born between the years 1980-1999. They like to
be independent, devote themselves to their freedom, and also differ in their
work values. They need to focus more on work than business hours. In this
case, it is important to engage them in business operations. Compared to
Generation X, the Y Generation has little organizational commitment and
can often change employers. The Z Generation are people who were born
in 2000 and beyond. They are noted for their intense use of Internet and
mobile technologies. They especially prefer to socialize through the Internet.
Unlike other generations, Generation Z is said to be born into the world
of the Internet and technology (Source: http://www.acikbilim.com/2013/09/
docs/News-Resources-x-y-ve-z-nesilleri.html).
Business Management
your turn 3
Suggested answers for “Your turn”
How do you describe the organizational culture in
your work environment regarding the classification for
organizational cultures?
Does your organization reveal a centralized or a decentralized business
environment, one that promotes or does not promote the flow of ideas, creativity,
teamwork, customer centeredness, high ethical standards, social responsibility,
care for the natural environment, a system of rewards, equality regarding gender,
ethnic diversity, and generational diversity. For example, the layout of offices
and meeting and recreation rooms will give you an idea. Moreover, factors such
as the way the employees in your a company treat each other, their behaviors
towards customers, the type of work relations encouraged in by the company,
principles on which the awards/rewards and discipline systems are based, and
the management style will provide valuable tips insights. If you are currently
employed, how would you describe your organization’s culture? Does it reflect
the ideal as noted above, or is it a mix of traditional and modern elements. If
it is a mix of old and new, how would you change the organization’s culture to
enhance employee motivation and profitability?
Do you think that the social responsibility activities of
businesses are only for the eyes of the society and the
customers?
your turn 4
It is not possible to say that every business which has social responsibility activities
conducts them with great sincerity. Some businesses run social responsibility
projects only to have a better image in the eyes of the community. However,
with a brief review, you can identify projects that are not for charitable purposes.
Such projects are usually short-term, not project-driven, and are initiatives that
prioritize the company itself. However, as you can see in Table 3-2, businesses
that want to create a real change in a society carry out such projects with
dedication. In these long-term social responsibility projects, the project itself is
at the forefront of unbiased commitment not the business.
endnotes
1
2
Hitt, M. A., Black, S. J., & Porter, L. W. (2012).
Management (3rd ed.). Prentice Hall, p. 6.
Clegg, S. R., Kornberger, M., & Pitsis, T. S. (2016).
Managing & Organizations: An Introduction to
Theory and Practice (4th ed.). Sage, pp. 8-13.
7
Ibid., p. 39.
8
Stephen & Coulter, op. cit., pp. 46-49.
9
Hitt et al., op. cit., pp. 28-29.
10
Stephen & Coulter, op. cit., pp. 46-49.
Cambridge Dictionary, Online version. (http://
dictionary.cambridge.org)
3
Robbins, S. P. & Coulter, M. (2012). Management
(11th ed.). Pearson, pp. 46-49.
11
4
Daft, R. L. (2008). Organization Theory and Design.
South-Western Cengage Learning, pp. 140-144.
12
5
Hill, C. W. L. & McShane, S. L. (2008). Principles
of Management. McGraw-Hill Irwin. pp. 28-29.
6
Hill & McShane, op. cit., p. 39.
George, J. M. & Jones, G. R. (2006). Contemporary
Management: Creating Value in Organizations (4th
ed.). McGraw-Hill Irwin, p. 172.
Lussier, R. N. (2006). Management Fundamentals:
Concepts Applications Skill Development. ThomsonSouth-Western Cengage Learning, p. 79.
13
77
Management Environment
Daft, R. L. & Marcic, D. (2009). Management: The
New Workplace (6th ed.). South-Western Cengage
Learning, pp. 89-90.
37
DuBrin, A. J. (2012). Essentials of Management (9th
ed.). South Western, p. 36.
38
George & Jones, op. cit., p. 157.
39
14
15
16
Wheelen, T. L. & Hunger, J. D. (2012). Strategic
Management and Business Policy: Toward Global
Sustainability (13rd ed.). Pearson, pp. 79-80.
Northouse, P. G. (2013). Leadership (6th ed.). Sage
Publications, p. 425.
Business dicitionary. Retrieved from http://www.
businessdictionary.com/definition/utilitarianism.
html
Daft & Marcic, op. cit., p. 49.
17
George & Jones, op. cit., p. 157.
18
Bowditch, J. L. & Buono, A. F. (2001). A Primer on
Organizational Behavior (5th ed.). Wiley, p. 4. In
DuBrin, op. cit., p. 90.
40
Ibid., p. 157.
19
Daft & Marcis, op. cit., p. 56.
20
Hitt et al., op. cit., p. 94.
21
Hill & McShane, op. cit., p. 39.
22
Daft, R. L. (2012). Management (10th ed.). SouthWestern Cengage Learning, p. 140.
41
Certo, S. C. & Certo, T. (2012). Modern Management:
Concepts and Skills (12th ed.). Prentice Hall, p. 64.
42
Robbins & Coulter, op. cit., p. 52.
23
Schein, E. H. (2010). Organizational Culture and
Leadership. Jossey-Bass, p. 18.
24
DuBrin, op. cit., pp. 104-106.
43
Ibid., p. 91.
44
Lussier, op. cit., p. 52.
45
Robbins & Coulter, op. cit., p. 54.
46
Ibid., p. 54.
47
25
26
27
Ibid., p. 54.
28
Ibid., p. 54..
29
Ibid., p. 94.
Ibid., p. 92.
Carroll, A. B. (May 2004). Managing ethically with
global stakeholders: A present and future challenge.
Academy of Management Executive, pp. 114–120.
In Wheelen, H., op. cit., p. 73.
Ibid., p. 52
48
Hitt et al., op. cit., p. 83.
49
30
31
DuBrin, op. cit., p. 91.
32
Ibid., p. 75.
33
Ibid., pp. 75-76
34
Ibid., p. 80.
35
Kutvan, A. B. (2015). A research on managerial
ethics practices in Turkish media organizations.
International Journal of Economic and
Administrative Studies, 8(15), pp. 221-245.
36
78
Wheelen & Hunger, op. cit., pp. 73-74
Luchsinger, V. (2009). Strategy issues in business
sustainability. Business Renaissance Quarterly, 4(3),
pp. 163–174. In Certo, op. cit., p. 69.
Chapter 4
Managerial Planning
and Decision Making
Learning Outcomes
After completing this chapter, you will be able to:
1
3
5
Discuss the basics and importance of
planning and decision making.
Explain the planning process.
Define decision making and explain the
decision-making process.
Chapter Outline
Basics of Planning
Levels of Planning
Managerial Planning Process
Types of Plans
Decision-Making Process
Decision Models
80
2
4
6
Identify the levels of planning in
organizations.
Describe the types of plans.
Distinguish between different decision
models.
Key Terms
Planning
Plan
Goals
Objectives
Budget
Budgeting
Decision making
Decision models
Business Management
From a vacation with friends to your own career,
from starting a small new business to managing a
large corporation, you can hardly succeed without
planning.1 For instance, one can hardly find a
successful start-up business story without a business
plan or any planning whatsoever.2 Even for funding
a business for expansion or a start-up through
seeking new investors and creditors, a business plan
is a must.3 The main reason for this is that without
planning there is no way one can figure out where
a business is going.
An organization cannot reach or maintain
effectiveness and efficiency without planning.
Thus, without planning, the remaining
managerial functions of organizing, leading and
controlling4 can hardly be done. Specifically, if we
do not plan, then the other three functions will take
more time and more mistakes will be generated
along the way. For instance, the organizational
goals set in planning, form the basis for standards
against which managers can evaluate (control)
the performance of the organization. This is why
planning is often called the primary function of
management.
Starting with planning, what managers do in
fulfilling all four managerial functions is that they
decide. The very first thing to be decided is the
organization’s mission. Then, many other decisions
such as what to produce, where to sell, who to
employ, and how to control operations follow. As
the decisions taken in organizations have serious
consequences, in other words, impact many people
and operations, managers should be careful and
skillful in order to make better decisions.
This chapter is about how managers plan
and decide. Throughout the chapter you will be
made familiar with relevant terminology and the
definitions of terms such as ‘goal’, ‘budget’, and
‘bounded rationality’. The processes of planning
and decision making, together with the types of
plans and decisions are explained. The chapter ends
with some suggestions for being more effective in
planning and decision making.
BASICS OF PLANNING
Planning is the process of determining where to
go by doing what. Planning is intertwined with
effectiveness, which is defined as the achievement of
organizational goals. In fact, the planning process
involves determining those goals and how to reach
them. After some time, if managers do not see
any progress or any fulfillment then the need for
changing plans arises. Let’s assume that a firm plans
to increase the sales of its product X to 1000 units in the
upcoming year. If there is no seasonality in demand,
this means it needs to sell 250 units per quarter. Later,
by the end of the first quarter, if 400 units of product
X are sold, then the firm needs to increase production.
However, if only 175 units are sold, then new plans
must be devised to increase sales. No matter what has
been done to increase the sales, if the sales continue to
be lower than planned by the end of second and third
quarters, then managers of this firm would start to
think about revising the product or developing a new
product. Therefore, with the help of this example,
one can easily see how planning gives us a direction
through setting of goals, helps us check and
determine the level of goal achievement, and shows
any need for modifying and changing the earlier
plans or goals in order to become more effective.
Another important concept that planning
serves is efficiency, being defined as how good
the organization is in its use of resources. As
we talk more and more about resource scarcity
on our planet, planning gains importance so
that businesses can become more sustainable
through eco-efficiency (producing by wasting less
resources).5 Simply, by planning, resources will
be wasted less, because managers also plan for
efficiency in their operations.
To wrap up, with planning, we seek answers to
these two main questions:
• Where do we want to go?
• How will we get there? In other words,
what should we do to go there?
Planning is the process of determining
where to go by doing what.
With the first question, even though we are
attempting to shape our future, we need to foresee
as much as possible what the future is going to look
like and what it holds for us. An argument that is
81
Managerial Planning and Decision Making
often used against planning is that the future can
hardly be predicted correctly. However, if we do not
try to foresee the future, many things happening
around us as time goes by will possibly be named
as “unexpected”. By trying to figure out what the
future is going to look like through a number of
highly probable scenarios, we can form alternative
plans for each. In this way, the unexpected becomes
something expected. Therefore, the matter is never
“not to plan” but “to be flexible in planning”.
Besides, if we do
not try to guess what
is awaiting us and
If you do not try to
do not decide what
foresee the future, you
we want to do, we
very well find yourself
can only be on the
reacting to events and
defensive side and
make costly mistakes.
be reactive rather
than
proactive.
Typically, when we just react we do not have a
lot of time to think over what to do. Then, it
is more likely that we make mistakes and waste
resources.
If a business organization just aims to survive,
then it should try to be as well prepared as possible
for the future. In our times where business
organizations try to survive in highly competitive
markets, the typical thing that happens is the rival
firms’ launching innovative products or services. If
an organization has not planned for this, it is more
likely to panic and lose its position in the market
because it takes time to do the very same thing.
However, if it planned for this, then probably it
can react correctly
in a quicker manner
because
there
If you do not plan for
would be some new
the future, then you lose
products or services
the chance of shaping the
being developed or
future.
ready in the pipeline.
LEVELS OF PLANNING
Being the primary function of management,
planning should be done by all managers. However,
the nature of planning changes with the level of
management (Table 4.1). High-level managers
deal with long-term planning, whereas low-level
managers plan for the short term. However, this
does not necessarily mean that middle-level
82
managers do not deal with long- or short-term
planning, or low-level managers do not deal with
medium-term planning. In fact, they do. In that
respect, Table 4.1 shows the dominant planning
that is held by a particular level of management.
Even though the
time horizons for
long-term and short- Middle-level
managers
term might change also plan for the long term
from one sector and short term, but their
to the other and planning is dominantly
from one company for the medium-term. By
to the other, for the same token, low-level
most
business managers also plan with
organizations long- different time horizons,
term planning has a but mainly plan for the
time horizon that is short term.
more than 3 years,
whereas short-term planning is done for a period
less than a year.
Table 4.1 Managerial Levels and Planning
Level of
Nature of
Planning
management
planning
High
Long-term
Middle
Medium-term
Low
Short-term
horizon
More than 3
years
More than a
year – 3 years
Less than a
year
Short-term and Medium-term
Planning
By looking at the present through the collection
of hourly, daily, monthly data, short-term
planning shapes the near future of the organization.
This planning addresses short-term concerns like
the condition of machinery and equipment used
in production. For example, instant planning for
the repair of a machine breakdown (calling and
waiting for the service personnel) or fixing a small
quality problem in a product (returning it back to
the relevant phase of production for a reworking)
are things that happen in the short run. With these
quick fixes, short-term planning is in fact assisting
the organization in moving gradually toward its
longer-term goals.
Business Management
Long-term planning is looking at the organizational
Short-term planning shapes the near future
of the organization.
In order to be more effective and efficient in
their operations, managers need to make sure that
day-to-day problems do not recur or are solved in a
much better way. Therefore, in the medium term,
more permanent solutions to short-term problems
are sought out. Those more permanent solutions
are usually found in developing and implementing
rules and procedures. For instance, arranging for
a service contract for some machines which often
breakdown and disrupt the smooth flow of production
is something to be done in medium-term planning.
With medium-term planning, managers aim
at more permanent solutions to short-term
problems.
Wrapping up, for managers the short term is the
daily grind of putting out fires and solving instant
problems, and the long term is a dream. Then,
medium term is where organizations are shaped;
where they really achieve results and growth.6
Long-term Planning
The planning that high-level managers do is
also called strategic planning, because strategies are
developed to guide the organization in reaching
its vision. By setting the long-term plans and
directions for the entire organization, high-level
management sets the context for lower levels
of management to work on useful short-term
and medium-term plans. As we go down in the
managerial hierarchy, planning gets to be divided
into parts (e.g. a particular geographical region)
and/ or functions (e.g. human resource planning)
of the organization, and time horizon becomes
shorter.
horizon.
Even though managers should plan for both
long term and short term, long-range planning
is more challenging than planning for the near
future. The main reason for that is the longer
the time span the less accurate we become in our
predictions about the future. In other words, one
feels safer and better, when predicting the near
future, because s/he is bound to be less mistaken.
More than 70% of the large manufacturing
companies in Turkey usually plan for a period
shorter than four years. In other words, relatively
few firms plan beyond four years (32% of the firms
have corporate plans, 42% have strategic plans). The
shortest time horizons in these large manufacturing
firms apply to planning in the areas of finance,
production and sales/market forecasts. Capital
planning and human resource planning also do not
extend beyond four years for most of the firms.7
Long-term planning is high-level managers’
responsibility whereas middle-level managers
are mainly responsible for medium-term
planning and lower level managers are
mainly responsible for planning for the
short term.
Since 1990s, the world economy has gone
through two major unanticipated financial crises:8
one originating from and contained in Asia and
the other originating from the United States but
impacting the world. Therefore, it has become more
and more difficult to make accurate predictions
about the future. In addition, Elliott Jaques’s
theory on the differences of human capabilities to
think with different time horizons seem to support
83
Managerial Planning and Decision Making
these findings. E. Jaques claimed that most people worked comfortably
with a 3-month time span whereas just a few people could handle a 20-year
time frame.9 Therefore, in order to develop effective strategic planning in
organizations, the conceptual and forecasting skills of lower-level managers
have to be developed as their careers progress to higher levels of management.
In this way, high ranking managers may become more attuned to strategizing
in the long-term.
Even though the main responsibility for strategic planning lies on the
shoulders of high-level managers in organizations, everyone needs to
understand the long-term plans and objectives. Otherwise, daily events may
easily divert the attention from important tasks, and even though hardwork
is involved one can still not achieve significant results.
1
How does the nature of planning change with the
level of management?
Only
the
high-level
managers can handle the
challenge of long-term
planning as they are more
experienced and have
developed the skill to see
the bigger picture.
As everyone in the organization is ultimately
serving the long-term objectives of the
organization, and as it is not feasible to
involve every employee in the planning
process, especially in big organizations,
high-level managers should make sure that
employees understand and embrace the longterm objectives.
MANAGERIAL PLANNING PROCESS
Managerial planning is the process whereby managers assess an organization’s goals and create a plan
of action for meeting those goals. Goals are the desired outcomes or results that people intend to achieve.
Organizational goals can also be called as overall objectives. As planning is of great importance to an
organization, the whole process of planning should be carried out in a systematic manner (Figure 4.1).
Set the goals and objectives
Managerial planning involves determining
(a) organizational goals, and (b) the action
plans to reach those goals.
Setting Goals
Identify resources that are needed
Determine the action plans
Implement and evaluate the plans
Identify adjustments to be made
The first step of the planning process is to identify Figure 4.1 Steps in the Managerial Planning Process
organizational goals and objectives. Even though
some distinguish between goals and objectives10 stating that goals are general qualitative statements showing
intention and objectives are the measurable descriptions of how intentions will be put into practice, for the
sake of simplicity, these two terms will mostly be used interchangeably throughout this chapter.
Organizational goals should be
• guided by the mission and vision statements, and organizational strategy.11(See the following chapter),
• written in measurable and quantifiable terms,
• stated in terms of anticipated outcomes rather
than actions,
Organizational goals should be measurable,
• clear as to a time frame, and
results-oriented, realistic, challenging, and have a
• challenging yet attainable12(not too easy or
clear time frame.
trivial, nor too difficult).
84
Business Management
There are some implications of the above-mentioned
characteristics of goals. For instance, goals should be
realistic. By a realistic goal, one should understand
that managers should be able to position the goal
with its time frame by making predictions of the
future environment in which the organization
will operate. For example, what will happen to
competitors, prices and products in the future? Will
there be new and more competitors? In order to be
able to paint the future with the possibilities it
might bring, data should be collected on present
trends.
Organizational goals are competitive targets.
Another implication of the goal setting stage
is the premise of wanting to do better on the
organization’s side. Therefore, it also inevitably
involves a critical assessment of the organization’s
current state.
Let’s look at some examples for well-written
organizational goals (objectives):
• Raise profits by 20 percent over a 12-month
period.
• Add 500 customers every month for the
next five years.
• Shorten the product development lifecycle
by 10%.
• Reduce operating costs by 10% in 12
months.
In setting the organizational goals one should
follow the hierarchy of objectives. This means that
one should start from the longer term goals and
continue with shorter term objectives that would
enhance the fulfillment of the long-term ones.
In setting organizational goals, managers
start from the long-term objectives, then
these long-term objectives serve as guides
for shorter term objectives.
Long-term objectives can be more ambiguous as
they may involve qualitative terms in their statements.
However, as time goes by, the long-term objectives
should be revised periodically, so that they can
become more tangible through being stated in more
quantifiable and/or specific terms which have closer
timelines. For example, “improving the compensation
and benefits packages of our computer engineers” can
be a good enough medium-term objective. However, as
time passes and we need to revise this goal statement
to make it a good enough short-term objective, we
may state it as “conducting a compensation survey
next month to learn the compensation packages
given to experienced computer engineers by our
three biggest competitors”. If a long-term objective
is not revised with the aim of making it clearer, it
can become ambiguous and get stuck as a long-term
objective. Therefore, it can hardly become a shorter
term objective. Thus, setting the shorter term
objectives can be left to lower ranking managers
and employees while plans of action are determined
(third step of the planning process).
When they are set, long-term objectives are
inevitably ambiguous and/or qualitative, but
through time they should be revised to be
made more specific and clear.
Traditionally, goals have been set by top
managers and as they flow down in the organization
they become subgoals for each organizational
area. However, turning strategic goals into
departmental, team, and individual goals can be
difficult and frustrating, because the goals at the
organizational level
are stated in broad
and
ambiguous
terms
such
as Setting objectives starts
“market leadership”. from the long term, then
As the goals make continues towards shorter
their way down from terms, not the other way
the top to lower around.
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Managerial Planning and Decision Making
levels, managers at each level apply their own
interpretation and this often results with clarity
being lost. Many organizations use management
by objectives13 (MBO) instead of this traditional
perspective. MBO is a process by which managers
and employees at all levels set mutually agreedupon goals. Those participatively set goals are used
for motivating employees14 as well as for evaluating
performance.
The more participatively the strategic goals get
to be broken down into departmental, team
and individual goals, the more motivated
people will be in chasing those goals.
Sometimes groups function better than individuals in
planning and decision making.
Identifying Resources
Upon setting the objectives, resources needed
to put those objectives into practice have to be
determined. In identifying the resources needed,
these three questions should be answered: Which
resources? How much? When? Typically, two types
of resources are taken into consideration: financial
and human resources. Coming to the answers of
the second and third questions, one needs to make
projections for how much of each resource should
be made available through time for the fulfillment
of each goal. When the type, amount and time of
the resources are established, then new questions
arise: “Do we have the resources?” “Are the current
resources enough?” “If not, where can we find
them?” Therefore, in determining the resources,
we need to look inside the organization first, then
look at the external environment if we foresee a
86
lack of resources for the achievement of objectives.
For example, if a firm wants to increase its sales by
20%, then managers should first look at the number
and availability of its current salesforce; then they
might see the need to (a) hire new salespeople through
time, and (b) calculate the possible additional costs of
bringing new salespeople into the firm.
Identifying resources involves answering
these questions: which resources, how much,
when, do we have them, where can we find
them?
Determining Action Plans
The third step in the managerial planning
process is determining the action plans. At this
stage, concrete and detailed plans, specifically,
statements of action steps (put in a chronological
order) should be developed. In other words, tasks
associated with the accomplishment of each goal
should be identified. For example, developing
advanced sales techniques and then training the
company’s salespeople on those techniques can be
relevant tasks (two steps of action) for the goal of
raising profits by 20 percent. During this stage,
together with the timelines for completing the tasks,
the units and individual employees to whom the tasks
are to be assigned have to be decided. Similarly, for
the goal of increasing sales by 20 percent, the sales
manager may give the salespeople monthly sales quotas
to stay on track.
In the managerial planning process, after
resources are identified, action plans
(tasks for accomplishing goals) should be
determined.
Action plans and individual assignments
can very often clash with each other. When that
happens, managers and employees need to be clear
on priorities so that they can choose what to do
over what. One can only be clear on priorities if
s/he has a good idea about and internalizes the
organization’s values. Let’s assume that a salesperson
has two conflicting tasks: (1) attending a meeting
set up by the sales manager, and (2) going to an
appointment which was very difficult to obtain from
Business Management
The clashing of action plans can only be
solved by getting priorities (organizational
values) straight.
a busy and important customer to discuss a business deal. In
this case, if this is a company which values its customers and
has a customer-centered approach, then the salesperson will be
clear on what to do. By informing the sales manager about the
appointment with an important customer, s/he will ask to be
excused from the meeting.
Implementing Plans and Identifying Adjustments
Plans alone do not bring results. In order to realize
results, plans have to be implemented (fourth step of the
planning process). For the implementation to become
successful the active participation or cooperation of people The managerial function of planning is never
is highly important. In order for this to happen, plans must complete without the function of controlling.
be communicated and explained so that people can get a
clear picture of what is to be done.
To ensure the plans are proceeding along the right lines, actual performance has to be compared
to planned performance. Managers should determine strategies for evaluating progress toward goal
achievement within an established time period. One way to do this is through requesting monthly progress
reports from responsible unit managers. If shortcomings are found, then the next and last step in planning
will be figuring out remedies for going back on track.
Even good plans can sometimes be thrown off track
by unanticipated events and when certain aspects of a
Planning is a cycle: plan – execute – review –
plan might prove to be unattainable. Then, it is wise to
replan – execute.
have alternative courses of action for correcting the plans
The managerial planning process involves
or have contingency plans in case a plan does not seem to
an assessment of the organization with its
work. Sometimes modification or even dropping of a goal
resources and environment, and encompasses
– because it turned out to be unrealistic – can be done.
the setting of objectives.
For instance, a multinational company might decide to close its
stores (disinvest) in a country after only a few years.
To wrap up, planning should not be seen as
something to be done by managers occasionally and
at scheduled times. It is an ongoing process, done
2
continuously through evaluation and revision of plans
What are the steps involved in the managerial and objectives.
planning process? Explain briefly.
TYPES OF PLANS
The most often used classification of organizational plans is strategic, tactical and operational plans (Table 4.2).15
Strategic plans focus on the broad future and identify the long-term direction the organization will take as a whole.
These plans ideally set forth the goals and objectives needed to accomplish the organization’s vision. In focusing on
the long-run, as pointed out earlier, organizations analyze their external (especially the competitive environment) and
internal (organizational resources) environments to gather information and determine the scope of business. Strategic
plans cover the major aspects of business such as products, services,
technology, finance and human resources with a time horizon of
A strategic plan is a broadly defined plan
three to five years. Plans at the top of the traditional organizational
that
is aimed at creating a desired future for
pyramid tend to be strategic in nature. Those at the middle and
the organization.
lower levels are more tactical.
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Managerial Planning and Decision Making
•
A good plan needs care.
•
•
•
•
Tactical plans translate strategic plans into
specific goals for specific parts of the organization.
They specify how the organization’s resources
can be used to put strategies into action. Tactical
plans in business often take the form of functional
plans that indicate how different operations within
the organization will contribute to the overall
strategy. Such functional plans might include:
Production plans (deal with work methods
and technologies)
Logistics plans (deal with suppliers and
acquiring resources)
Financial plans (deal with money and
capital investments)
Marketing plans (deal with selling and
distributing goods or services)
Human resource plans (deal with building
a talented workforce)
Tactical plans are short-range plans that
emphasize the current operations of various
parts of the organization, such as production,
marketing and human resources.
Even though tactical plans should complement
the overall strategic plan, they are often somewhat
independent of other tactical plans.
Table 4.2 Key Differences Between Strategic, Tactical, and Operational Plans
Strategic Plans
Tactical Plans
Operational Plans
Usually focused on the next
12 months or less
Narrowest; usually centered
on departments or smaller
organizational units
Time Horizon
Typically 3–5 years
Often focused on 1–2
years in the future
Scope
Broadest; focus on the
entire organization
Typically focused on a
strategic business unit
Complexity
The most complex and
general, because of Complex but more
potentially
covering specific, with a more
different industries and limited domain of
business (for groups of application
companies)
Impact
Interdependence
88
Have the potential to
dramatically impact,
Affect specific business
both positively and
units, but the effect on
negatively, the survival
the entire organization
and success of the
is measured
organization
High; must take into
Moderate; must
account the resources
take into account
and capabilities of the
the resources and
entire organization and capabilities of several
its external environments units within a business
The least complex, because
of usually focusing on small,
homogenous units
Impact is usually restricted
to a specific
department or organization
unit
Low; the plans may be
linked to higher-level
tactical and strategic plans
but are less interdependent
with these plans
Business Management
Operational plans translate tactical plans into specific
goals and actions for small units of the organization and
An operational plan presents information to
focus on the near term (12 months or less). For instance,
direct people in their day-to-day tasks that will
an operational plan can focus on a particular product
support and enable the tactical plan.
line in its respective market. Being the least complex of
the three types of plans, an operational plan hardly has a
direct impact beyond the organizational unit for which the plan is developed. Operational plans include
both standing plans and single-use plans.
Standing plans are ongoing plans that provide
guidance for activities performed repeatedly, like
3
policies and procedures. A policy is a standing plan
that communicates broad guidelines for making Compare the three types of plans prepared in an
decisions and taking action in specific circumstances. organization.
Organizations operate with lots of policies that set
expectations for many aspects of employee behavior. Put
in simple terms, policies state the preferred ways of doing
things. There are a number of policies, for instance,
regarding the management of human resources. Human
resource policies typically cover things like employment,
termination, performance evaluations, promotions
and pay increases. For example, in order to alleviate
A policy is a set of basic principles and guidelines
organizational blindness and bring in new blood, a firm
to direct and limit actions.
might prefer to find and appoint 15% of its middle-level
managers from outside.
Procedures describe specific rules for what actions
are to be taken in various situations. They are stated in
A procedure is a step-by-step sequence of
employee handbooks and often called SOPs—standard
activities that must be followed to perform a
operating procedures. Whereas a policy sets a broad
task.
guideline, procedures define precise actions to be taken.
For example, an employee should know how to file a
grievance at work and how that complaint will be handled.
As the other type of operational plans, a single-use
plan is a one-time plan specifically designed to meet the
A single-use plan is a set of activities aimed
needs of a unique situation, like an advertising campaign
at achieving a specific goal within a particular
for a new product launch. Projects,16 programs,17 and
budget and time period that is unlikely to be
budgets are examples of single-use plans because they
repeated in future.
apply to a specific task or time period, and once they are
finished they are unlikely to be repeated exactly.
Let’s take a closer look at the budgets, as they
constitute the classical example of single-use plans.
In most organizations, budgets are proposed and set
The number of policies and procedures also
on an annual basis. Even though there are a number
tell us about the level of formalization in an
of different types of budgets,18 they are not always
organization: The more policies and procedures
alternative to each other but interrelated (Table 4.3).
an organization has the more formalized it is.
Standing plans are developed to ensure the
smooth running of operations. They bring
consistency and uniformity to employees’
efforts.
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Managerial Planning and Decision Making
Budgets and Budgeting
A budget is a plan that commits resources to
projects or activities for a specific time period.In
some organizations managers may spend a fair
amount of time bargaining with higher levels to
get adequate budgets to support the needs of their
work units or teams. The main reason for this is
that the more resources they obtain, the higher the
possibility of performing better.19
A budget is a plan that commits resources to projects
or activities for a specific time period.
Table 4.3 Types of Budgets
Type of Budget
Definition
Master budget
is an overall financial and operating plan for a forthcoming calendar or fiscal year.
Operating budget
shows income and expenses that are likely to be produced through the current
operations of the organization (does not include non-operating items such as
income from investments).
Cash budget
presents expected cash inflow and outflow for a designated time period.
Flexible budget
allows resources to vary in proportion with various levels of activity (e.g. setting
aside extra money to have it available for hiring and paying temporary workers, in
case sales increase and so does the need for production).
Expense budget
includes the money planned to be spent on all the primary activities of a unit
together with the amount to be spent on each item during a year.
Capital expenditure specifies the significant amount of money planned to be spent on items that have
budget
long-term use such as manufacturing equipment, land, and buildings.
N o n m o n e t a r y is expressed in nonfinancial terms and allocates resources such as units of output,
budget
hours of direct labor, machine hours, or square-meter allocations.
Program budget
shows funding for a product line or program such as preventive maintenance,
research, and development.
Because budgets link planned activities with the resources needed to
accomplish them, they are useful for activating and tracking performance of
relevant organizational units through their managers. However, budgets can
get out of control. Even though it is a good managerial and unit performance One of the main reasons
indicator to come in “under budget” (spending less than planned), to be for managers’ exceeding
their budgets is that
“over budget” (spending more than planned) is generally a poor performance
they experience a higher
indicator.
than forecasted level of
Most organizations have a two-phase process in making budgets. In the inflation. Therefore, extra
first phase, managers form a proposed budget. This provides a plan of the care should be shown in
amount of money needed and is submitted to a superior or budget review forecasting the inflation
committee. Then, by the end of the second phase, the manager receives rate more correctly.
an approved budget. This budget shows the total amount of money the
manager is authorized to spend together with how much on which budget item. Typically, the proposed
budget and approved budget is hardly ever the same. Usually, the approved budgets involve cutbacks from
the proposed budgets mostly for the purpose of controlling and reducing costs.
90
Business Management
A proposed budget is rarely approved without
a cutback. Therefore, many managers propose a
budget by adding the expected amount of cut
and/or attempt to give better rationalizations
for each or critical budget items.
An approved budget shows the total amount
of money the manager is authorized to spend
together with how much on which budget
item.
In planning through the use of budgets, organizations
have different approaches. Some of the widely used
planning approaches to budgeting include incremental,
zero based, and activity based budgeting. In incremental
budgeting20 the previous period’s budget is used as
a starting point for the new budget of the upcoming
period. A number of increases are made on the previous
term’s budget like inflationary and salary increases.
Sometimes, the previous period’s budget is increased by a
certain amount of money or a predetermined percentage.
Incremental budgeting is relatively easy to implement,
but it has some limitations. For instance, it encourages
Incremental budgeting uses the previous
people to have expectations of inflationary increases in
period’s budget or actual performance as a basis
salary and business. It also encourages departments to
with some additions made for the new budget.
spend all of their allocated budget to ensure that there is
an increase next year.
In zero-based budgeting21 the budget for any
activity at the beginning of each period is set at zero and
all proposals – old and new – must be justified on a cost/
Incremental budgeting fails to take into account
benefit basis. Justification for continuing any budget
changing circumstances and leads the managers
item is also included in the budget. In principle, this
to a “spend or lose” mentality.
approach to budgeting leads to an efficient allocation of
resources. However, it can lead to short-term thinking rather than long-term strategic thinking.
Activity-based budgeting22 emphasizes the expected
cost of the planned activities that will be consumed
Zero-based budgeting starts from scratch, and
for a process, service, product or department. In this
every part of the organization is analyzed for its
budgeting, costs can be assigned to activity and product
short-term needs.
level (e.g. assembly-line setup, inspections), rather
than being averaged out across a number of products
or services. As the real cost behavior can be analyzed,
In activity-based budgeting, activities that
through this focus on cost, these budgets do not simply
incur costs in every functional area of an
adjust the prior budgets to account for inflation or
organization are recorded and their relationships
business development but also search for efficiencies in
are defined and analyzed.
business operations.
Overall, just like any other function of management, planning also involves making decisions. In
business organizations, decisions should be made with great care because those decisions can have influential
positive and negative outcomes. Therefore, starting with managers who take most of the organizational
decisions, any organizational member should improve her or his decision making skills by taking into
consideration a number of factors and use a systematic structure to proceed in making decisions.
4
Compare the three approaches to budgeting in
organizations.
From planning to controlling, in fulfilling any
of the four functions of management, managers
have to make decisions.
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Managerial Planning and Decision Making
DECISION-MAKING PROCESS
Decision making is the process of identifying
a problem or opportunity and selecting among
available alternatives to solve the problem or
capitalize on the opportunity.23 The process of
decision making can be described as involving
seven steps (Figure 4.2).
Figure 4.2 Steps of the Decision-making Process
Identify the
decision
situation
Develop
decision
criteria
Generate
alternatives
Decision making is the process of finding
or identifying problems/opportunities in
order to resolve them. This involves making
a choice from available options.
Identifying the Decision Situation
The decision-making process starts with
identifying a problem or opportunity. In order to
initiate the decision-making process, one should
feel the need to decide. The need to decide can be
external or internal. If a problem or opportunity
is brought to the attention of the relevant person
or people by outside parties, then the trigger
for decision making is external. If the decision
maker takes initiative and chooses to come to
a decision, then there is an internal trigger for
taking a decision. Sometimes people can be driven
to decide both internally and externally. Let’s
analyze these two triggers in an example. For a senior
student at high school, taking the yearly national
university entrance exam (YKS) can be internal,
though preparing a priority-ordered preference list of
undergraduate programs and submitting it to OSYM
(Center for student selection and placement) until the
end of July is mostly external. The externality mainly
comes from when to submit the preference list. If
the need to decide is external, often the decision
maker would not internalize this need and this
will probably reduce the quality of the decision or
might even lead to
a wrong decision.
Therefore,
outside
The need to decide does
parties should be
not necessarily come
made
conscious
from the decision maker,
enough about this
sometimes it is posed to
and spend extra effort
the decision maker from
on convincing the
external parties such as
decision makers for
the boss, a superior or a
the need to decide.
subordinate.
92
Evaluate
alternatives
Select the
best
alternative
Implement
the decision
Monitor and
evaluate
results
Is there a problem or an opportunity?
A problem or opportunity that starts the
decision-making process is not necessarily an
objective fact. The decision-making process does
not start unless the relevant person or people
see a problem or opportunity. A problem can be
defined as an unfavorable difference between a
desired position and a current position, whereas
an opportunity can be defined as a possibility for
bettering a position. An example of a problem can
be that the head of the accounting department in a
growing firm discovers that the accounting clerks
can hardly finish their work on time. (One possible
solution is to hire new clerks). An example for
opportunity can be a horrific fire in the production
facility of a competitor firm. (Greater market share
can be captured by increasing production.)
Business Management
Questions asked for determining the organizational
direction.
of a clearly and specifically stated problem or
opportunity will the decision makers be able
to reach an understanding of what the decision
aims to accomplish. The 5 Whys (a technique to
determine the root cause of the problem),24 and
5W 1H25 (a technique for refining the problem
statement) are two techniques that improve the
definition of the problem and opportunity.
In order not to make a wrong start, the decision
maker needs to state the root cause of the problem
or opportunity as clearly as possible.
Going back to the definitions of problem and
opportunity, some people might claim that there is
always a difference between the desired state and
current state and/or no real opportunities because
of going through difficult times. Then, the matter
becomes whether the difference or possibility is
deemed important or big enough to be driven to
do something about it.
When a problem is small, it is either hardly
noticed or neglected, but when it becomes bigger,
then it becomes harder to solve. Therefore,
managers should take more care in collecting and
evaluating information to look for early signs.
The smaller the difference and the less the
amount of probable improvement, the more
difficult it is to notice. The bigger the problem or
opportunity, the easier it is to notice, but this time
it becomes more difficult to solve the problem or
to benefit highly from utilizing the opportunity,
because it may have already been capitalized on by
at least one person or firm. Therefore, it becomes
an important skill for a decision maker to be
proactive and sense a problem or opportunity
before many others do and make a big difference
with the decision taken.
The statement of the problem or opportunity
correctly and fully is of ultimate importance for
the quality of the decision. Only with the help
The 5 Whys is a technique to determine the
root cause of the problem.
The 5W 1H is a technique for refining the
problem statement.
Developing Decision Criteria
Once a problem or opportunity is identified, the
decision maker needs to determine the criteria for
selecting among alternative solutions. One simple
way of doing it is to perform a cost-benefit analysis.
Cost-benefit analysis compares the expected cost
of an alternative to its expected benefits. In other
words, it is simply guessing the downside and
upside of choosing an alternative and weighing one
side against the other. If a more refined and detailed
approach is needed, one can think of three more
criteria: ethicality, acceptability and timeliness.26
Ethicality refers to whether an alternative would be
seen as ethical by various stakeholders. Acceptability
is the extent to which an alternative will be found
acceptable and supportable by the stakeholders.
For making these two evaluations, the decision
maker should know the values and concerns of the
stakeholder groups.
Cost-benefit analysis compares the expected
cost of an alternative to its expected benefits.
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Managerial Planning and Decision Making
A typical approach in setting decision criteria
is to make a list of important features or qualities
that would make an alternative good or bad
relative to the expected outcome of the decision.
Let’s assume that as the manager of the call center
for a household appliance manufacturer, it has come
to your attention that there is an increased level of
customer dissatisfaction due to more time taken to solve
customer problems. As the manager believing that this
problem can be alleviated by hiring a new call center
representative, you need to have a list of the required
qualifications from the candidates for the job.
The decision criteria which will be taken into
consideration in evaluating alternatives are not
necessarily of equal importance. Therefore, it
is wise for the decision makers to weigh each
criterion against the others.
When there is more than one criterion to
use in evaluating decision alternatives, assigning
weights to each criterion is a good approach.
This is because not every criterion may have the
same level of importance and when each criterion
is seen as having equal importance then there is
the possibility of going into a deadlock because
being good at a criterion might mean being bad
at another. Think about choosing a place for a new
production facility. The firm’s managers would want
this facility both close to the market and close to the
source of a particularly important raw material.
However, being close to one might mean being further
away from the other. Therefore, in order to solve this
dilemma, the managers need to figure out which
proximity is more important for them.
Let’s go back to our call center example and assume
that we have determined four main criteria for selecting
from among the applicants and give these weights:
•
Interpersonal skills – 35%
•
Problem-solving – 30%
•
Data entry skills – 20%
•
Multi-tasking – 15%
94
Alternatives lead to different results.
Generating Alternatives
Upon determining and assigning weights to
the criteria, the decision maker needs to develop
alternative courses of action that have the potential
to bring the desired results. In solving a particular
problem or capturing an opportunity mostly the
first thing that people resort to is considering an old
solution if they find the problem or opportunity
to be the same or similar. This can be effective,
but as time passes, it is possible that much better
alternatives will lead to better quality decisions.
Therefore, it often becomes worthwhile to pursue
new, even creative alternatives. For example in the
past, advertising for a product in order to increase its
sales would mostly take place in television and radio
channels, newspapers, and magazines, but nowadays
not considering social media to advertise a product
is not wise at all.
If managers want continuous improvement in their
operations so that they can compete much better,
they should not take the easy road – replicating
a previously worked out solution for the same
or similar problem or opportunity. Instead, they
should look for new options even for a recurring
problem or opportunity.
Business Management
Evaluating Alternatives
In evaluating alternatives, the decision maker might do
preliminary screening and eliminate some alternatives that
do not seem to bring minimally acceptable results and/or to
reduce the number of alternatives to a manageable amount.
Then, the alternatives thought to be worth giving serious
consideration have to be examined. Returning to our hiring
example, you may have found four candidates but two of them
turned out to be unfeasible for the position because one candidate
asked for too high a salary and another one told the contact person
that she had just recently taken a job in one of the competitor firms. For the remaining candidates let’s assume that
after a series of tests and interviews each candidate received the
following ratings (over 10) on each of the four criteria as shown
Evaluating alternatives can sometimes be
in Table 4.4.
It should be noted that this stage of the decision-making a two-step sub-process: checking whether
process can be cumbersome, because in rating an alternative any alternative fulfills certain criteria at
with respect to each criterion the decision maker does not the minimally acceptable levels and upon
always have the relevant information readily available. eliminating the alternatives not fulfilling the
Therefore, s/he needs to put some effort and time to collect minimum requirements, continuing with
weighted calculations for each alternative.
that information.
While evaluating alternatives, one difficulty
that can come up will be that different
stakeholder groups might be influenced
differently by an alternative. Then, the
decision maker should make sure that most
people benefit and the costs that might incur
are negligible for a smaller group of people.
Table 4.4 Evaluation of Alternatives & Selection of the Best: An Application
Candidate
Criterion
Rating x Weight = Score
Total
A
Interpersonal skills
Problem-solving
Data entry skills
Multi-tasking
8 x 0.35 = 2.8
7 x 0.30 = 2.1
6 x 0.20 =1.2
7 x 0.15 = 1.05
7.15
B
Interpersonal skills
Problem-solving
Data entry skills
Multi-tasking
9 x 0.35 = 3.15
8 x 0.30 = 2.4
5 x 0.20 = 1.0
6 x 0.15 = 0.9
7.45
After each alternative is evaluated, the alternative with the highest expected future value
is chosen to be the decision.
Selecting the Best Alternative
By multiplying each rating with the relevant
criterion’s weight and then calculating the total
score (points) for each alternative (last column of
Table 4.4), those who make decisions come closer
to finalize the process. Then, whichever alternative
has the highest score will be chosen, because that
alternative is the one that seems to maximize the
desired outcome. The alternative with the highest
expected future value is chosen to be the decision.
In our hiring example, when we calculate and
compare the total scores, we can see that candidate
B is better. Nevertheless, the chosen alternative can
have a feasibility problem. For example, if we offer
the job to candidate B and she says that she can start
one month later, after her summer vacation, then we
might take the offer away from the table and make a
job offer to candidate A.
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Managerial Planning and Decision Making
Implementing the Decision
Making a decision does not necessarily
guarantee its implementation. The main reason
for that is resistance. Resistance to implement
a decision can stem from the fact that the
implementer of the decision did not take or was
not given any part in making the decision. This
separation between the taker of the decision and
the implementer can lead to the implementer’s not
having enough commitment and motivation to
carry out the decision. Even when the implementer
cannot evade the decision, not giving him or her
the required time and effort can seriously harm
the expected positive results from the decision.
The implementer’s not carrying out the decision in
the expected way can alternatively stem from his/
her belief that the decision is wrong. For example,
the call center representatives who have already
formed a closely-knit work group might resent a new
representative and not give her or him the expected
orientation and initial training.
The decision-making process does not
end with the decision being taken, because
problems might occur in putting it into
action, the most typical problem being
resistance of some stakeholders.
Therefore, in order to counteract such
resistances before or after it surfaces, the managers
should (a) show extra care in bringing the voice of
the implementers into the decision-making process
(more participative
decision making) or
(b) sell the decision
The more change is
to the potential
involved with the decision,
implementers
by
the
more
resistance
pointing out the
will come out. This is a
expected benefits to
natural human reaction,
convince them about
because losing sight of a
the merits of the
foreseeable future makes
decision or (c) look
people
uncomfortable
for individuals who
and they worry about not
seem more motivated
knowing what is going to
and
competent
happen to them.
to carry out the
decision.
96
The decision-making process does not end
with implementation, because there is the
possibility of not realizing expected results.
That is why, the decision makers need to follow
up on the realization of expected results.
Monitoring and Evaluating Results
The decision-making process does not
necessarily end with putting the decision into
effect. The decision maker has to follow it up in
order to check whether it is producing the expected
benefits and generating some unexpected costs. At
this stage, the decision maker or the implementer
needs to collect information in order to see
whether things are going in the right direction.
In determining whether things are on track, one
needs to know that implementation does not
usually bring immediate results. In that case, the
person who is making the decision should have a
good enough idea about how long to wait before
starting to collect and analyze the results.
In monitoring results, checkpoints should be
placed at different points in time. As well as when
to check, it is important what to check. In terms of
the information (what) to be collected, it is critical
to make sure that the right kind of information is
gathered from reliable sources. Generally, the easily
obtained information is not always the right kind
of information and obtaining the right kind of
information is usually not so easy.
Continuing
with the new call
center
representative
example,
checking Being put into action,
whether the customers’ some decisions do not
satisfaction with the bring immediate results.
managers
handling and solving Therefore,
should have an idea about
of their complaints has
increased by the end of how long to wait before
the first month is not certain results can be
going to work for us. attained so that they can
We probably need more start checking.
than a month before she
can demonstrate full performance at work, because it will
take quite some time to adapt to a new work environment,
co-workers, and customers even after an orientation and
initial training. As for the information to be sought out,
the manager of the call center should consider customer
feedback rather than the co-workers’ feedback especially
Business Management
during the initial phase, knowing that the established closelyknit
workgroup has difficulty in seeing the new representative as a
If a decision does not seem to be giving the exmember of their team. Even though collecting customer feedback
pected results, before it becomes a new problem,
is not as easy as collecting co-worker feedback, customer feedback
modifications on the decision or changing the
will provide relatively more objective information about the
decision should be given serious consideration.
performance of the new employee and the overall performance of
the center with the addition of this new employee.
If monitoring and evaluation of the decision’s consequences do not bring the expected positive results
or the results are not as much as expected, then the decision has to be changed or corrected. If a correction
seems the right thing to do, then we need to go back
to the previous stages in the decision-making process.
If the decision seems to be wrong and needs to be
5
changed, then we start the whole process usually from
What are the phases of the decision-making the first stage or earlier stages of developing decision
process? Explain briefly.
criteria and alternative courses of action.
DECISION MODELS
Rational model of decision making favors
objectivity, logic, and a formal process of
analysis over subjectivity and intuition.
The decision-making process discussed above is also
known as the rational model of decision making, but this
classical model is not the only model put forward to
explain managerial decision making. There is the bounded
rationality model which challenges the rational model for
not being realistic enough and a third model, namely,
intuitive decision making, which will be discussed under the
title of decision models.
The Rational Model of Decision Making
The rational model or approach to decision making27 takes
its name from its major premise that the decision makers,
typically managers, are fully rational. Also known as the classical
model of decision making, this model is built on a number of
assumptions that constitute rationality (Figure 4.3). However,
these assumptions are not realistic and it has been found that
managers do not decide as rationally as they are assumed to do.28
The rational decision-making model is
a step-by-step process for making logically
sound decisions. This model assumes that
the decision maker has full or perfect
information.
Figure 4.3 The Assumptions Underlying the Rational Model of Decision Making
The problem or opportunity
can be clearly and easily
defined.
The objectives (results to be
accomplished) are clear.
The decision criteria and their
weights are clear and fixed.
All the alternatives and all the
consequences of each
alternative are known.
All the individuals involved in
taking and/or implementing
the decision are in complete
agreement at every step of
the process.
There are no time and cost
limitations.
The chosen alternative is the
best (optimal), giving the
maximum economic value
(lowest cost or highest
benefit).
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Managerial Planning and Decision Making
On the contrary and in reality, there are a
number of factors that hinder the ability to be
rational. Below is a list of some factors that draw
those with decision making authority away from
full rationality:
• The problem, opportunity or the expected
result (aim) of the decision can be defined
too broadly or narrowly, such as “getting
rid of some problem workers” rather than
“solving performance problems of some
workers”.
• Symptoms can be stated instead of
problems, such as “drop in sales” rather than
addressing root causes like “falling behind
competition in new product development”.
• There can be a multiplicity of problems and
opportunities at a certain point in time and
the decision makers do not always get their
priorities straight (may choose the wrong
one to deal with).
• The search for alternatives may be
abandoned too quickly, which leaves
the decision maker with a small set of
alternatives.
• Preferences (the criteria and their weights,
the set of alternatives) may change on the
way to decide.
• All possible alternatives cannot be
generated and thoroughly analyzed even
with sophisticated analytical tools (it is just
impossible).
• There are budgetary and time constraints.
• There is a limit to the amount of
information that can be processed by the
human brain in a short-period of time
(cognitive limitation).29
Based on these, then an alternative model of
decision-making, named as the bounded rationality
model was developed.
decision maker as an optimizer, this model sees
him or her as a satisficer. An alternative is optimal
or satisfactory based on two criteria31 as shown in
Table 4.5. Those criteria for each type of alternative
show that finding an optimal solution is several
times harder than finding a satisfactory one.
Table 4.5 Criteria for Optimal and Satisfactory Alternatives
Criterion
1
2
Optimal
Alternative
There must be
a set of criteria
that allows the
decision maker
to compare all
alternatives.
It must be better
than all the other
alternatives on
these common
criteria.
Satisfactory
Alternative
There is a set
of criteria that
applies to all
the acceptable
alternatives
The preferred
alternative meets
or exceeds all the
criteria in this set.
According to the bounded rationality model,
the decision-making process32 can be outlined as
follows:
1. Set the goal you want to pursue, or define
the problem you want to solve.
2. Establish a minimum performance
or criterion level. (When is a solution
acceptable even if it is not perfect?)
3. Employ heuristics33 to narrow the solution
to a single promising alternative.
4. If you cannot identify a feasible alternative,
lower your aspiration level and search for a
different solution (repeat steps 2 and 3).
5. After identifying a feasible alternative,
evaluate it to determine its acceptability.
6. If the individual alternative is unacceptable,
initiate a search for a different solution
(repeat steps 3 to 5).
The Bounded Rationality Model
The bounded rationality model30 is built on the
fact that managers, as human beings, are limited by
their ability to process information, therefore, they
tend to satisfice rather than optimize. Satisficing
means, the decision maker settles for the first
satisfactory alternative that comes to his or her
attention. Whereas the rational model sees the
98
Bounded rationality is the idea that in
decision making, rationality is limited by (a)
the information at hand, (b) the cognitive
limitations of the human mind, and (c) the
finite amount of time to make a decision.
Business Management
7. If the identified alternative is acceptable,
implement the solution.
implementation,
evaluate
8. Following
the ease with which the goal was (or was
not) attained, and raise or lower the level
of performance accordingly on future
decisions.
If a growing firm decides to buy new tablet
computers for the recently hired salespeople, from
the manufacturer of the tablets already used by
the firm, the decision model in play is bounded
rationality. In this case, the firm is taking a familiar
and feasible course of action as long as it does not
have any problems with the supplier. In this model
of decision-making which is quite different from
the rational model, not the best but the acceptable
alternative solution is sought. The search behavior
(for alternatives) is sequential – one solution at a
time. Therefore, the rational model is a normative
model, whereas the bounded rationality model is a
descriptive one.
Intuitive Decision Making
When compared with the rational model,
another realistic model or approach would be
intuitive decision making:34 Intuition is knowing
or understanding something instinctively or
subconsciously without reasoning or proof.
Intuition is knowing or understanding
something instinctively or subconsciously
without reasoning or proof.
In this model, decisions are taken through
five different aspects of intuition,35 as shown
in Figure 4.4. Starting with experience-based
decisions, managers use their past experiences.
The second aspect of intuition in decisions are
feelings and emotions (affect-initiated decisions).
In the third, managers make decisions based on
skills, knowledge, and training (cognitive-based
decisions). The fourth facet of intuitive decisionmaking utilizes values or ethics as guides. Lastly,
the subconscious mental processing comes into
play in executive decision-making. The main
reason for managers’ using intuition is to make
decisions fast and this is very important for the
business organizations that function in more and
more innovative and competitive environments.
Figure 4.4 Five Aspects of Intuition in Decision Making
Experiencebased
decisions
Values or
ethicsbased
decisions
Subconscious
mental
processing
Intuition in
decision
making
Affectinitiated
decisions
As the speed of communications
and business transactions has increased
tremendously in the global economy
through the use of computers and
Internet, the leaders of business
organizations have no choice other than
to make decisions without all the data
and the time to consult with others.
Moreover, intuitive decision making
does not necessarily mean that the
quality or correctness of the decision
will suffer. In fact, it has been argued
that this approach can complement
both rational and bounded rational
models and should be included in
management education.36
Cognitivebased
decisions
Intuitive decision making should not
always be thought of as being irrational.
In fact, the majority of the decisions we
make use intuition and not all of those
decisions have proven wrong!
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Managerial Planning and Decision Making
6
Compare the three models of decision making in
organizations.
Overall, being more effective in planning
and decision-making in our world, in our times,
requires managers to do the following:
• Never refrain from taking input from those
who will be influenced by the plans and
decisions and those who will be implementing
them. Engaging the relevant stakeholders
in both planning and decision-making
•
•
•
activities will build a positive and constructive
organizational climate rather than resistance.
Consider the utilization of planning and
decision-making tools and techniques such
as PERT/CPM and time series analysis.37
As the lack of information is an important
threat to effectiveness in both planning
and decision-making, then it is ultimately
important for managers to deal with big
data management.38
Managers at all levels should always try
to see where the decision they are about
to take fits in the bigger picture (need for
strategic thinking).39
Further Reading
Intuition at Use
“When confronted with a problem—
choosing a chess move or deciding whether to
invest in a stock—the machinery of intuitive
thought does the best it can. If the individual
has relevant expertise, she will recognize the
situation, and the intuitive solution that comes
to her mind is likely to be correct. This is what
happens when a chess master looks at a complex
position: the few moves that immediately occur to
him are all strong. When the question is difficult
and a skilled solution is not available, intuition
still has a shot: an answer may come to mind
quickly—but it is not an answer to the original
question. The question that the executive faced
(should I invest in Ford stock?) was difficult,
but the answer to an easier and related question
(do I like Ford cars?) came readily to his mind
and determined his choice. This is the essence of
intuitive heuristics: when faced with a difficult
question, we often answer an easier one instead,
usually without noticing the substitution.
The spontaneous search for an intuitive
solution sometimes fails—neither an expert
solution nor a heuristic answer comes to mind.
In such cases we often find ourselves switching
to a slower, more deliberate and effortful form
100
of thinking. This is the slow thinking of the title.
Fast thinking includes both variants of intuitive
thought—the expert and the heuristic—as well
as the entirely automatic mental activities of
perception and memory, the operations that
enable you to know there is a lamp on your desk
or retrieve the name of the capital of Russia.
The distinction between fast and slow
thinking has been explored by many psychologists
over the last twenty-five years. For reasons that I
explain more fully in the next chapter, I describe
mental life by the metaphor of two agents, called
System 1 and System 2, which respectively
produce fast and slow thinking. I speak of the
features of intuitive and deliberate thought as if
they were traits and dispositions of two characters
in your mind. In the picture that emerges from
recent research, the intuitive System 1 is more
influential than your experience tells you, and
it is the secret author of many of the choices
and judgments you make. Most of this book is
about the workings of System 1 and the mutual
influences between it and System 2.”
Source: Kahneman, D. (2011). Thinking, Fast and
Slow. Farrar, Straus and Giroux.
Business Management
Inside Practice
TCI and Acıbadem Healthcare Group
Turkish firm to make galleys for Indian air
carrier
Turkish Cabin Interior Inc. (TCI) -- a joint
venture of Turkish Airlines, Indian Turkish Technic
and Turkish Aerospace Industries -- has agreed on a new
deal with one of India’s largest airlines to manufacture
onboard galleys, it was announced on Wednesday.
Flag carrier Turkish Airlines said deliveries of
the galleys to SpiceJet will start in August 2018 and
will continue until 2024.
SpiceJet will strengthen its market position with
the Turkish-made galleys, Turkish Airlines said,
adding: “TCI is delighted with the current deal,
which will consolidate its position in the South Asia
market.”
Commenting on the new deal, Cetin Tugtag,
general manager of TCI, said the company’s “smart
design philosophy” provided lightweight-yet-durable
systems. “We believe that this significant deal, that we
signed with SpiceJet, in order to deliver our privileged
philosophy to their new B737 MAX fleet, will be
highly beneficial for both sides,” Tugtag added.
As presented in the above news,40 if a business
organization aims at bettering its position in
the market, then its managers can hardly afford
the luxury of taking a passive, reactive stance.
Instead, they should be taking a proactive
approach and their planning efforts should go
above and beyond simply getting prepared for
the future. Following from this example, which
increases the fuel economy of Turkish Airlines’
passenger planes—one of the largest fleets in
the world—as well as enhances the quality and
efficiency of serving meals to passengers in tight
quarters, we can appreciate how seemingly minor
changes which combined strategically with other
efforts can leave the competition behind. With
this ethos for planning, managers will guide their
organizations in shaping the future rather than
letting the future shape them.
The expansion of Acıbadem Healthcare
Group – Utilizing an opportunity
When the Ministry of Health issued a
bylaw (a new legislation) in February 2008
that introduced significant limitations to the
further expansion of the role of the private
sector in the provision of healthcare; rather than
seeing this as a threat, the Acibadem Healthcare
Group recognized this as an opportunity to
grow internationally.41 In 2012, the healthcare
organization made an agreement with IHH
Healthcare Berhad, one of the largest groups in
the Far East, to become a preferable destination
for health tourism. In 2016, it acquired the
Tokuda Group and the City Clinic Group,
both of which are leading Bulgarian healthcare
providers and opened up clinics in Bulgaria. The
healthcare group has opened another clinic in
Amsterdam in May 2017.
Discuss:
1. When you go through some company
news and compare their planning horizons,
which ones emphasize their long-term
objectives, which ones emphasize their
medium- and/or short-term objectives?
Why do companies differ in their emphasis
on different planning horizons?
2. If you were to see an opportunity where many
other firms in your sector (pick a sector if you
are a non-working student) see as a threat,
what kind of actions would you take in order
to counteract them in your market?
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Managerial Planning and Decision Making
Summary
LO 1
Discussing the basics and importance
of planning and decision making
Even a short trip with friends needs to be planned, so that you have what you need with you and are ready
to deal with certain issues that arise along the way. If you do not give consideration to and get prepared
for the things waiting for you, more time, money and effort will be wasted. For instance, how can we talk
about starting up and sustaining a business without knowing how much capital, what kind of technology,
how many people with which competencies do we need? In other words, planning is the first of the
four managerial functions (planning-organizing-leading-controlling) and without performing this key
function, a manager can hardly succeed in the functions following it.
Planning is deciding on where to go, by taking which actions. By planning, we try to foresee and shape
the future. As for decision making, in fulfilling all the functions, starting from planning, managers have
to decide. The decisions taken by managers often make a major impact on a number of elements vital to
the success of an organization: for example, what to produce and sell, and for people whom to employ
and whom to sell a service or a product. Therefore, it is ultimately important that managers have good
decision-making skills so that they make the correct decisions.
LO 2
Identifying the levels of planning
in organizations
In organizations, the levels of planning go hand in hand with the levels of management. Starting at the top
of the organization, at a high-level of management, long-term planning is conducted. This long-term
planning that is performed by high-level managers is also termed as strategic planning. With strategic
planning, managers aim at formulating plans as to how their organizations or organizational units will
evolve, typically within 3 to 5 years.
As we move down the managerial hierarchy, the time horizon of planning becomes shorter. The nature
of planning done by middle-level management becomes medium-term, meaning that middle-level
managers aim at planning for a period less than 3 years, more than a year’s duration. Then for low-level
management, short-term planning is performed. Short-term planning involves planning for hourly,
daily, weekly, monthly activities.
LO 3
Explaining the planning process
Planning process flows through the following stages:
1. Setting the goals/objectives
2. Identifying resources that are needed
3. Determining the action plans
4. Implementing and evaluating the plans
5. Identifying adjustments to be made
102
Business Management
LO 4
Describing the types of plans
LO 5
Summary
There are three types of plans: strategic, tactical and operational. Starting from strategic plans they have
their own hierarchical order.
A strategic plan is a broadly defined plan aimed at creating a desired future for the organization. These
long-term plans set forth the goals needed to accomplish the vision for the organization. Strategic plans
cover the major aspects of business such as products/services, finance, human resources with a time frame
of 3 to 5 years.
Tactical plans translate strategic plans into specific goals for specific parts of the organization. These are
functional plans often focused on next year or at most 2 years. They indicate operations under each function
that contribute to the overall strategy; examples can be logistics, marketing, and human resource plans.
Operational plans translate tactical plans into specific goals and actions for small units of the organization
and focus on one year or less. These plans guide employees’ day-to-day tasks and can be in the form of
standing and single-use plans. Policies and procedures are the standing plans that are developed to ensure
smooth running of operations, whereas single-use plans are one-time plans each designed to meet the
needs of a unique situation such as a program budget.
Defining decision making and
explain the decision-making
process
Decision making is the process of identifying a problem or opportunity, then selecting a course of action
to solve the problem or capitalize on the opportunity.
The decision-making process is constituted by the following stages:
1. Identifying a problem or opportunity
2. Developing decision criteria
3. Generating decision alternatives
4. Evaluating alternatives
5. Selecting the best alternative
6. Implementing the decision
7. Monitoring and evaluating the results
LO 6
Distinguishing between different
decision models
The classical rational model of decision making is a normative (ideal) model, telling us how decisions
should be taken, in a step-by-step manner. It starts with identifying a problem or opportunity and ends
with evaluating the decision’s effectiveness and changing the decision if needed. In this model, the decision
maker is assumed to have full and reliable information on everything related to deciding and does not
change his or her mind about anything while proceeding.
The second model of decision making is the bounded rational model, which is a realistic model that
contradicts with the rational model. It states that there is hardly full rationality ever. This model rejects the
rational model, seeing it only as developed and workable in a perfect world. The bounded rational model
claims that the decision maker satisfices, rather than finding the optimal solution.
The third model, intuitive decision making is another model contradicting the rational model. This
model argues that the decision maker should use his or her intuition to make a decision. One major reason
for employing this model is that many managers lack the information they need to make a decision.
Therefore, intuition replaces models based on information and uses experience, affect (feelings and
emotions), cognition (skills, knowledge, training), and values or ethics.
To sum up, the rational model presents an ideal, whereas bounded rationality and intuitive decision-making
models are descriptive.
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Managerial Planning and Decision Making
1
6 ________ budget allows resources to vary in
proportion with various levels of activity
a. Predictions of future never hold.
b. One has to be prepared for the future.
c. Business people should prepare business plans
for investors.
d. Without planning you lose the chance of
shaping the future.
e. If you do not plan, you will lose more time and
money.
a. Nonmonetary
c. Capital expenditure
e. Program
Test yourself
Which of the following statements is a myth
that does not support the need for planning?
2 Which of the following is not correct about
planning and decision making?
a. In fulfilling all managerial functions, decision
making is inevitable.
b. Planning helps the organization be more
efficient in its use of resources.
c. The decisions that managers take do not have a
big impact on things and people.
d. Managers are evaluated based on their
achievement of goals and objectives.
e. Managers should involve relevant stakeholders
in planning and decision making as much as
possible.
b.
d.
Flexible
Operating
7 In which type of budgeting is the previous
period’s budget used as a starting point?
a. Zero-based budgeting
b. Activity-based budgeting
c. Expense budgeting
d. Incremental budgeting
e. Cash budgeting
8
The 5 Whys and 5W 1H are ________.
a. sets of criteria for evaluating the decision
alternatives
b. techniques for improving the problem
definition
c. types of activity-based budgets
d. acronyms for two types of decisions
e. frameworks for analyzing the effectiveness of
plans
3
9 Which one of the following statements is not
valid for the rational decision-making model?
a. high-level managers’ planning
b. planning of middle-level management
c. long-term planning
d. short-term planning
e. strategic planning
a. The decision maker settles for an alternative
that is satisfactory enough.
b. All individuals involved in the process or
implementation are in complete agreement.
c. There is a clearly defined problem or
opportunity.
d. The criteria to be employed in evaluating
alternatives are clear.
e. All the alternative courses of action are easily
determined.
Daily, weekly, monthly planning of tasks are
typical of ________.
4 Among the following steps of the planning
process which one comes after all the others?
a. Determine plans of action
b. Identify adjustments to be made
c. Implement and evaluate the plans
d. Set the goals and objectives
e. Identify resources needed for objectives
5 ________ plans are the most complex plans,
because they potentially cover different industries
and different areas of business.
a. Operational
c. Standing
e. Strategic
104
b.
d.
Tactical
Procedural
10 Which of the following is not listed as a
factor that limits rationality in decision making?
a. Symptoms can be stated instead of problems.
b. There are budgetary and time constraints.
c. All the alternatives and all the consequences of
each alternative are known.
d. The criteria and the weights assigned to the
criteria may be changed on the way to decide.
e. The search for alternatives may be abandoned
too quickly.
Business Management
If your answer is incorrect, review “Basics of
Planning.
6. b
If your answer is incorrect, review “Budgets
and Budgeting”.
2. c
If your answer is incorrect, review “ Basics
of Planning”.
7. d
If your answer is incorrect, review “Budgets
and Budgeting”.
3. d
If your answer is incorrect, review “Levels of
Planning”.
8. b
If your answer is incorrect, review
“Identifying the Decision Situation”.
4. b
If your answer is incorrect,
“Managerial Planning Process”.
review
9. a
If your answer is incorrect, review “Decision
Models”.
5. e
If your answer is incorrect, review “Types of
Plans”.
10. c
If your answer is incorrect, review “The
Bounded Rationality Model”.
your turn 1
High-level managers are expected to see the big picture – the organization as
a whole. They are the ones who set the main direction of their organization
for the long-term. The type of planning done by high-level managers – also
called as strategic planning – typically has a time horizon of more than three
years. With long-term strategic planning, managers aim at establishing which
strategies to pursue in order to reach the vision of the organization.
As we go down the organizational hierarchy, the middle-level managers mostly
deal with medium-term planning, having a time horizon of more than a year,
but less than 3 years. Through the development of rules and procedures,
medium-term planning serves the organization with relatively permanent
solutions for a number of recurring short-term problems.
Low-level managers plan for a time horizon of less than a year, and this
planning is known as short-term planning. With short-term planning,
managers deal with current small problems or crises that disrupt the day-to-day
operations. Therefore, by putting out the daily fires, low-level managers assist
the organization in moving toward its longer term goals little by little.
Suggested answers for “Your turn”
How does the nature of planning change with
the level of management?
Answers for “Test yourself”
1. a
105
Managerial Planning and Decision Making
Suggested answers for “Your turn”
What are the steps involved in the managerial planning
process? Explain briefly.
your turn 2
The managerial planning process starts with setting goals. Being guided by
the mission and vision statements, goals should be measurable, results-oriented,
realistic, challenging and have a clear time-frame. It is also important that goals
are set participatively rather than being imposed by the high-level managers, so
that employees will be more motivated.
After setting the goals, the resources needed to attain the goals have to be
identified. This three-part question has to be answered at this stage: How
much of which resources are needed and when?
Then, the third step of planning comes next which is determining plans of
action. At this stage, tasks associated with the accomplishment of each goal
are identified. Timelines for completing tasks and who will be completing
them are also determined at this stage.
After the action plans are prepared, they have to be put into effect. During the
implementation, from time to time evaluations have to be made to determine
whether the plans in action are taking the organization where it wants to go.
After gathering initial information, if the managers find out that certain action
plans are not meeting the anticipated progress toward goal accomplishment,
the action plans will need to be revised. If adjustments are made, we need
to go back to the implementation phase of the process. From that stage,
planning continues through the stages of evaluation and revision of the action
plans and/or goals.
Compare the three types of plans prepared in
organizations.
your turn 3
106
The three types of plans are strategic plans, tactical plans and operational plans.
Plans at the top of the traditional organizational pyramid tend to be strategic
in nature. Strategic plans are the plans that have a focus on the broad future
of the organization as a whole. These plans identify the long-term direction
the organization will take with a time horizon of 3 to 5 years. These plans
cover the major aspects of business such as products, services, technology,
finance, and human resources. Potentially, these plans have a dramatic impact
on the survival and success of the organization.
Tactical plans specify how the organization’s resources can be used to put
strategies into action. As they translate strategic plans into specific goals for
the parts of the organization they have a shorter time horizon than strategic
plans – 1-2 years. These plans often take the form of functional plans that
indicate how different operations within the organization will contribute to
the overall strategy. Such functional plans might include production, logistics,
financial, marketing, and human resources.
Operational plans translate tactical plans into specific goals and actions for
small units of the organization and focus on the near term (12 months or
less). These plans have the narrowest scope of all the three types of plans as
they focus on small, homogeneous units of the organization – for example, a
particular product line in its respective market. Being the least complex of the
three types of plans, an operational plan hardly has a direct impact beyond the
organizational unit for which the plan is developed.
Business Management
Compare the three approaches to budgeting in
organizations.
Suggested answers for “Your turn”
your turn 4
The three approaches to budgeting are incremental, zero based, and activity
based budgeting.
If a previous period’s budget is used as a starting point for the new budget
of the upcoming period, it is called incremental budgeting. A number of
increases are made on the previous term’s budget such as inflationary and
salary increases. The previous period’s budget is sometimes increased by just a
certain amount of money or a predetermined percentage.
Zero-based budgeting occurs when a budget for any activity is set at zero at the
beginning of each period and all proposals must be justified on a cost/benefit
basis. Justification for continuing any budget item is also included in the budget.
Compared with incremental budgeting, in zero-based budgeting the previous
period’s budget does not necessarily have a major influence on the new budget.
Activity-based budgeting emphasizes the expected cost of the planned
activities which will be consumed for a process, service, product or
department. In this budgeting, costs are assigned to activity and product level
(e.g. assembly-line setup, inspections) rather than being averaged out across
a number of products or services. Averaging the costs across a number of
products or services happens in the other two types of budgeting. The real cost
behavior can be analyzed, through this focus on cost.
What are the phases of the decision-making
process? Explain briefly.
your turn 5
The process of decision making involves seven steps:
1. Identifying the decision situation: The decision maker should feel a
need to decide because of a problem or opportunity. This need can come
from the person himself or herself (internal) and/or can be externally
imposed by an outside party such as a superior.
2. Developing decision criteria: The criteria for selecting among alternative
solutions are in fact a list of important features or qualities that would make
an alternative good or based with respect to the expected outcomes of the
decision. A simple way of fulfilling this stage is to perform a cost-benefit
analysis.
3. Generating alternatives: The alternatives are possible solutions. These
are the alternative courses of action that have the potential to bring the
desired results. Sometimes there can be just a few solutions or just one
possible solution. That one solution can be a solution tried and worked
out in the past. However, as time passes it is probable that new and better
alternatives can come out even for a familiar problem or opportunity.
4. Evaluating alternatives: At this stage, the party who makes the decision
might do a preliminary screening and eliminate some alternatives that
do not seem to bring minimally acceptable results and/or to reduce
the number of alternatives to a manageable bulk. Then, the remaining
alternatives are examined. A weighted score of each alternative (score or
rating given to the alternative on criterion 1 x weight of criterion 1),
(score on criterion 2 x weight of criterion 2 + …) is calculated.
107
Managerial Planning and Decision Making
Suggested answers for “Your turn”
What are the phases of the decision-making
process? Explain briefly.
5.
6.
your turn 5
7.
Selecting the alternative: In order to be able to select one among the
alternatives, the above-mentioned scores on each criterion for a particular
alternative are summed up. Then, the alternative which gets the highest
score is chosen as the decision, because that alternative is at the same time
the one with the most expected future value.
Implementing the decision: A decision that is taken is not automatically
implemented. There can be resistance on the side of the implementer(s).
The main reason for this is that the implementer(s) can be the ones
who did not take part in the decision-making process. If the decision
maker and the implementer are not the same people then there is room
for resistance. In that case, even if they start to carry out the decision
they might not have enough motivation and commitment. In order to
counteract resistance before it surfaces, managers should be attentive to
have implementers participate in the decision-making process.
Monitoring and evaluating results: In determining whether things
are on track, one needs to know that the implementation of some
decisions do not usually bring immediate results. In that case, the person
who makes the decision should wait long enough to start collecting
information on results. In monitoring, checkpoints should be indicated
for different points in time. In addition to checking, it is important to
know what to check. It is important also to make sure that the right kind
of information is gathered from reliable sources.
Compare the three models of decision making
in organizations.
your turn 6
108
The three models of decision making are rational, bounded rational and
intuitive decision making.
The rational model of decision making assumes that there is full or perfect
information on the problem or opportunity, the decision criteria, the
alternatives, and their consequences. This model sees the decision making as
a step-by-step process. In addition, the rationality model of decision making
assumes that there are no time or cost limitations and the chosen alternative
is the one giving the maximum economic value.
The bounded rationality model is built on the premise that rationality is limited,
and there are certain factors drawing the decision maker away from full rationality,
such as cognitive limitation of human beings, difficulty of defining the problem
or opportunity, limited information, time and budget. This approach to decision
making claims that the decision maker settles for the first satisfactory alternative
that comes to his or her attention, rather than the optimal alternative. Therefore,
this model is simply in contradiction with the rational model.
The third model of decision making is intuitive decision making. Just like
the bounded rationality model, this model is also contradicting the rational
model. Saying that decision making happens through the use of intuition,
the model puts forward five aspects of it: experience, affect (feelings and
emotions), cognition (skills, knowledge, training), and values or ethics.
Overall, the rational model is a normative/ideal model, whereas bounded
rationality and intuitive decision making are realistic models.
Business Management
endnotes
Meszaros, G. (July 26, 2016). 50 Reasons Why Some
Businesses Fail While Others Succeeed. Retrieved
from https://www.successharbor.com/why-somebusinesses-fail-while-others-succeed-02132015/
2
Startup Success Stories (July 13, 2017). Retrieved from
https://www.entrepreneur.com/topic/startupsuccess-stories
3
Kozan, M. K., Öksoy, D., & Özsoy, O. (2005). Growth
plans of small businesses in Turkey: individual
and environmental influences. Journal of Small
Business Management, 44(1), pp.114-129. DOI:
10.1111/j.1540-627X.2006.00157.x;
Mason,
C. & Stark, M. (2004). What do investorslLook
for in a business plan? A comparison of the
investment criteria of bankers, venture capitalists
and business angels. International Small Business
Journal: Researching Entrepreneurship, 22(3), pp.
227-248. DOI: 10.1177/0266242604042377
4
Carroll, S. J. & Gillen, D. J. (1987). Are the classical
management functions useful in describing
managerial work? Academy of Management Review,
12, pp. 38-51.
5
DeSimone, L. D. & Popoff, F. (2000). Eco-efficiency:
The Business Link to Sustainable Development.
MIT Press.
6
Houlder, D. & Nandkishore, N. (June 23, 2016).
All hail medium-term planning. Harvard Business
Review. Retrieved from https://hbr.org/2016/06/
all-hail-medium-term-planning
7
Dinçer, Ö., Tatoğlu, E., & Glaister, K. W. (2006).
The strategic planning process: evidence from
Turkish firms. Management Research News, 29(4),
pp. 206-219.
8
Rajan, R. G. (2010). Fault Lines: How Hidden
Fractures Still Threaten the World Economy.
Princeton University Press; Stiglitz, J. E. (2010).
Freefall: America, Free Markets, and the Sinking of
the World Economy. W. W. Norton & Company.
9
Jaques, E. (1982). The Form of Time. Russak-Co. In
Schermerhorn, Jr. & J. R. (2013). Management:
Learn, Succeed (12th ed.). Wiley.
10
Belicove, M. E. (September 27, 2013)Understanding
Goals, Strategy, Objectives, and Tactics in the Age
of Social. Retrieved from https://www.forbes.com/
sites/mikalbelicove/2013/09/27/understandinggoals-strategies-objectives-and-tactics-in-theage-of-social/#6007ff9b4c79; Carpenter, M.,
Bauer, T., & Erdoğan, B. (2010). Principles of
Management, v. 1.1. Flat World Knowledge, Inc.
1
Mission is a written declaration of an organization’s
core purpose (reason for existence) that does
not change over time. Vision is an aspirational
description of what the organization hopes to be in
the future in fulfilling its mission. Organizational
strategy is the sum of actions intended to be taken
by the organization to achieve its long-term goals
which would serve the realization of its vision.
11
Locke, E. A. & Latham, G. P. (2002). Building a
practically useful theory of goal setting and task
motivation. American Psychologist, 57(9), pp. 705717.
12
Thomson, T. M. (1998). Management by
objectives. The Pfeiffer Library, 20(2), p. 317.
13
Latham, G. P. (November, 2004). The motivational
benefits of goal-setting. Academy of Management
Executive, 18(4) pp. 126-129.
14
Adapted from Van Wingerden, R. (2001). Managing
change. International Journal of Technology
Management, 21(5&6), pp. 487-495.
15
A project is an undertaking that involves considerable
money, human resources, and equipment.
16
A program is a plan of action aimed at accomplishing
a clear objective, involving what work is to be
done, when, by whom, and with which resources.
17
Shim, J. K. & Siegel, J. G. (2008). Budgeting Basics
and Beyond. John Wiley & Sons.
18
Russo, M. V. & Fouts, P. A. (1997). A resourcebased perspective on corporate environmental
performance and profitability. Academy of
Management Journal, 40(3), pp. 534-559.
19
Tucker, H. J. (1982). Incremental budgeting: myth
or model? Western Political Quarterly, 35(3), pp.
327-338.
20
Pyhrr, P. A. (1999). Zero‐based budgeting. Handbook
of Budgeting, (6th ed.). pp. 677-696.
21
Brimson, J. A., Antos, J. J., & Mendlowitz, E.
(2012) Activity based budgeting. Handbook
of Budgeting (6th ed.). John Wiley & Sons, Inc.
doi: 10.1002/9781119200871.ch33
22
23
Hitt, M. A., Black, S., & Porter, L. W. (2012).
Management (3rd ed.). Pearson Education Inc.,
p. 332.
Ries, E. (February 7, 2012). The 5 whys. Harvard
Business Review. Retrieved from https://hbr.
org/2012/02/the-5-whys.html
24
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Obara, S. & Wilburn, D. (2012). Toyota by Toyota:
Reflections from the Inside Leaders on the Techniques
that Revolutionized the Industry. CRC Press.
25
Schermerhorn, Jr., J. R. (2013). Management: Learn,
Succeed (12th ed.). Wiley. Ch. 7.
35
Burke, L. A. & Miller, M. K. (November, 1990).
Taking the mystery out of intuitive decision
making. Academy of Management Executive,
pp. 91-99.
36
Dane, E., Rockmann, K. W., & Pratt, M. G.
(2012). When should I trust my gut? Linking
domain expertise to intuitive decision making
effectiveness. Organizational Behavior and
Human Decision Processes, 119(2), pp.187-194;
Sadler-Smith, E. & Shefy, E (2007). Developing
intuitive awareness in management education.
Academy of Management Learning & Education,
June, pp. 186-205; Kahneman, D. (2002).
Maps of bounded rationality: A perspective
on intuitive judgment and choice. Nobel Prize
Lecture, 8, pp. 351-401.
26
Miller, D. W. & Starr, M. K. (1967). The Structure of
Human Decisions. Prentice Hall.
27
Krieshok, T. S., Black, M. D., & McKay, R. A.
(2009). Career decision making: the limits of
rationality and the abundance of non-conscious
processes. Journal of Vocational Behavior, 75(3), pp.
275–290; Simon, H. A. (1977). The New Science
of Management Decisions. Prentice Hall; Parking,
J. (1996). Organizational decision making and
the project manager. International Journal of
Project Management, 14(5), pp. 257–263.
28
Sweller, J. (1988). Cognitive load during problem
solving: Effects on learning. Cognitive Science, 12(2),
pp. 257-285.
29
Simon, H. A. (1979). Rational decision making in
business organizations. The American Economic
Review, 69(4), pp. 493-513.
30
Anderson, D. R., Sweeney, D. J., Williams, T.
A., Camm, J. D., Cochran, J. J., Fry, M. J., &
Ohlmann, J. W. (2016). Quantitative Methods for
Business (13th ed.). Cengage Learning.
37
The Economist Intelligence Unit (2014). Views from
the C-suite: Who’s big on big data? Retrieved from
https://www.eiuperspectives.economist.com/
sites/default/files/Whosbigonbigdata.pdf
38
March, J. G. & Simon, H. A. (1958). Organizations.
Wiley, pp. 140-141.
39
Hitt, M. A., Black, S., & Porter, L. W. (2012).
Management (3rd ed.). Pearson Education, Inc., p.
338.
40
31
32
Bonn, I. (2001). Developing strategic thinking as a core
competency. Management Decision, 39(1), pp. 63-71.
https://doi.org/10.1108/EUM0000000005408
Turkish Firm to Make Galleys for Indian Air carrier
(21 June, 2017). Retrieved from http://www.
anews.com.tr/economy/2017/06/21/turkishfirm-to-make-galleys-for-indian-air-carrier; Photo
source: https://www.turizmle.com/wp-content/
uploads/2017/06/TurkishCabinInterior-TCITurizmleCom.jpg
Tversky, A. & Kahneman, D. (1975). Judgment
under uncertainty: Heuristics and biases.
In Utility, Probability, and Human Decision
Making. Springer, pp. 141-162.
33
34
Simon, H. A. (1987). Making management
decisions: the role of intuition and emotion. The
Academy of Management Executive (1987-1989),
pp. 57-64; Dane, E. & Pratt, M. G. (2007).
Exploring intuition and its role in managerial
decision making. Academy of Management
Review, 32(1), pp. 33-54; Sadler-Smith, E.
& Shefy, E. (2004). The intuitive executive:
understanding and applying ‘gut feel’in
decision making. The Academy of Management
Executive, 18(4), pp. 76-91.
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Yilmaz, V. (2017). The Politics of Healthcare Reform
in Turkey. Springer, pp. 221-222; (10 August,
2017); Acıbadem: General Information. Retrieved
from
http://www.acibadem.com/en/generalinformation; Photo source: http://memurhaber.
co/acibadem-hastanesi-personel-alimi-2014/
41
111
Chapter 5
The Fundamentals of
Strategic Management
Learning Outcomes
After completing this chapter, you will be able to:
1
3
5
Identify the fundamentals of strategic
management.
Differentiate among a company’s core
competencies, resources, and capabilities.
Compare corporate, business, and
functional-level strategies.
Chapter Outline
The Fundamentals of Strategic Management
Strategic Management Process: Analysis
Strategic Management Process: Formulation and
Implementation
Global Strategy
112
2
4
6
Analyze different market structures and five
competitive forces in different industries.
Apply the value chain and SWOT analyses.
Understand the role of global strategy in
international markets.
Key Terms
Strategy
Five forces model
Core competencies
Value chain analysis
SWOT analysis
Cost leadership
The BCG matrix
Strategic alliances
Global strategy
Business Management
Strategy is a popular term. Strategic thinking is important for a successful career, for a happy marriage,
for talking with kids, and even for growing more colorful flowers! However, most mention of strategies
miss two important points. First, strategy is related to competition. If there is no competition, we do not
need strategy. Second, strategy deals with the longer term. It is always about the future.
Our subject is business management and strategy is an essential component. Business life has both a
competitive and future-oriented context: suppliers compete with each other for the business of important
buyer companies, and companies compete with each other for building a valuable customer base, while
business units compete with each other for obtaining more resources from company headquarters.
Moreover, those organized actors would not like to win only now, but for the longer term.
Strategic management is a management field that brings analysis, formulation, and implementation
together for achieving sustainable competitive advantage. Studying strategic management helps a person
to think like a manager who must see the organization and its relationships with the environment in a
holistic way in order to position the organization for superior performance.
This chapter includes the basic topics of strategic management. We start with defining the
fundamental terms of strategic management. Relevant to the strategic management process, the external
analysis of the environment and internal analysis of the company are examined. The following part
introduces corporate-level, business-level, and functional-level strategies and their main tools. Finally,
the concluding part is about global strategy which is critical for determining the path to succeed in
international markets.
THE FUNDAMENTALS OF STRATEGIC MANAGEMENT
Strategic management is both an academic field and a process that is necessary for all organizations, from
small to medium, and large, from profit to non-profit and public, from local to national and multinational
to global. Hence, the question is not if strategic management is relevant for all companies, but whether
the strategies companies have devised is what they really need.1 Before explaining the steps of the strategic
management process, we should learn some fundamental terms and concepts.
Sustainable Competitive Advantage
One essential strategic feature of markets is competition. Producers, whether manufacturers or service
providers, would like to be ahead of their competitors for achieving their goals such as profit, growth, and
market share. A company which reaches a higher performance relative to other rivals in the same industry
or the industry average has a competitive advantage.
Competitive advantage is always relative, not absolute.
To evaluate competitive advantage, we compare company
Sustainable competitive advantage is either
performance to either the performance of other companies
being ahead of competitors or achieving
in the same industry or an industry average.2 A company
higher performance than the industrial
which can surpass its competitors or the industry average
average for a long time.
over an extended period has a sustainable competitive
advantage.
Using accounting profitability is the most common practice to evaluate company performance and
competitive advantage. Accounting profitability is a company’s efficiency in utilizing production factors
to generate earnings.3 Some of the profitability ratios most commonly used in strategic management
are the following: the return on equity (ROE), which is profit after taxes/total stockholder’s equity;
return on assets (ROA), which is profit after taxes/total assets; return on revenue (ROR), which is profit
after taxes/total revenue; and return on sales (ROS), which is profit after taxes/total sales. A company’s
performance and competitive advantage is measured by data and ratios gathered from accounting
reports such as income statements and balance sheets.
113
The Fundamentals of Strategic Management
Another practice to evaluate company
performance and competitive advantage is assessing
stock market performance, which reflects the
perceptions of investors regarding an organization’s
future performance.4 Total shareholder return
(TSR) is the share price at the end of a period
and at the beginning of a period plus dividends.
It is the most common ratio to assess stock market
performance in strategic management.
Profitability ratios and total shareholder
return are the most common metrics for the
company performance.
Strategy and Strategic Management
The root of the word of strategy is found
in the Greek: strategia, which means “office or
command of a general”. Strategia’s root is strategos,
“general, commander of an army”, also the title
of various civil officials and magistrates, which is
composed of stratos, “multitude, army, expedition,
encamped army”, and agos, “leader”.5 As we see
from the etymology of the word, strategy relates
to competition, leading, and achieving a particular
goal. Strategy includes “the determination of
the basic long-term goals of an enterprise, the
adoption of courses of action and the allocation of
resources necessary for carrying out these goals”6
for achieving sustainable competitive advantage.
However, it is usually very difficult to predict how
competition in an industry will evolve, and so it
is rarely possible to know for sure that a company
is choosing the right strategy. This is why a firm’s
strategy is usually a theory: It is a company’s best
bet about how competition is going to evolve and
how that evolution can be exploited for competitive
advantage.7
Strategy refers to the determination of
the basic long-term goals of an enterprise,
the adoption of courses of action and the
allocation of resources necessary for carrying
out these goals to achieve sustainable
competitive advantage.
114
Strategy is usually a theory of the company
that explains how the competition is going to
evolve and how that evolution can be used for
competitive advantage.
Strategic management is the integrative
management field that combines analysis of the firm’s
external and internal environments, formulation of
strategy resulting in the company’s corporate, business,
and functional strategies, and implementation of a
set of coherent actions in the quest for competitive
advantage. Managers make decisions under conditions
of uncertainty and complexity. As they follow these
steps, they keep an awareness of key audiences and
how they can affect or be affected by the decisions
that are made. Managers then monitor and evaluate
the progress toward key strategic objectives and make
adjustments as necessary.8
Strategic management includes analysis of
the firm’s external and internal environments,
formulation of corporate, business, and
functional strategies, and implementation
of strategies in the quest for competitive
advantage.
Stakeholder approach to strategic
management
The audiences who can affect or can be affected
by the achievement of a company’s objectives are
called stakeholders.9 Stakeholders can be divided
into two groups: internal stakeholders and external
stakeholders. Internal stakeholders are stockholders,
board of directors, executive officers, other managers,
and employees. External stakeholders are all other
individuals and groups that have some claim on the
company. This group includes customers, suppliers,
alliance partners, creditors, local and national
governments, unions, local communities, media, and
the public. There are so many claims on any company,
and they often include clean air, clean water, jobs,
taxes, dividends, investment opportunities, real
estate, career opportunities, employee benefits,
wages, and community services.
Business Management
Stakeholders are the actors who can affect
or can be affected by the achievement of a
company’s objective. Internal stakeholders
are stockholders, board of directors,
executive officers, other managers, and
employees. External stakeholders are all
other individuals and groups that have some
claim on the company.
Although stakeholder is a relatively old term,
the development of the stakeholder approach was
set in motion in the beginning of 1980s. As time
passes, the stakeholder concept has gained greater
importance due to public interest, and greater
coverage by the media.10 A central assumption of
the stakeholder approach is that of focusing on
stakeholders, specifically treating them well and
managing with their interests in mind. This helps
a company to achieve a higher performance.11
Research on this subject generally supports the
positive relationship between stakeholder-oriented
management and company performance.12
• According to the stakeholder approach,
there are several benefits derived from
having good stakeholder relationships.13
• Building strong reputations that are
rewarded in the marketplace by business
partners, employees, and customers.
• Achieving greater organizational flexibility.
• Facilitating the formation of strategic
alliances.
• Increasing trust lowers the costs for a firm’s
business transactions.
• Revealing valuable information from
stakeholders that can lead to greater
efficiency and innovation.
Stakeholder approach asserts that treating
stakeholders well and managing their
interests helps a company achieve a higher
performance.
1
Define the terms of sustainable competitive
advantage, strategy, and strategic management.
STRATEGIC MANAGEMENT
PROCESS: ANALYSIS
The strategic management process in general
terms is illustrated in Figure 5.1. The first step
of a strategic management process is analysis.
Managers start the analysis stage by evaluating the
existing vision, mission, and values statements of
companies. The business environment is dynamic;
thus strategic elements are subject to be modified
under the impact of environmental changes.
Second, they conduct an external analysis which is
composed of the analyses of market and industry
structures. Third, managers analyze internal
variables including resources, capabilities, core
competencies, and value chain activities. Fourth,
managers conduct a SWOT analysis to generate
insights from the whole analysis and their strategic
implications. Finally, if it is necessary, they will
rewrite vision, mission, and value statements.
Figure 5.1 Strategic Management Process
Analysis
Internal; external; SWOT
Implementation
Formulation
Corporate, Business, Functional
Developing Statements of Vision,
Mission, and Values
A vision is a statement about where the
company wants to be in the future. It is composed
of the desired achievements of the company. A
clearly phrased vision communicates management’s
aspirations to stakeholders about “where we are
going” and helps channel the energies of company
personnel in a common direction. See Table 5.1
for examples. Well-conceptualized visions are
distinctive and specific to a particular company. An
115
The Fundamentals of Strategic Management
effectively communicated vision is a valuable management
tool for making the employees engaged in actions that
move the company in the intended direction.14
A vision states where a company wants to be
in the future.
Table 5.1 Vision Examples of Some of the Most Successful Companies in the World
To provide access to the world’s information in one click.
To help individuals and businesses realize their full potential.
To be the best retailer in the hearts and minds of consumers and employees.
To be the preferred partner to healthcare providers and pharmaceutical manufacturers.
The effectiveness of vision statements differs based
on type. A product-oriented vision defines a company in
terms of a product provided (e.g. to be the best company
Customer-oriented visions let companies
in the mobile phone business). Product-oriented visions
adapt to changing environments more easily
tend to force managers to take a more myopic view of
while product-oriented visions can make
the competitive landscape. A customer-oriented vision
companies less flexible and more likely to fail.
defines a company in terms of providing solutions for
customer needs. Companies with customer-oriented
visions can more easily adapt to changing environments. In contrast, companies that define themselves
based on product-oriented statements tend to be less flexible and thus more likely to fail.15
Mission is a statement about the reason for the existence
of a company. Mission describes what a company actually
does (the products it plans to provide and the markets in
which it will compete). See Table 5.2 for examples. People
Vision defines what an organization wants to
sometimes use the terms vision and mission interchangeably,
accomplish while a mission describes what an
but they differ in the strategy process. A vision defines what
organization does.
an organization wants to accomplish ultimately, a mission
describes what an organization does actually.16
Table 5.2 Mission Examples of Some of the Most Successful Companies in the World
To organize the world’s information and make it universally accessible and useful.
To empower every person and every organization on the planet to achieve more.
To save people money so they can live better.
To improve patients’ lives by delivering innovative products and services that drive quality and efficiency
in pharmaceutical care.
Values state what is desirable, proper, and appropriate in the organizational context. Values show what
is right, what is wrong, what is fair, what is unfair, what is acceptable and what is unacceptable. They guide
how managers and employees should conduct themselves, how they should do business, and what kind of
organization they should build to help a company achieve its mission.17 Most companies normally have four
to eight values, such as fair treatment, honor and integrity, ethical behavior, innovativeness, teamwork, a
passion for excellence, social responsibility, and community
citizenship. While some companies announce their values
publicly but have little observable effect on either how
Values provide guidance on what is desirable,
employees behave or how the company operates, there are
proper, and appropriate in the organizational
some other companies whose executives are committed to
context.
anchoring company operations on sound values.18
116
Business Management
External analysis
The external analysis comprises the analyses of the
market structure and industry structure. The products
(goods and services) are bought and sold in the market. The external analysis comprises the analyses
Each market includes at least one industry, which is a group of the market structure and industry structure.
of companies offering products to satisfy the same customer
needs. Moreover, a group of closely related industries
form a sector.19 For example, the automotive sector consists of several related industries such as the component
manufacturers, automobile manufacturers, dealers, and maintenance companies.
The analysis of market structure. We observe different behavior patterns by producers across
markets to a great degree. In some markets, producers are highly competitive; in others, they seem in some
ways to coordinate their actions to avoid competing with
one another; and, in some markets, there is no competition
Models of market structure refer to the ideal at all. For understanding markets and explaining the
types which were developed by economists behaviors in them, economists have developed four
for understanding markets and explaining principal models of market structure which are based
on four dimensions:20 21 (1) the number of producers in
the behaviors in them.
the market, (2) the companies’ degree of pricing power,
(3) whether the products offered are undifferentiated or
differentiated (products that are different but viewed substitutable by customers), and (4) the market is
consolidated or fragmented (market share for the leading four firms is equal to or less than 40% of total
industry sales).
• In a monopoly, a single producer sells an undifferentiated
Monopolies have just one producer who
product such as water, natural gas, and rail transportation
sells an undifferentiated product with a
in Turkey with a large degree of pricing power in a
considerable pricing power in a consolidated
consolidated market.
market.
•
In oligopoly, a few producers—more than one but not a
large number—sell products which may be either undifferentiated
or differentiated such as mobile phone service in Turkey, cola beverages
in the global market, and manufacturing of commercial airplanes
with some pricing power in a consolidated market.
•
In monopolistic competition, many producers each sell
a differentiated product such as the smartphone, t-shirts, and
chocolates with some pricing power in a consolidated
or fragmented market. When a company can greatly
differentiate its product, it creates a niche in the Monopolistic competition markets have
market in which it has some degree of temporary many producers each sell a differentiated
monopolistic power over pricing, thus the name product with some pricing power in a
consolidated or fragmented market.
“monopolistic competition”.
Oligopolies have a couple of producers which
sell a differentiated or an undifferentiated
product with some pricing power in a
consolidated market.
The name of monopolistic competition comes from the situation where a company differentiates
its product so much and creates a niche in which it has some degree of temporary monopolıstic
power over pricing.
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The Fundamentals of Strategic Management
•
Finally, in perfect competition many producers
each sell an undifferentiated product such as
iron, crude oil, and olives and little or no ability
for each individual company to raise its prices in
a fragmented market.
Perfect competition markets have many producers
which sell an undifferentiated product with a little
or no pricing power in a fragmented market.
The analysis of industry structure. The concept of market structure has proven to be very useful in
informing both research and government policy. However, the concept can sometimes be inconvenient to use
to identify threats in a company’s local environment.22 Michael E. Porter’s well-known analytical framework,
the Five Forces model,23 is essential in identifying opportunities and threats facing a specific company in an
industrial context. Porter developed two important assumptions that form the basis of his five forces model:
(1) rather than defining
competition
narrowly
as rivalry to explain and
The Five Forces Model refers to a framework that was developed for identifying
predict a firm’s performance,
opportunities and threats facing a specific company in the industrial context.
competition must be viewed
more broadly through
Porter suggested that the competitiveness of an industry can be analyzed based
considering the other forces
on five forces: rivalry among existing competitors; threats of new entrants;
in an industry, (2) the profit
bargaining power of buyers and suppliers; and substitute products.
potential of an industry is a
function of the five forces
that shape competition.24
Porter suggested that the competitiveness of an industry can be analyzed based on five forces which are
discussed below:
Rivalry among existing competitors. This is usually the most powerful of the five competitive
forces.25 Four factors have a major impact on the intensity of rivalry among established companies
within an industry: market structure, demand conditions, cost conditions, and the height of exit
barriers in the industry. In general, competition in perfect competition and monopolistic competition
markets are higher than monopolies and oligopolies, as mentioned above in market structure. While
increasing demand tends to reduce competition since all companies can sell more without taking market
share away from other companies, decreasing demand results in increased competition as companies
fight to maintain market share and revenues. In industries where fixed costs, which are the costs that
are independent of customer demand such as property taxes, rent, and the cost of capital for building
facilities are high, profitability, tend to be highly depended on sales volume, and the desire to grow
volume can trigger intense competition. Exit barriers are economic (investments in assets such as specific
machines, equipment, or operating facilities that are of little or no value in alternative uses, or cannot be later
sold), strategic (e.g. economic dependence on the industry because a company relies on a single industry for
its total revenue and all profits), and emotional factors (e.g. when a company’s owners or executives do not
want to exit from an industry because of pride), which prevent companies from leaving at an optimal time.
If exit barriers are high, companies may be locked into
an unprofitable industry where demand is unchanging
Exit barriers are economic, strategic, and
or declining. The result is often redundant productive
emotional factors, which block companies
capacity, This leads to even more intense rivalry and
from leaving an industry.
price competition as companies cut prices, attempting to
obtain the customer orders.26
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Business Management
Threats of new entrants. The impact of new entrants depend on several factors such as economies
of scale, network effects, customer switching costs, and government policy. If economies of scale (the cost
advantage that arises with increasing output of a product that results in per-unit fixed costs decreasing) is high,
large existing companies can have a cost advantage over new entrants. When network effects are present, the
value of the product increases with the number of customers. As a result, it will be difficult for new entrants to
compete effectively. If changing suppliers may require the customer to change product specifications, retrain
employees, and/or modify existing processes, switching costs can be a great barrier to entry. When restrictive
government policies exist or industries are regulated heavily, the threat of entry is low.27
Bargaining power of buyers and bargaining power of suppliers. When the number of buyers
is small, and threaten to be rival producers, and when products sold to buyers are a significant percentage of a
buyer’s final costs,28 and when buyers purchase large quantities, and the purchased product is unimportant to
the final quality or price of a buyer’s products,29 the bargaining power of buyers is high. If the suppliers’ industry
is dominated by a small number of companies and suppliers threaten to be rival producers, companies are not
important customers for suppliers.30 When there are few good substitutes, which can be used instead of others,
and suppliers do not depend heavily on the industry for a large portion of their revenues,31 the bargaining power
of suppliers is high.
Substitutes. These are products which can replace other
products. For example, tea can be a substitute for coffee and vice
versa. The threat of substitute products is high if (1) good
substitutes are
readily available or new ones are emerging; (2) substitutes are
attractively priced; (3) substitutes have comparable or better
Internet
performance characteristics; (4) customers have low costs in
switching to substitutes; and (5) customer companies grow You can watch an interview with Michael E. Porter
on his five competitive forces model. https://www.
more comfortable with using substitutes.32
Substitutes refer to products replace other
products.
youtube.com/watch?v=mYF2_FBCvXw
Internal analysis
Within a particular industry or market, some companies
outperform others. The basis of their sustainable competitive
advantage is their resources, capabilities, core competencies, and
value chain activities. Internal analysis, which is conducted
after external analysis, gives managers the information they
need to choose the strategy which will enable their company
to achieve a sustainable competitive advantage.33
Internal analysis is the examination of
resources, capabilities, core competencies,
and value chain activities.
Resources, capabilities, and core competencies. All assets which the company can
use when formulating and implementing strategies are resources. Resources can be tangible or
intangible. Tangible resources, such as labor, capital,
and land, have physical characteristics and are visible.
Intangible resources, such as brand equity, reputation,
Resources refers to all assets which the
and intellectual property (e.g. patents, copyrights, and
company can exploit when formulating and
trade secrets), have no physical characteristics and are
implementing strategies.
invisible. Competitive advantage tends to be developed
from intangible rather than tangible resources. Tangible
Tangible resources have physical attributes
resources can be bought on the open market easily by
and are visible.
anyone who has the necessary cash. However, it is very
Intangible resources have no physical
difficult to buy intangible resources if not impossible and
attributes and are invisible.
it takes longer to build them.34
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The Fundamentals of Strategic Management
A company’s resources which enable the company
to fully capitalize the other resources it controls are
capabilities. Capabilities alone do not enable a company
Rather than tangible resources, intangible
to formulate and implement its strategies, but they
resources tend to lead to competitive
enable a company to use other resources to formulate
advantage.
and implement such strategies. Examples of capabilities
include a company’s marketing skills and teamwork and
cooperation among its managers.35
Resources and capabilities increase, perfect, and
upgrade each other. In addition, the interaction of
resources and capabilities leads to core competencies.
Capabilities are a company’s resources which
Core competencies are unique strengths, that are deeply
enable a company to fully take advantage of
embedded within a company. Core competencies are key
the other resources it controls.
for sustainable competitive advantage. Being superior
in marketing, in creating algorithms, or in designing
products are some examples of core competencies.
Companies preserve their core competencies through
Capabilities enable a company to use other
resources and capabilities: resources reinforce and
resources to formulate and implement its
capabilities orchestrate core competencies. Core
strategies.
competencies leverage company activities, which will
lead to competitive advantage.36
Value chain analysis. Value is one of the key concepts of strategic management. Value refers to
the monetary amount that a customer is willing to pay for a product. If the price of the product is higher
than the value of the product, the customer will not buy it. If the price of the product is lower than the
value of the product, the customer will definitely buy it. While this is the ideal case for the customer,
the ideal case for the producer is determining the price
that is equal to the value. Thus, the company’s profit will
be as high as possible and it will be equal to the margin.
Core competencies refer to unique strengths
Margin refers to the difference between value and total
that are deeply embedded within a company.
costs. All activities of the company must be organized for
pursuing margin for achieving competitive advantage.37
Since the underlying intent of a company’s activities is
to do things which will create the highest value (highest
margin) for customers, all of the diverse but integrated
Margin is the difference between value and
activities that a company performs internally is called
total costs.
the value chain. A company’s value chain contains two
categories of activities that create value: the primary
activities that create value for customers directly, and
the support activities that facilitate and increase the
performance of the primary activities.38 Supply chain
Value chain refers to all of the diverse but
management, production, sales and distribution, and afterintegrated activities that a company performs
sale services are primary activities of many companies.
internally.
Support activities of many companies are human resource
management, accounting, finance, and research and
development (R&D).
Value chain analysis (VCA) is the process whereby a company determines the costs associated with
organizational activities. The value chain analysis aims to identify where cost advantages or disadvantages
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Business Management
exist anywhere along the value chain. The VCA process can enable a company to better identify its
own strengths and weaknesses, especially as compared to a competitors’ value chain analyses and their
own data examined over time. The initial step in implementing VCA is to divide a firm’s operations
into specific activities or business processes. Then the analyst attempts to attach a cost to each discrete
activity; the costs could be in terms of both time and money. Finally, the analyst converts the cost data
into information by looking for competitive cost strengths and weaknesses that may yield competitive
advantage or disadvantage. It is important to note that
value chains differ vastly across industries and companies.
Whereas a paper products company would include timber
Value chain analysis includes the process
farming, logging, pulp mills, and papermaking in its value
whereby a company determines the costs
chain, a hotel would include food, housekeeping, check-in
associated with organizational activities.
and check-out operations, website, reservations system, and
so on.39
The SWOT Analysis
SWOT analysis. SWOT is an acronym for
Strengths, Weaknesses, Opportunities, and Threats
of the company. While strengths and weaknesses
are determined via internal analysis, opportunities
and threats are obtained from external analysis.
If a resource is not valuable, it is a weakness. If a
resource is valuable, rare, difficult to imitate and
to substitute, and required to be organized, it is a
strength. PESTEL ((Also see Chapter 3), market
structure, and competitive forces analyses capture
opportunities and threats.
First, teams of managers determine the
positive (advantages) and the negative sides
(disadvantages) of internal and external elements.
Then, they develop strategic alternatives for the
company using a four-step process:40
SWOT analysis captures strengths, weakness,
1) Focus on the strengths: Opportunities
opportunities, and threats for the company.
to infer “offensive” alternatives by using
an internal strength in order to exploit an
external opportunity. All managers would like their company to be in a position in which internal
strengths can be used to take advantage of external opportunities. Such a company may choose to
establish more facilities, employ more people, or start a new marketing promotion.
2) Focus on the weaknesses: Threats to infer “defensive” alternatives by eliminating or minimizing
an internal weakness in order to mitigate an external threat. A company confronted by
numerous external threats and internal weaknesses may indeed be in a precarious position.
In fact, such a company may have to fight for its survival, merge with other companies,
downsize, declare bankruptcy, or choose liquidation (termination of operations by using assets
to discharge liabilities).
3) Focus on the strengths–threats: To use an internal strength to minimize the effect of an external
threat. For example, if an auto repair company’ costs for in-store repair and service are up 8 % and gas
prices are up 7 %, the company can raise out-of-store service calls to compensate.
4) Focus on the weaknesses–opportunities: To shore up an internal weakness to improve its ability
to take advantage of an external opportunity. For example, if the population of a city is growing 15%
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The Fundamentals of Strategic Management
per year and the demand for bathroom fixtures is increasing, refurbishing a showroom is warranted by
anticipated demand.
Finally, managers need to evaluate carefully the
advantages and disadvantages of each strategic
alternative to select one or more alternatives to
2
implement. Managers need to explain their decision
Explain the steps of analysis processes.
rationale, including why other strategic alternatives
were rejected.
STRATEGIC MANAGEMENT PROCESS: FORMULATION AND
IMPLEMENTATION
After analyzing the external and the internal environments of the company, strategists engage in
formulating and implementing the strategies. Strategy formulation is relevant to the choice of strategy in
terms of where and how to compete. Strategy implementation is relevant to the organization, coordination,
and integration of how work gets done. In short, it concerns the execution of strategy.41
A good strategy is a mind game.
Strategy formulation is choosing the strategy
in terms of where and how to compete.
Strategy implementation is the execution of
strategy.
Formulation of strategies apply to different
levels: corporate, business, functional, and
operational.
Formulation of strategies apply to different levels: Corporate, business, functional, and operational.
(Figure 5.2). Corporate-level strategy is about determining the operational fields, in other words which
sectors to position in.
Figure 5.2 Strategy Levels
It is important to remark that three strategy
levels are hierarchical and the one above it restricts
each level of strategy: functional-level strategy
would be restricted by the company’s business-level
Corporate-level
strategy, which in turn is restricted by corporatestrategy
level strategy. Although it seems that corporate-level
strategy is the most important strategy since it drives
Business-level
the other levels, the strategy process is bidirectional:
strategy
lower levels of strategy can and do effect corporate
strategy.42
Functional-level
strategy
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Business Management
As we have mentioned above, business-level
strategy concerns the question of how to compete
and functional-level strategy relates to the question
of how to implement business-level strategy.
As companies grow, they expand their business
activities through dominating the industry in
which they operate and/or seeking new markets in
which they will offer new products and services.
When this happens, managers must formulate
corporate-level strategy.
Corporate-Level Strategy
Corporate-level strategy includes the
determination of the long-term goals and
objectives, the allocation of resources, and the
adoption of courses of action in seeking competitive
advantage when competing in more than one
industry and market simultaneously. It concerns
the broad question, where to compete and effects
the entire business. Thus, corporate-level strategy is
concerned with decisions about in what businesses
to operate.
Corporate-level strategy refers to the
determination of the long-term goals and
objectives, the allocation of the resources,
and the adoption of courses of action
in seeking competitive advantage when
competing in more than one industry and
market simultaneously.
Diversification and vertical
integration
Corporate strategy determines the boundaries of
the company along two dimensions: diversification
and vertical integration.
Corporate-level strategy of a firm is about
deciding where to compete.
Diversification. As a corporate-level strategy,
diversification is the degree of doing business
in different industries to offer new products
and services. Pınar had applied a diversificiation
strategy when it moved into frozen foods. Amazon’s
latest corporate-level strategy is the entry into the
retail business by purchasing Whole Foods. Richard
Rumelt developed the most popular diversification
typology, which is based on two dimensions:43
the percentage of revenue from the dominant
or primary business, and the relationship of the
resources, capabilities, and core competencies across
the businesses. Based on these two dimensions four
major types of diversification were introduced: (1)
single-business, (2) dominant-business, (3) related
diversification, and (4) unrelated diversification.
Diversification refers to the degree of doing
business in different industries to offer new
products and services.
A single-business company gets 95% or more
of its revenues from one strategic business unit.
A strategic business unit (SBU) is an
independent division of a larger corporation with
its own mission, vision, market features, customers,
and profit-and-loss responsibilities. For example,
Arçelik, Aygaz, Koç University, and Yapı Kredi are
strategic business units of Koç Holding that operate in
different sectors.
For instance, Alphabet obtains more than 95% of
its revenue from Google through online advertising.
A strategic business unit (SBU) is an
independent division of a larger corporation
with its own mission, vision, market
features, customers, and profit-and-loss
responsibilities.
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The Fundamentals of Strategic Management
A dominant-business company gets 70% to 94% of
its revenue from one business, which shares its resources,
capabilities, and core competencies with all the other
SBUs. e.g. Harley Davidson gets 70% to 94% of its revenue
from motorcycle sales, and shares its resources, capabilities,
and core competencies with motorcycle parts and accessories,
and merchandise businesses.
Dominant-business diversification happens
as a company gains 70% to 94% of the
revenue from one business, which shares its
resources, capabilities, and core competencies
with all the other SBUs.
A related diversified company gets less than 70%
of its revenue from one primary SBU, which shares its
resources, capabilities, and core competencies with some
of the other SBUs more and some of the others less, if not
at all. For example, Nike gets less than 70% of its revenue
from footwear, and shares its resources, capabilities, and core
competencies with apparel business more, with equipment
business less.
Related diversification forms when a
company gains less than 70% of its revenue
from one primary SBU, which shares its
resources, capabilities, and core competencies
with some of the other SBUs more and some
of the others less, if not at all.
Unrelated diversification refers to getting
less than 70% of its revenue from one primary
SBU, and shares few if any of its resources,
capabilities, and core competencies with the
other SBUs.
A company that uses unrelated diversification gets
less than 70% of its revenue from one primary SBU,
and shares few if any of its resources, capabilities, and
core competencies with the other SBUs. An example is
Sabancı Holding which gets less than 70 % of its revenue
from banking, and also does business in automotive, energy,
retailing, construction, and insurance.
The BCG matrix. The Boston Consulting Group (BCG) provides a matrix as an instrument for
helping corporations allocate their resources based on the growth rate of each strategic business unit’s
(SBU) market (10% per year being considered “high”), and relative market share of each SBU (the ratio
between the market share of the SBU and that of its leading competitors is considered as the equal
breaking point between “high” and “low”).
The matrix, shown in Figure 5.3 separates SBUs into four categories. Stars are SBUs that have a large
share of a fast-growing market. To take advantage of a star, the corporation must invest considerably in
it. Question marks are SBUs that have a small share of a fast-growing market. If the corporation invests
in these companies, they may finally become stars, but their relatively small share in the market makes
investing in question marks more risky than investing in stars. Cash cows are SBUs which have a large share
of a slow-growing market. SBUs in this situation are often
highly profitable, therefore the name “cash cow.” Finally,
dogs are SBUs which have a small share of a slow-growing
The BCG Matrix guides corporations in
market. As the name suggests, having a small share of a
the allocation of their resources based on
slow-growth market is often not profitable. Since dogs lose
the growth rate of each SBU’s market and
relative market share.
money, they should either be sold to other companies or
closed down and liquidated for their resources.44
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Business Management
Figure 5.3 The BCG Matrix
High
High
Relative Market Share
Market Growth
Stars
Cash
cows
Low
Ouestion
marks
Dogs
Low
Mergers and acquisitions,
outsourcing, and strategic alliances
Implementation of corporate-level strategy
is supported by three major tools: mergers and
acquisitions, outsourcing, and building strategic
alliances.
The terms mergers and acquisitions are often
used instead of each other, although they are
not equivalent. If two independent companies
come together and become just one company,
a merger occurs. Mergers tend to be friendly.
Usually, companies which engage in mergers have
similar sizes. However, one of the companies often
becomes more dominant in the control after the
merger. In 2015, a merger between Heinz, a food
processing company, and Kraft Foods created Kraft
Heinz Company, in which Kraft is more dominant
than Heinz.45
A merger is the integration of two
independent companies that become just
one company.
A company pursues an acquisition when it buys
the second company. The form of this purchase can
vary. When the management of the target company
wants the company to be acquired, a friendly
acquisition occurs. When the management of the
target company does not want the company to be
acquired, a hostile takeover occurs. It is usually the
case that the larger company—in terms of sales
or assets—acquire the smaller company.46 Some
acquirers may let the target company operate
independently. Facebook acquired Instagram in
2012, and the CEO of Instagram continued his role
after the acquisition.47
An acquisition refers to buying another
company.
Sometimes companies choose to be smaller to
achıeve competitive advantage. Outsourcing refers
to the contracting out of activities that otherwise
would be conducted within a company. There are
two types of outsourcing: outsourcing primary
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The Fundamentals of Strategic Management
activities and outsourcing support activities. Outsourcing
primary activities have to be organized for preserving a
high level of operational integration because its main
Outsourcing includes the contracting out of attractiveness has been the prospect of minimizing stock.
activities that otherwise would be conducted Outsourcing support activities, such as accounting, IT,
within a company.
and HR, does not require such finely adjusted integration
with primary activities.48
Finally, companies can choose to bring their resources
and capabilities together. An “alliance” is any medium to
long-term cooperative relationship between companies.
It excludes one-time or short-term contracts and other
Strategic alliance is the cooperation of
agreements and does not imply some joint working
companies for realizing their strategic
relationship between companies over time. We term
objectives.
alliances often “strategic” because they are normally
formed to help the partner companies realize their
strategic objectives on the basis that this can be done
better through cooperation than alone.
There are three broad types of strategic alliances:50 (1)
nonequity alliances, (2) equity alliances, and (3) joint
Nonequity alliances are based on contracts
ventures. The most common type of strategic alliance is a
between companies.
nonequity alliance, which is based on contracts between
firms. The most frequent forms of nonequity alliances are
supply agreements, distribution agreements, and licensing
(including franchising) agreements. In a nonequity alliance, companies tend to share explicit knowledge—
knowledge that can be codified, such as patents, user manuals, and routines. In 2016, Vestel contracted a
license agreement with Toshiba Corporation for the production, sales, marketing, and supply chain functions in
the European market for Toshiba branded TVs.51
The equity alliance refers to the partnership in which
one partner has minority shares of the other. Equity
The equity alliance is based on minority alliances are often first steps toward full integration of
the partner companies through either a merger or an
ownership.
acquisition. They are less common than non-equity
alliances because they often require larger investments,
but more common than joint ventures because it is easier to initiate and end equity alliances than joint
ventures. In an equity alliance, companies tend to share tacit knowledge—knowledge that cannot be
codified, such as how to do a certain task. It can be gained only through actual experience. Hence, the
partners frequently exchange employees to make the acquisition of tacit knowledge possible in an equity
alliance. Equity alliances have been common in the auto
industry since the 2000s because of the improvements
in both electric and driverless car technologies.
Internet
When two or more companies come together to
One of the most common non-equity alliances
create a new company and the companies continue to
is franchising. Sir Harold Evans describes
operate, a joint venture occurs. Joint ventures are the
the remarkable story of a beauty salon that
least common form of strategic alliances because they
allowed hundreds of women to own their
often require the largest investments, and it is difficult
own businesses. https://www.youtube.com/
to initiate and end them. The exchange of both
watch?v=Ie8qJuXYN7w
explicit and tacit knowledge through the interaction
of employees is typical (e.g. sharing technologies or
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Business Management
capabilities to develop an improved product). For
example, Koçtaş was established as a joint venture between
Koç Holding and Kingfisher, a British retailing company,
in 2000.
Joint ventures refer to the creation of a new
company by two or more companies which
continue to operate.
Vertical integration. While diversification is the
degree of doing business in different industries, vertical
Vertical integration refers to the degree of integration is the degree of the direct participation
the direct participation of a company to the of a company to the different stages of an industrial
different stages of industry value chain.
value chain. The value chain is inside the company;
the industry value chain, which includes competing
Industry value chain refers to competing companies from different industries in each stage, is
companies from different industries in each outside the company.
stage.
Although industrial value chains of products
vary, many of them include supplying raw materials,
manufacturing the components and/or intermediate goods, final assembly and/or manufacturing,
marketing, and after-sale services and/or support.
If a company directly participates in the stages towards
the inputs for a product, it is called backward vertical
Backward vertical integration is the
integration. If an automobile manufacturer also produces
participation
of the company in stages
steel this an example of backward vertical integration because
towards
inputs
for a product.
steel is a raw material for the cars. If a company directly
participates in stages towards the customer, it is called
Forward vertical integration is the
forward vertical integration. If the auto manufacturer
participation of the company in the stages
starts to engage in repair services for its cars, this is an example
towards the customers.
of forward vertical integration. There are various degrees
of vertical integration. Some companies participate in
only one or a few stages of the industry value chain, while
others participate in many if not all stages. For example,
in 1927, Ford Motor Company established the River Rouge
plant, which employed 75,000 people in Dearborn, Michigan.
Corporate-level strategy is about where to
Ford produced its own steel, glass, and fabrics, often from Fordcompete; business-level strategy is about how
owned sources of raw materials that were transported to the
to compete.
factory through Ford-owned trains and ships.52
Business-Level Strategy
Business-level strategy includes the determination
of the long-term goals and objectives, the allocation
of resources, and the adoption of courses of action in
seeking competitive advantage when competing in a
single product market. Briefly, business-level strategy is
about how to compete in sectors and markets determined
by corporate-level strategy. Business strategy occurs within
either strategic business units or a company that offers a
single product or similar products.
Business-level strategy refers to the
determination of the long-term goals and
objectives, the allocation of the resources, and
the adoption of courses of action in seeking
competitive advantage when confıned to a
single product market.
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The Fundamentals of Strategic Management
Company and industry effects determine
competitive
advantage
jointly.
Resources,
capabilities, core competencies, and value chain
play prominent roles in determining business-level
strategy. Moreover, managers need to be certain that
the business strategy is aligned with both the market
structure and industrial structure (See Porter’s Five
Forces explained in the external analysis section).
Since focusing on margin, which is the
difference between value and cost, is essential
for competitive advantage, there are two
fundamentally different business-level strategies:
cost leadership and differentiation. They are
called generic strategies since they can be used by
any company - manufacturing or service, large
or small, domestic or foreign - in the quest for
competitive advantage.53
industrial average in offering value to the customers.
If a cost leader’s value offer is below the average, the
company will be forced to reduce prices too much to
gain sales. This may invalidate the advantages of the
company’s favorable cost position.54
A cost-leadership strategy refers to offering
the same or similar value for customers by
delivering products or services at a lower cost
than competitors, enabling the company
to charge average or lower prices to the
customers.
Cost leadership requires being “the” cost
leader in the market.
Two fundamentally different businesslevel strategies are cost leadership and
differentiation.
Generic strategies can be used by any
company.
Cost-leadership strategy
A cost leadership strategy includes offering the
same or similar value for customers by delivering
products or services at a lower cost than competitors,
enabling the company to charge average or lower
prices to the customers. The sources of cost
advantages are varied, and they depend on both
market and industry structures. One major way to
have lower costs compared to a competitor’s is having
lower cost access to input factors such as capital,
land, and raw materials. There are two important
points about cost leadership. First, the strategic
logic of cost leadership usually requires that one
company be the cost leader, not one of the several
companies competing for this position. Unless one
company becomes the cost leader and influences
others to abandon their pursuit of cost leadership,
the consequences for profitability can be bleak.
Second, a cost leader must not be far away from the
128
Differentiation strategy
This type of strategy includes offering higher
value through delivering products with unique
characteristics while keeping costs at the same or
similar levels with the competitors and charging higher
prices for customers. The tools for differentiation
are particular to each industry. Again, there are
two important points about differentiation. First, a
company must really be unique at something or be
perceived as unique if it expects a premium price.
Second, a differentiator must not be far away from
industrial average on cost levels. If a differentiator’s
costs are above the average, this may invalidate the
advantages of the company’s premium price.55
A differentiation strategy refers to offering
higher value through delivering products
with unique characteristics while keeping
costs at the same or similar levels with the
competitors and charging higher prices to
the customers.
Differentiation strategy focuses on unique
features.
Business Management
Integration strategy
Functional-Level Strategy
We have mentioned above, companies can
focus on either creating higher value or reducing
costs. There is a trade-off between those two
strategic alternatives: When the focus is on creating
higher value, costs will likely start to increase.
When the focus is on reducing costs, value will
likely start to diminish. However, there are a few
companies that can hybridize cost leadership and
differentiation. The essence of an integration
strategy is offering customers more value for the
money by satisfying their desires and reducing
costs compared to competitors with similar caliber
product offerings.56
Functional-level strategy includes the
determination of the long-term goals and objectives,
the allocation of the resources, and the adoption
of the courses of action in seeking competitive
advantage at the functional or departmental
level. In other words, these are the departmental
action plans that aim to support the business-level
strategies. The implementation of business-level
strategies, therefore, is strengthened by functionallevel strategies formulated by the departments in
a company. For example, as a business-level strategy,
a company may be a differentiator. Accordingly, the
HR department may be highly selective in hiring
decisions. Below some functional-level strategies
are described in correlation with business-level
strategies such as differentiation,
An integration strategy refers to offering
customers more value for the money by
satisfying their desires and reducing costs
compared to competitors with similar caliber
product offerings.
Although it is very attractive, an integration
strategy can be difficult to translate into reality
because, as mentioned above, cost leadership and
differentiation are distinct strategic positions that
require serious trade-offs. They require distinct
resources, capabilities, core competencies, and
value chain activities. If things go bad for an
integrator, the company will be stuck in the middle,
since it has neither a clear cost-leadership nor a
clear differentiation profile. The company “stuck
in the middle” is nearly assured low profitability.
It loses the high-volume customers who demand
low prices. It also loses the customers who are
ready to pay more for a different and high-value
product. Being stuck in the middle leads to lowlevel performance and competitive disadvantage.57
Being “stuck in the middle” is an important
risk for an integrator which stems from
losing both the high-volume customers who
demand low prices and the customers who
are ready more for a different and high-value
product.
Functional-level strategy is the determination
of the long-term goals and objectives, the
allocation of the resources, and the adoption
of the courses of action in seeking competitive
advantage at the functional or department
level.
Marketing strategy
If a company adopts a differentiation strategy,
marketing strategy plays the most important
role. There are three major tools of marketing
for achieving higher value: product innovation,
focusing on customer service, and finding
complements.
Major tools of marketing for achieving
differentiation are: product innovation,
focusing on customer service, and finding
complements.
Offering novel products or new product
characteristics is a common tool for
differentiation. There are two types of product
innovation: incremental innovation and radical
innovation. Incremental innovation is based on
exploiting the existing knowledge base and small
improvements of existing products. The immense
129
The Fundamentals of Strategic Management
majority of innovations are incremental ones, such
as adding an additional blade with each new version
of a razor, putting a new and faster chip in a PC,
and redesigning an automobile model. Because they
are easier and less risky than radical innovations.
Radical innovation includes exploring novel
knowledge and development of new and different
products such as biotechnology for pharmaceutical
companies, jet engines for airplane manufacturers,
and fiber-optic cable for telecommunication
companies.58
Incremental innovation refers to exploiting
the existing knowledge base and small
improvements of existing products whereas
radical innovation refers to exploring novel
knowledge and development of new and
different products.
Another common tool for differentiation is
superior customer service such as free and/or fast
shipping, creating an excellent store atmosphere,
or hosting travelers at airport lounges. One recent
tool managers can use to get close to customers and
understand their needs is customer relationship
management (CRM). CRM is a technique that
uses IT to develop a continuous relationships with
customers to maximize the value a company can
deliver to them over time. CRM IT monitors,
controls, and links each of the functions such as
monitoring the delivery of products through the
distribution channel, monitoring salespeople’s
selling activities, setting product pricing, and
coordinating after-sales service. Contemporary
social CRM systems can track customers on
social media and strengthens the awareness of
companies.59
Customer relationship
management
(CRM) is a technique that uses IT to develop
a continuous relationship with customers to
maximize the value a company can deliver to
them over time.
130
Finally, providing complements helps
to persuade customers to pay higher prices.
Complements are the products which add value to
the products of companies in an industry because,
when used together, the combined products better
satisfies customer demands.60 Adding door-to-door
limousine service to the air flight service, bundling
high-speed Internet access, phone and TV services for
home usage, and offering cloud services to customers
who buy smartphones are examples of complements.
Complements refer to the products that
add value to the products of companies in
an industry because when used together the
combined products better satisfies customer
demands.
There are two important tools of marketing
for a cost leadership strategy: aggressive pricing,
promotion and advertising, and building brand
loyalty. Everyday low pricing as an aggressive
pricing practice, which refers to set prices lower
than competitors and usually do not include
special sales, focuses on bringing customers to the
store. Coupons and bonuses (buy one, get one free)
are examples of aggressive promotion. Comparison
advertising
(advertising
which
compares
competitive products) is an example of aggressive
advertising. For building brand loyalty, companies
engage in practices like lowering the carbon footprint
of their products and linking of a brand to famous
product users.
Two important tools of marketing for a cost
leadership strategy are aggressive pricing,
promotion and advertising, and building
brand loyalty.
Production strategy
Production strategy plays the leading role when
a company adopts a cost leadership strategy.
There are three major tools utilized by production
department for achieving lower costs: economies
of scale, experience effects, and process innovation.
Business Management
Three major tools of production for a cost
leadership strategy are economies of scale,
experience effects, and process innovation.
Economies of scale, which refers to decreases
in average costs per unit of production as output
increases, have important effects on lowering
costs.61 The main reasons for decreasing costs while
increasing production output are (1) spreading
fixed, advertising, selling, and distributing costs
over more units; (2) having specialized employees
and systems and equipment like 3-D printers
and manufacturing robots, which lead to higher
efficiency; and (3) providing discounts on bulk
purchases of raw material inputs and components.
Economies of scale includes decreases
in average costs per unit of production as
output increases.
Experience effects refer to the systematic
lowering of costs, which are observed to occur over
the life of a product. The main reason of experience
effects taking less and less time to produce the same
output is that companies learn how to be more
efficient. Experience effects are more significant
in the production of complex products such
as airplanes. It is important to note that while
economies of scale are captured at one point in
time when output increases, experience effects
occur over time as output accumulates.62
Experience effects include the systematic
lowering of costs that occur over the life of
a product.
Process innovation refers to a new method
or technology to produce an existing product.
One great example of process innovation is justin-time (JIT) systems, as you have already learned
through Introduction to Business course. Although
it is commonly believed that Japanese manufacturers
invented the JIT system, Oldsmobile Motor Works of
the USA invented it in 1905. Because the Oldsmobile’s
facility in Detroit burned down, the company
immediately rented a new but small facility which
had no room to store large stockpiles of inventory
because of financial problems. Thus, the company
developed “hand-to-mouth inventories” in which each
production station had only enough parts on hand to
do a short production run. Because all of its suppliers
of parts were close by, Oldsmobile could place orders in
the morning and receive them in the afternoon (even
without telephones), just as with today’s computerized
JIT systems.63 The major cost saving of the JIT
system comes from increasing inventory turnover,
which reduces inventory holding costs, such as
warehousing and storage costs, and the company’s
need for working capital. The system requires
an accurate production schedule and excellent
coordination with carefully selected suppliers, who
are usually connected electronically so they know
what will be needed and when.64
Economies of scope refers to decreasing the
cost of combined production of multiple
products more than the cost of separate
production because of sharing activities,
such as the same marketing channels or
manufacturing facilities.
Production strategy is critical also for
integration strategy. The major tools for an
integration strategy are economies of scope,
flexible manufacturing, and mass customization.
Economies of scope result when the value chains
of two separate products (e.g. motorcycles and
automobiles) share activities, such as the same
marketing channels or manufacturing facilities. The
cost of combined production of multiple products
can be lower than the cost of separate production.65
For example, Facebook achieves economies of scope in
software development resources and capabilities. The
programmers working on the original proprietary
software code for Instagram share these skills with
programmers working on Facebook and WhatsApp.
Process innovation includes a new method
or technology to produce an existing product.
131
The Fundamentals of Strategic Management
Flexible manufacturing means using
machines to do multiple tasks so they can produce
a variety of products. Operators simply load new
programs in the machines, as necessary, to produce
different products. The result is a system that
can economically produce low volume but high
variety. The flexible manufacturing system includes
(1) computer-aided manufacturing (CAM)
which converts raw materials into components
or products, (2) automated storage and retrieval
systems (ASRSs) and automated guided vehicles
(AGVs) which move incoming materials and
parts, work-in-process, and complete product,
and (3) robots, which weld, insert, and assemble
components.66 Some of the pioneer industries in
adopting flexible manufacturing systems are general
machinery, aviation, and automotive industries.
must hire a large number of low-skilled employees
who receive low pay and perform repetitive
jobs.69 This strategy requires job descriptions to
involve the specification of economical working
methods aimed at waste reduction. In performance
appraisal of the employees, electronic surveillance
and output control are widely used. Electronic
surveillance records in detail items such as the
time taken to complete a transaction and the
added value achieved. Output control specifies
appropriate targets, which are then monitored at
regular intervals.70 Conversely, a company must
hire high-skilled and creative employees who
receive higher than the average pay, are developed
and motivated regularly, perform customized jobs,
and likely work for a long period, according to a
differentiation focused HR strategy.
Flexible manufacturing includes to using
machines to do multiple tasks so they can
produce a variety of products.
Mass customization is tailoring products
to meet the needs of a large number of
individual customers.
To customize means to make a unique product
or provide a specific service to specific individuals.
Although it once may have seemed impossible, mass
customization, which means tailoring products
to meet the needs of a large number of individual
customers, is now practiced widely.67 Producing
custom products rapidly and inexpensively
requires (1) a limited product line and modules
(groups of parts or components of a product which
are easily interchanged or replaced), (2) a flexible
product design (the ability to match changes in a
marketplace where design innovations and volumes
fluctuate considerably), (3) tight inventory control,
(4) tight schedules, and (5) responsive partners in
the supply chain.68 Dell Computer was one of the
pioneer companies that effectively developed modules
from many part and component inputs like chips,
hard drives, software, and cases and manufactured
custom PCs and notebooks in the 1990s.
If a company adopts an integration-focused
HR strategy, the use of self-managing teams,
whose members coordinate their own activities
and make their own hiring, training, work, and
reward decisions, is an appropriate tool. The
typical team includes 5 to 15 employees who
produce an entire product or undertake an entire
task. Team members learn all team tasks and
rotate from job to job. The greater autonomy
and responsibility thrust on team members
and the empowerment it implies are seen as
motivators. Performance bonuses are linked to
team production. According to the research,
introducing self-managing teams increase
productivity and product quality. Further cost
savings arise from eliminating supervisors and
creating a flatter organizational hierarchy, which
also lowers the cost structure of the company.71
Human resources strategy
Human resources (HR) strategy differs
between cost leadership and differentiation
strategies at the business level. According to a
cost leadership focused HR strategy, a company
132
Self-managing teams are composed of
members who coordinate their own activities
and who make their own hiring, training,
work, and reward decisions.
Business Management
GLOBAL STRATEGY
We have examined the business, functional, and corporate level strategies in detail. Now, we turn our eyes
to the globe. The main reasons for companies to go abroad are extending a product’s life-cycle, gaining easier
access to raw materials, having opportunities to integrate operations on a global scale, and opportunities to
better use rapidly developing technologies, and gaining
access to customers in new markets.72 Global strategy
refers to the determination of the long-term goals and
Global strategy includes the determination
objectives, the allocation of the resources, and the
of the long-term goals and objectives, the
adoption of courses of action in seeking competitive
allocation of the resources, and the adoption
advantage when competing around the world.73
of courses of action in seeking competitive
Companies primarily confront two sets of pressures
advantage when competing around the world.
in the global context: cost reduction and local
responsiveness. The framework that considers these
two sets of pressure is called the global integrationlocal responsiveness framework which indicates:
Global integration - local responsiveness refers
cost pressure often require global integration and
to a model on how to simultaneously deal with
local responsiveness press companies to adapt locally.
two sets of pressures for global integration and
In both domestic and international competition,
local responsiveness.
pressures for cost reductions are almost universal.
What is unique in international competition is the
pressure for local responsiveness, which is reflected in different consumer preferences and host country
demands. Consumer preferences vary extremely around the world.74
Figure 5.4 The Global Integration-Local Responsiveness Framework
Pressure for cost reduction
High
Low
Low
Global
standardization
strategy
Transnational
strategy
Home
replication
strategy
Localization
strategy
Pressure for local responsiveness
High
Source: Peng, M.W. (2009), Global Strategy (2nd ed.). South-Western Cengage Learning. p. 295.
Based on the integration-responsiveness framework, Figure 5.4 displays the four strategic choices for
companies: home replication, localization, global standardization, and (4) transnational strategy.75
A home replication strategy includes selling the same
A home replication strategy is based on products in both domestic and foreign markets. It enables
selling the same products in both domestic companies to leverage their home-based core competencies in
and foreign markets through exploiting foreign markets. A home replication strategy is either the first
step companies take when beginning to conduct business
home-based core competencies.
abroad, or adopted by companies which own luxury brands.
133
The Fundamentals of Strategic Management
A localization strategy requires maximizing
local responsiveness hoping that local consumers
will perceive the products as local ones. A
localization strategy results from the combination
of high pressure for local responsiveness and low
pressure for cost reductions. Companies frequently
use a localization strategy when entering host countries
with large and/or idiosyncratic domestic markets, such
as China or India. Moreover, a localization strategy
is common in the consumer markets such as processedfood and beverages.
A transnational strategy combines the benefits
of a localization strategy (high local responsiveness)
with those of a global-standardization strategy
(lowest-cost position attainable). This strategy
is generally used by companies that adopt an
integration strategy at the business level by
attempting to reconcile product differentiations at
low cost. Moreover, global learning and diffusion
of innovations (from home country to host
countries and vice versa) are important elements of
a transnational strategy.
A localization strategy, which is common in
the consumer markets and usually adopted
when entering the large and/or idiosyncratic
foreign markets, necessitates maximizing
local responsiveness and hoping that local
consumers will perceive the products as local
ones.
A transnational strategy, which requires
realizing global learning and diffusion of
innovations, integrates the benefits of a
localization strategy (high local responsiveness)
with those of a global-standardization strategy
(lowest-cost position attainable).
A
global-standardization strategy
is
composed of achieving significant economies of
scale and low cost inputs by pursuing a global
division of labor based on wherever best-of-class
capabilities reside at the lowest cost. This strategy
results from the combination of high pressure
for cost reductions and low pressure for local
responsiveness. Companies adopting this strategy are
often organized as networks, such as companies in the
PC, smartphones, and automobile industries. This
lets them strive for the lowest-cost position possible.
Besides, industrial products, such as screws, nuts, and
bolt, are ideal for a global-standardized strategy, since
they are highly isolated from the local differences.
A global-standardization strategy, which
is common in the industrial markets and
network organizations, includes achieving
significant economies of scale and low cost
inputs by pursuing a global division of labor
based on wherever best-of-class capabilities
reside at the lowest cost.
134
3
Compare the global strategies that an
electronics and a beverages company
implement.
Strategic management covers a broad spectrum
and emphasizes an analytical approach for today’s
managers. In this chapter, we briefly explained the
fundamentals of strategic management to serve as
a basis for an advanced level engagement with the
subject. Once again, remember strategic thinking
is critical to gaining competitive advantage in a
dynamic and integrated business environment
whether local, national, or global.
Business Management
Further Reading
Strategy is Mostly About Creating and
Capturing Value
If you’ve ever watched a major poker tournament,
you’ve probably noticed some of the players wearing
sunglasses. Or you may have heard that professional
poker players are masters at reading their opponents’
verbal ticks or counting cards. While there’s no guarantee
these tactics will work in any given hand, players use these
“strategies” as a way to gain a competitive advantage and,
hopefully, claim a larger share of the pot than their rivals.
Of course, winning the game of business requires
strategy, too. And that term is one that gets thrown
around a lot at every level of an organization, from
the boardroom to the shop floor. The problem is,
that much confusion exists around the concept of
strategy and the discipline of strategic management.
Without a clear understanding of what strategy is—
and what it isn’t—businesses can miss out on critical
opportunities to succeed.
Dictionary.com tells us that strategy is “a plan,
method, or series of maneuvers or stratagems for
obtaining a specific goal or result.”
Fair enough.
The objective of strategy is to bring about
conditions that favor one’s own side. In the business
world, this involves an attempt to alter the strength of
one company relative to that of a close competitor on
some dimension of relevance. In common discussions,
strategy invokes a forward looking perspective. It is
a tool to help managers think about the prospective
effect of various decisions relative to competitors.
These observations tell us something about strategic
management. Beyond the importance of the customer,
the benefits of managing one’s cost structure, or the
significance of one’s employees, strategy forces managers
to strive for a higher goal. To bring about conditions that
favor one firm’s side in competitive interactions.
When these attempts at improving one’s
competitive position are managed successfully, strategy
helps firms develop competitive advantage—value
that exceeds that created by rivals. That is, strategic
management examines how companies gain advantage
relative to close competitors. It suggests ways to build
a larger wedge between an organization’s opportunity
costs (or the costs associated with choosing one
direction over another) and what the consumer
is ultimately willing to pay for the organization’s
products or services than rivals so that the company
may earn more than its cost of capital.
Source: Leiblein, M. (July 10, 2017). What’s Strategic
About Strategy? Retrieved from https://www.linkedin.
com/pulse/whats-strategic-strategy-july-10-2017michael-michael-leiblein/
Inside Practice
Read the following online news account below about Amazon’s decision to gamble on physical stores and
the business of food. This article discusses the strategic thinking that went into Amazon’s decision to enter the
retail supermarket sector through its decision to purchase Whole Foods, a national chain of many hundreds of
stores selling organic and natural foods. In effect, Amazon would have access to millions of customers to pick up
groceries ordered online. This decision challenged Walmart’s entry (with its access to millions of consumers) into
this hybrid of online food shopping connected to physical stores. Amazon’s decision had an immediate impact on
stock-market valuations of traditional supermarkets and major national retailers featuring groceries as significant
part of consumer sales. Be sure to read online accounts about Walmart’s strategies.
Source: La Monica, P. R. & Isidore, C. Amazon is Buying Whole Foods for $13.7 Billion. Retrieved from http://
money.cnn.com/2017/06/16/investing/amazon-buying-whole-foods/index.html
Discuss:
1. Do you believe that Amazon’s ability to compete with Walmart and similar national retailers will be seriously
challenged? In other words, did Amazon carefully consider the potential impact of competing with Walmart
and other major retailers that feature discounted groceries? Why or why not?
2. What would your initial approach be if you were assigned for a company that operates in different sectoral
circumstances than the one you were previously a part of?
135
The Fundamentals of Strategic Management
Summary
LO 1
Identifying the fundamentals of
strategic management
The main target of strategic management is achieving sustainable competitive advantage, which refers
to either being ahead of competitors or achieving higher performance than the industrial average for a
long time. Strategy includes the determination of the basic long-term goals of an organization, and the
adoption of courses of action and the allocation of resources necessary for carrying out these goals. Strategic
management is composed of analysis of the firm’s external and internal environments, formulation of
corporate, business, and functional strategies, and implementation of strategies in the quest for competitive
advantage. Strategists need to care about the actors who can affect or can be affected by the achievement
of the company’s objective. Those actors are stakeholders. Internal stakeholders are stockholders, board
of directors, executive officers, other managers, and employees. External stakeholders are all other
individuals and groups that have some claim on the company. The stakeholder approach asserts that
treating stakeholders well and managing their interests helps a company to achieve higher performance.
At the analysis stage, managers first develop vision, mission, and value statements for their companies.
Vision states where the company wants to be in the future. Mission is a statement about the reason for the
existence of the company. Mission describes what a company actually does. Values state what is desirable,
proper, and appropriate in the organizational context.
LO 2
Analyzing different market
structures and five competitive
forces in different industries
After developing vision, mission, and value statements, strategists conduct an external analysis that includes
the analyses of market structure and industry structure. For understanding markets and explaining their
behaviors, economists have developed four principal models of market structure. Monopolies have just
one producer which sells an undifferentiated product with a considerable pricing power in a consolidated
market. Oligopolies have a couple of producers which sell a differentiated or an undifferentiated product
with some pricing power in a consolidated market. Monopolistic competition markets have many
producers. Each sells a differentiated product with some pricing power in a consolidated or fragmented
market. Perfect competition markets have many producers which sell an undifferentiated product with a
little or no pricing power in a fragmented market.
The Five Forces Model refers to a framework that was developed for identifying opportunities and threats
facing a specific company in the industrial context. Rivalry among existing competitors is usually the most
powerful of the five competitive forces. Four factors have a major impact on the intensity of rivalry among
established companies within an industry: market structure, demand conditions, cost conditions, and the
height of exit barriers in the industry. Threats of new entrants depend on several factors such as economies
of scale, network effects, customer switching costs, and government policy. The bargaining power of buyers
and bargaining power of suppliers are dependent on many factors such as number of buyers and suppliers;
the potential threat of becoming a rival; the presence of good substitutes; and dependency. Finally, the
threat of substitute products plays important roles in determining the attractiveness of an industry.
LO 3
Differentiating among a
company’s core competencies,
resources, and capabilities
All assets which the company can use when formulating and implementing strategies are resources.
A company’s resources which enable the company to fully capitalize the other resources it controls
are capabilities. Resources and capabilities increase, perfect, and upgrade each other. In addition, the
interaction of resources and capabilities leads to core competencies. Core competencies are unique
strengths that are deeply embedded within a company.
136
Business Management
LO 4
Applying the value chain and
SWOT analyses
LO 5
Comparing corporate, business,
and functional-level strategies
Summary
Since the underlying intent of a company’s activities is to do things which will create the highest value
(highest margin) for customers, all of the diverse but integrated activities, which a company performs
internally, is called the value chain. Supply chain management, production, sales and distribution, and
after-sale services are primary activities of many companies. Support activities of many companies are human
resource management, accounting, finance, and research and development (R&D). Value chain analysis
(VCA) refers to the process whereby a company determines the costs associated with organizational activities.
SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats of the company. While
strengths and weaknesses are determined via internal analysis, opportunities and threats are generated by
external analysis.
The three strategy levels are hierarchical and the one above it restricts each level of strategy: functionallevel strategy would be restricted by the company’s business-level strategy, which in turn is restricted by
corporate-level strategy. Although it seems that corporate-level strategy is the most important strategy
since it drives the other levels, the strategy process is bidirectional: lower levels of strategy can and do effect
corporate strategy.
Corporate-level strategy refers to the determination of the long-term goals and objectives, the allocation
of the resources, and the adoption of the courses of action in seeking competitive advantage when
competing in more than one industry and market simultaneously. Corporate strategy determines the
boundaries of the company along two dimensions: vertical integration and diversification.
Business-level strategy is about how to compete. It includes the determination of the long-term goals and
objectives, the allocation of the resources, and the adoption of the courses of action in seeking competitive
advantage when competing in a single product market.
Functional-level strategies support the implementation of business-level strategies. These are the action
plans. Functional-level strategies are established by departments such as marketing, production, and
human resources.
Global strategy refers to the determination of the long-term goals and objectives, the allocation of the
resources, and the adoption of courses of action in seeking competitive advantage when competing around
the world.
LO 6
Understanding the role of global
strategy in international markets
Global strategy refers to the determination of the long-term goals and objectives, the allocation of the
resources, and the adoption of courses of action in seeking competitive advantage when competing around
the world. Companies primarily confront two sets of pressures in the global context: cost reduction
and local responsiveness pressures. The framework that considers these two sets of pressures is called the
integration-responsiveness framework, because cost pressures often require global integration and local
responsiveness press companies to adapt locally.
Based on the integration-responsiveness framework, there are four strategic choices for companies: (1)
home replication, (2) localization, (3) global standardization, and (4) transnational. A home replication
strategy is based on selling the same products in both domestic and foreign markets through exploiting
home-based core competencies. A localization strategy, which is common in the consumer markets and
usually adopted when entering the large and/or idiosyncratic foreign markets, necessitates maximizing
local responsiveness and hoping that local consumers will perceive the products as local ones. A globalstandardization strategy, which is common in the industrial markets and network organizations, includes
achieving significant economies of scale and low cost inputs by pursuing a global division of labor based
on wherever best-of-class capabilities reside at the lowest cost. A transnational strategy, which requires
realizing global learning and diffusion of innovations, integrates the benefits of a localization strategy
(high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable).
137
The Fundamentals of Strategic Management
Test yourself
1
Which statement is true for strategy?
a. Strategy is focused on planning.
b. Strategy is focused on sustainable competitive
advantage.
c. Strategy is focused on organizing.
d. Strategy is focused on coordinating.
e. Strategy is focused on controlling.
2
Which one is a customer-oriented vision?
a. To be a leading and an admired company in
our sector.
b. To be an international company.
c. To ease and enrich the lives of our customers.
d. To be the most valuable and preferred company
in our country.
e. To be a world-class company.
3 Which one is the market structure of the
Turkish garment industry?
a. Perfect competition
b. Monopolistic competition
c. Oligopoly
d. Monopoly
e. Duopoly
4 When customer switching costs and capital
requirements of establishing business are low,
which competitive force is probably high?
a. Bargaining power of buyers
b. Bargaining power of suppliers
c. Threat of new entrants
d. Rivalry among existing competitors
e. Threat of substitute products
5
Which one is an intangible resource?
a. Capital
b. Land
c. Buildings
d. Copyrights
e. Machines
138
6 Which analysis does include the process
whereby a company determines the costs
associated with organizational activities?
a. SWOT analysis
b. PESTEL analysis
c. Value chain analysis
d. PIMS analysis
e. Market analysis
7 What do we call the determination of the
long-term goals and objectives, the allocation of
the resources, and the adoption of the courses of
action in seeking competitive advantage when
competing in manufacturing only sports bags?
a. Corporate-level strategy
b. Global strategy
c. Functional-level strategy
d. Local strategy
e. Business-level strategy
8
Which one is directly about functional-level
strategy?
a. Mass customization
b. Industry value chain
c. Products
d. Geographic scope
e. Diversification
9 What do we call the strategic initiative if a
retailer acquires a manufacturing company?
a. Forward vertical integration
b. Backward vertical integration
c. Internal vertical integration
d. External vertical integration
e. Industrial vertical integration
10 Which global strategy is common in the
sports car industry?
a. Localization
b. Transnational
c. Conqueror
d. Global-standardization
e. Home replication
Business Management
If your answer is incorrect, review “Strategy
and strategic management”.
6. c
If your answer is incorrect, review “Internal
analysis”.
2. c
If your answer is incorrect, review “Developing statements of vision, mission, and value”.
7. e
If your answer is incorrect, review “Businesslevel strategy”.
3. b
If your answer is incorrect, review “External
analysis”.
8. a
If your answer is incorrect,
“Functional-level strategy”.
review
4. c
If your answer is incorrect, review “External
analysis”.
9. b
If your answer is incorrect,
“Corporate-level strategy”.
review
5. d
If your answer is incorrect, review “Internal
analysis”.
10. e
If your answer is incorrect, review “Global
strategy”.
your turn 1
The main target of strategic management is achieving sustainable competitive
advantage, which refers to either being ahead of competitors or achieving
higher performance than the industrial average for an extended period of
time. Strategy includes the determination of the basic long-term goals of
an organization, and the adoption of courses of action and the allocation
of resources necessary for carrying out these goals. Strategic management
is composed of the analysis of a firm’s external and internal environments,
formulation of corporate, business, and functional strategies, and
implementation of strategies in the quest for competitive advantage.
Explain the steps of analysis process.
your turn 2
At the analysis stage, managers first develop vision, mission, and values
statements of companies. After developing vision, mission, and value
statements, strategists conduct an external analysis that includes market
structure and industry structure.
Since the underlying intent of a company’s activities is to do things which will
create the highest value (highest margin) for customers, all of the diverse but
integrated activities, which a company performs internally, is called a value
chain. Value chain analysis (VCA) refers to the process whereby a company
determines the costs associated with organizational activities.
SWOT is an acronym for Strengths, Weaknesses, Opportunities, and Threats
of the company. While strengths and weaknesses are determined via internal
analysis, opportunities and threats are from external analysis.
Suggested answers for “Your turn”
Define the terms of sustainable competitive
advantage, strategy, and strategic management.
Answer for “Test yourself”
1. b
139
The Fundamentals of Strategic Management
Suggested answers for “Your turn”
Compare the global strategies that an
electronics and a food company implement.
your turn 3
In order to decide the most suitable global strategy, companies analyze a mix
of factors such as their resources, environmental conditions of the sectors
that they operate, and governmental and legal factors. In addition, product
features is one of the leading factors for comparing the global strategies of
these two companies that occupy separate sectors.
Electronic products are mostly sophisticated and technology based. They are
manufactured using well-designed hardware and software. Furthermore, electronic
products such as smartphones are demanded for the features they offer to buyers.
Thus, these products can sell anywhere in the world with the same features, under
the same marketing methods, and the same price. In other words, an electronics
company can spread around the world by applying a global integration strategy.
For example, one of Apple’s global strategies is to manufacture its I-Phone in
China where labor costs are lower than in the United States.
Food products on the other hand, reflect individual tastes that are often rooted
in one’s culture. Compared to electronics food is personal. The consumption of
these products are much related to income level, culture, life style, religion, and
geography. Therefore, a food company must consider and comply with these
factors for operating in different countries around different regions. For example,
ingredients of meat products change between religions or distribution of fruits
differ from one climate to another. The necessity for different approaches for
selling food products require formulating a nationally or locally responsive
global strategy despite cultural constraints, etc. we have seen the spread of
many thousands of fast food restaurants throughout China as just one example
of traditional food preferences accommodating the Western palette and the
strict adherence to ingredients, preparation , and presentation, including the
physical settings and the iconography of pictures and statues, e.g. McDonalds
and Ronald McDonald, Kentucky Fried Chicken (KFC) and Colonel Sanders.
endnotes
1
Linstead, S., Fulop, L., & Lilley, S. (2009).
Management & Organization: A Critical Text (2nd
ed.). Palgrave Macmillan, p. 762.
Porter, M. E. (2008). The five competitive forces that
shape strategy. Harvard Business Review, January,
pp. 78–93; Porter, M. E. (1996). What is strategy?
Harvard Business Review, November–December, pp.
61–78; Porter, M.E. (1980). Competitive Strategy:
Techniques for Analyzing Competitors. The Free Press.
2
Hamann, P. M., Schiemann, F., Bellora, L., & Guenther, T.
W. (2013). Exploring the dimensions of organizational
performance: A construct validity study. Organizational
Research Methods, 16(1), pp. 67-87.
Rothaermel, F. T. (2016). Strategic Management. (3rd
ed.). McGraw-Hill Education, p. 23.
8
Freeman, R. E. & Gilbert, D. R. (1988). Corporate
Strategy and the Search for Ethics. Prentice Hall, p. 6.
9
Harrison, J. S., & Wicks, A. C. (2013). Stakeholder
theory, value, and firm performance. Business Ethics
Quarterly, 23(1), pp. 97-124.
10
Wagner M., E., Alves, H., & Raposo, M. (2011).
Stakeholder theory: Issues to resolve. Management
Decision, 49(2), pp. 226-252.
11
3
Fryxell, G. E. & Barton, S. L. (1990). Temporal and
contextual change in the measurement structure of
financial performance: Implications for strategy research.
Journal of Management, 16(3), pp. 553-569.
4
5
h t t p : / / w w w. e t y m o n l i n e . c o m / i n d e x .
php?term=strategy&allowed_in_frame=0
Freeman, R. E., Harrison, J. S., Wicks, A. C, Parmar, B.,
& de Colle, S. (2010). Stakeholder Theory: The State of
the Art. Cambridge University Press, p. 104.
12
Parmar, B.L., R.E. Freeman, J.S. Harrison, A.C. Wicks,
L. Purnell, & S. De Colle (2010). Stakeholder
theory: The state of the art. Academy of Management
Annals, 4, pp. 403–445.
13
Gamble, J. E., Peteraf, M. A., & Thompson, Jr. A. A.
(2015). Essentials of Strategic Management: The Quest
For Competitive Advantage (4th ed.). McGraw-Hill
Education, p. 18.
14
Chandler, A. D. (1962/1990). Strategy and Structure: Chapters
in the History of the Industrial Enterprise. MIT Press, p.13.
6
Barney, J. B. & Hesterley, W. S. (2015). Strategic
Management and Competitive Advantage: Concepts
and Cases. (5th ed.). Pearson Education, p. 26.
7
140
Rothaermel, op. cit., p. 36.
15
Ibid.
16
Business Management
Hill, C. W. L., Jones, G. R., & Schilling, M. A. (2015).
Strategic Management: An Integrated Approach (11th
ed.). Cengage Learning, p. 15.
17
Child, J. (2015). Organization: Contemporary Principles
and Practice. John Wiley & Sons. pp. 218-221.
48
Ibid, p. 269.
49
Gamble et al., op. cit., p. 21.
50
Hill et al., op. cit., p. 46.
51
18
19
This section is based on Rothaermel, op. cit., p. 304.
Hürriyet Daily News (September 2, 2016). Turkey’s
Vestel, Japan’s Toshiba Sign Deal With Growth Plans
for Consumer TV Business in Europe. Retrieved from
http://www.hurriyetdailynews.com/turkeys-vesteljapans-toshiba-sign-deal-with-growth-plans-forconsumer-tv-business-in-europe.aspx?pageID=549
&nID=103501&NewsCatID=345
Krugman, P. & Wells, R. (2015). Economics. (4th ed.).
Worth Publishers, p. 386.
20
Wheelen, T. L., Hunger, J. D., Hoffman, A. N., &
Bamford, C. E. (2015). Strategic Management
and Business Policy: Globalization, Innovation, and
Sustainability (14th ed.). Pearson Education, p. 142.
21
Barney & Hesterly, op. cit., p. 55.
22
Davis, G. F. (2016). The Vanishing American Corporation:
Navigating the Hazards of A New Economy. BerrettKoehler Publishers, p. 24.
52
Porter (1980), op.cit., p. 4.
23
Porter (1980), op. cit., p. 35.
Rothaermel, op. cit., p. 73
53
David, F. R. & David, F. R. (2017). Strategic Management:
Concepts and Cases. A Competitive Advantage Approach
(15th ed.). Pearson Education, p. 230.
54
24
25
Hill et al., op. cit., p. 54.
26
Porter (1985), op. cit., p. 13.
Ibid, p. 14.
55
Chan K. W. & Mauborgne, R. (1997). Value
innovation: The strategic logic of high growth.
Harvard Business Review, 75(1), pp. 103-112.
56
Rothaermel, op. cit., p. 77.
27
Porter (1980), op. cit., p. 41.
Barney & Hesterly, op. cit., p. 65.
57
Wheelen et al., op. cit., p. 141.
58
28
29
Barney & Hesterly, op. cit., p. 64.
Pisano, G. P. (2015). You need an innovation strategy.
Harvard Business Review, 93(6), pp. 44-54.
30
Rothaermel, op. cit., p. 79.
31
Jones, G. R. & George, J. M. (2016). Contemporary
Management. (9th ed.). McGraw-Hill Education, p. 255.
59
Gamble et al., op. cit., p. 46.
60
Hill et al., op. cit., p. 82.
61
Rothaermel, op. cit., p. 111.
62
Barney & Hesterly, op. cit., p. 86.
63
32
33
34
35
Rothaermel, op. cit., p. 89.
Porter (1980), op. cit., p. 7.
Hill et al., op. cit. p. 122.
Williams, C. (2015). Principles of Management. (7th
ed.). South-Western Cengage Learning. p. 39.
Rothaermel, op. cit., p. 108.
36
Porter, M. E. (1985). Competitive Advantage: Creating and
Sustaining Superior Performance. The Free Press, p. 38.
37
Porter (1998), op. cit., p. 36.
38
Hill et al., op. cit., p. 128.
64
Wheelen et al., op. cit., p. 170.
65
Heizer, J., Render, B., & Munson, C. (2017). Operations
Management: Sustainability and Supply Chain
Management (12th ed.). Pearson Education. p. 297.
66
David & David, op. cit., p. 201.
39
Rothaermel, op. cit., p. 131.
40
Nickels, W. G., McHugh, J. M., & McHugh, S.
M. (2016). Understanding Business (11th ed.).
McGraw-Hill Education. p. 250.
67
Ibid, p. 44.
41
Linstead et al., op. cit., p. 732
42
This section is based on Rumelt, R.P. (1974). Strategy,
Structure, and Economic Performance. Harvard
Business School Press.
43
Reeves, M., Moose, S., & Venema, T. (June 4, 2014). BCG
Classics Revisited: The Growth Share Matrix, Retrieved
from
https://www.bcg.com/publications/2014/
growth-share-matrix-bcg-classics-revisited.aspx
44
Giammona, C. & Boyle, M. (March 25, 2015). Kraft
Will Merge With Heinz in Deal Backed by 3G and
Buffett, Retrieved from https://www.bloomberg.com/
news/articles/2015-03-25/3g-capital-berkshire-tobuy-kraft-foods-merge-it-with-heinz
45
Barney & Hesterly, op. cit., p. 298.
46
Heizer et al., op. cit., p. 285.
68
Wheelen et al.. op. cit., p. 259.
69
Child, op. cit. p. 165.
70
Hill et al., op. cit., p. 130.
71
Hitt, M. A., Ireland, R.D. & Hoskisson, R. E. (2017)
Strategic Management: Competitiveness & Globalization
(12th ed.). South-Western Cengage Learning, P. 240.
72
Peng, M.W. (2009), Global Strategy (2nd ed.). SouthWestern Cengage Learning. p. 18.
73
Ibid, p. 293.
74
Rothaermel, op. cit., pp. 344-348.
75
Marston, R. (April 10, 2012). Instagram’s founders
Kevin Systrom and Mike Krieger. Retrieved from
http://www.bbc.com/news/business-17661976
47
141
Chapter 6
Organizational Design,
Teamwork, and
Organizational Change
Learning Outcomes
After completing this chapter, you will be able to:
1
3
5
Define the basics of organizing function.
Identify various organization structures.
Define work teams and their characteristics.
Chapter Outline
Organizing: Terms and Definitions
Key Elements in Organizational Design
Organizational Structure
Contingency Factors and Organizational Structure
Teamwork
Organizational Change
142
2
4
6
Describe the key elements of organizational
design.
Explain the contingency factors and their
effects on structural choices.
Describe the basics of organizational change
and managing change.
Key Terms
Organizing
Organizational design
Structure
Teamwork
Organizational change
Division of labor
Departmentalization
Centralization/Decentralization
Business Management
Organizing is one of the main management functions that typically follows the planning function. The
organizing function is concerned with arranging and assigning tasks, allocating resources, and structuring work in
order to reach organizational objectives. In other words, the organizing function creates the organization’s structure.
A business of any size needs to have a solid and effective organization structure that matches the nature of its work
so that the work gets done efficiently and effectively. A global comprehensive research study concluded that business
firms which design their organizations and assign roles and responsibilities have large impacts on their effectiveness.1
We will discuss these design issues in this chapter.
The topic of organizational structure has seen various developments over the past decade. We start this chapter
with the basics of organizing function. Then we look at several key elements or building blocks of organizational
design and various structures. We discuss the issues of teamwork and the use of teams in organizations. Lastly,
we look at organizational change as a constant factor for most
organizations that must be managed for successful outcomes.
The organizing function is concerned
with arranging and assigning tasks,
allocating resources, and structuring work
in order to reach organizational objectives.
ORGANIZING: TERMS AND DEFINITIONS
Managers arrange and structure work during an organizing
process that results in an organization structure. The purpose
of organizing can be summarized as: dividing work into
specific jobs; assigning tasks and responsibilities for each job; coordinating those tasks, grouping jobs into units
and departments; establishing relationships and formal authority among individuals; and allocating resources.
In the following sections, we will discuss and expand on these various issues so that readers will have a solid
understanding of the organizing function and its importance to the management system.2
Importance of Organizing
The organizing function is a mechanism that managers use in order to activate plans. The importance
of organizing can be readily seen when managers allocate organizational resources efficiently and
effectively by specifying when, where, and how resources are to be used.3 Effective organizing gets rid of
the duplication of effort and/or maximizing the utilization of resources. For example, resources can be
moved from an unprofitable business unit to a more profitable one. Henri Fayol offered 16 guidelines
for organizing resources as shown in Table 6.1. You have learned Fayol’s Principles of Management in
Chapter 2. The guidelines in Table 6.1 complete and support Fayol’s perspective for establishing an
effective managerial environment.
Table 6.1 Henri Fayol 16 General Guidelines for Organizing Resources
1. Judiciously prepare and execute the operating plan.
2. Organize the human and material facets so that they are consistent with objectives, resources and requirements of the concern.
3. Establish a single component, energetic guiding authority i.e. a Formal Management Structure.
4. Co-ordinate all activities and efforts.
5. Formulate clear, distinct and precise decisions.
6. Arrange for efficient selection so that each department is headed by a competent, energetic manager and all employees are
placed where they can render the greatest service.
7. Define duties.
8. Encourage initiative and responsibility.
9. Offer fair and suitable rewards for services rendered.
10. Make use of sanctions against faults and errors.
11. Maintain discipline.
12. Ensure that individual interests are consistent with the general interests of the organization.
13. Recognize the Unity of Command.
14. Promote both material and human coordination.
15. Institute and Effect Controls.
16. Avoid regulations, red tape and (excessive) paper work.
Source: Organizing – 16 General Guidelines by Henri Fayol (December, 2008). Retrieved from https://
managementinovations.wordpress.com/managementinnovations
143
Organizational Design, Teamwork, and Organizational Change
Max Weber is another writer who offered
structural principles for managers that contributed
to the development of bureaucratic organizations.
Several decades have passed since the introduction
of bureaucracy together with several changes that
have taken place in organizations; bureaucratic
principles are still an enduring part of modern
organizations and continuing relevance to
discussions of organization structures.4
Organizational structure is a system that
consists of rules and policies to outline work
roles, responsibilities and reporting relationships,
and how they fit within the overall system.5 A
visual representation of an organization structure
is an organization chart. It shows the tasks or
major activities and how employees and tasks are
grouped, the line of authority (who people report
to) including the flow of communication and
the levels in the hierarchy. A simple organization
chart for a manufacturing firm is illustrated in
Figure 6.1. It shows an organization chart with
four departments where the tasks are grouped by
functions (Sales, Production, Finance, and HR).
The sales department is further divided into three
groups that focus on geographical location of
customers (Asia, North America and Europe).
Organizational structure is a system that
consists of rules and policies to outline
work roles, responsibilities and reporting
relationships and how they fit within the
overall system.
A visual representation of an organization
structure is an organization chart.
Figure 6.1 A Manufacturing Company
CEO
Director
Sales
Sales
Manager
Asia
Sales
Manager
North
America
Director
Production
Sales
Manager
Europe
Purchasing
Manager
Quality
Control
Manager
Director
Finance
Manufacturing
Manager
Financial
Planning
Manager
Accounting
Manager
Director
HR
Employee Employment
Relations
Services
Specialist
Specialist
1
Discuss the elements that can be identified from an organization chart.
KEY ELEMENTS IN ORGANIZATIONAL DESIGN
Organizational design is the process of developing or changing an organization structure. In this
section, we will discuss various building blocks or the key elements in organizational design including
division of labor, chain of command, span of control, centralization/decentralization, formalization
and departmentalization. We will conclude this section with two categories of organizational design –
mechanistic and organic design.
Division of Labor
Division of labor or work specialization is the degree to which work activities are divided into separate
jobs. For example, Figure 6.1 shows specialization by functions such as sales and production. Production
144
Business Management
tasks are separated into purchasing, quality control
and manufacturing. This way, individual employees
perform only the tasks they are specialized in rather
than the entire activity.
Division of labor is the degree to which
work activities are divided into separate jobs.
We can readily see in a production process such
as an automobile assembly line where each worker
works on only certain parts of a car (and not the
whole car). Since workers concentrate on one small
aspect of production, this helps them to be more
efficient as their skills at performing those tasks
tend to increase. Further, workers with different
skill-levels can be assigned to work on parts of
the tasks which match their particular skill levels.
Since highly skilled workers are more expensive
than unskilled workers, managers can assign
sophisticated tasks to only highly skilled workers
to avoid inefficient use of resources.
Although the division of labor is advantageous,
too much specialization leads to problems as the job
tasks can become repetitive and boring.6 This can
lead to lower morale as workers become resentful
and lose their motivation. Further, errors may creep
in as they get bored. Therefore, managers need to
maintain a balance between work specialization
and workers’ motivation.
Chain of Command
The chain of command is defined as
the hierarchy of authority and the reporting
relationships from one management level to the
next. It clearly shows who is responsible for each
task and who has the authority to make decisions.7
The authority flows from upper levels to lower
levels such that employees would know who reports
to whom. For example, Figure 6.1 shows that the
Financial Planning manager reports to the Finance
director, who in turn reports to the CEO.
The chain of command is defined as the
hierarchy of authority and the reporting
relationships from one management level
to the next.
An underlining principle associated with the
chain of command is the unity of command which
recommends that an individual should report to
only one supervisor or manager. If an employee
has more than one supervisor, conflicting demands
from multiple supervisors may lead to problems
and conflict in the chain of command. In today’s
business organizations where jobs are done by
teams of employees or as project-based processes,
individual team members can have two bosses:
a project manager and a functional manager in
which each member belongs to. We need to have
an understanding of the concepts of authority,
responsibility and delegation to better understand
the chain of command, which are discussed in the
following sections.
Authority is related to the position in an
organization, not the person occupying the
position.
Authority
Authority refers to the right of a person to give
instructions, make decisions and allocate resources.
In an organization, a manager has the formal
authority from his or her position that is accepted
by subordinates. The authority flows down the
hierarchy such that top managers have more
authority than those at the bottom.8 For example,
Figure 6.1 shows that anyone working as the CEO
of a company has the most formal authority while
the four functional directors have the same level
of authority. Managers work within their authority
in order to be accepted by their subordinates.
However, if they give orders beyond their area of
authority then they may face resistance. Also if
managers are given too little authority then their
jobs may be more difficult.
Authority refers to the right of a person
to give instructions, make decisions and
allocate resources.
Authority in an organization may have more to do
with the subordinates’ acceptance of the authority of
managers. According to Chester Barnard, subordinates
145
Organizational Design, Teamwork, and Organizational Change
would follow an order when authority is accepted,
given that subordinates can understand the order and
believe that it is consistent with the organizational
purpose, compatible with their personal interests, and
that they are able to comply with such an order.9
There are two forms of authority: line authority
and staff authority. Line authority takes the form of
the employer-employee relationship that moves from
top to bottom according to the chain of command.10
This consists of the right to direct and control
subordinates and to make decisions. We refer to line
managers as those whose functions are linked directly
with the achievement of organizational objectives.
For example, in a computer software company, managers
dealing with the making of software and selling of
software are typically line managers.
Line authority takes the form of employeremployee relationship that moves from
top to bottom according to the chain of
command.
Staff authority on the other hand, is created
to assist, support, and advise the work of line
managers. Often when an organization grows larger
and becomes more complex, line managers find that
they need more expertise in certain areas to perform
their required tasks more effectively. To assist and
advise line personnel, Harold Stieglitz proposed
that staff personnel use their expertise as internal
consultants to solve problems, to provide services in
a centralized function, and to help establish control
mechanism for top management.11
Staff authority is created to assist, support,
and advise the work of line managers.
Figure 6.1 shows that the HR function of
the manufacturing firm represents the staff
authority. Also, the quality control manager is a
staff manager; advising the production director
about quality issues in its manufacturing process.
Note that the staff personnel can give advice
to line managers, but the final decisions are
up to the line managers. In general, the larger
the organization, the greater the need for staff
personnel. For example, if the manufacturing firm
in Figure 6.1 grew larger, it may need to add other
support functions such as Research & Development
and Information Systems functions.
Many of the readers may think that the terms
authority and power are one and the same.
However, we should recognize the difference
between the two in organizations. As mentioned
earlier, authority is the right that comes with
a professional capacity or position. Power is a
personal trait or capacity to influence others’
actions, decisions, and performances.12 The major
source of power is knowledge and expertise. While
authority flows downward through the hierarchy,
power flows in any direction and individuals can
be powerful even though s/he has little authority.
Power is a personal trait or capacity to
influence others’ actions, decisions, and
performances.
We can argue that managers can get things
done more readily when they possess more power.
Therefore, effective managers would want to
increase their power by developing a new power
base. John French and Bertram Raven identified
five forms of power in the workplace as shown
in Table 6.2.13 Raven also added informational
power to the original list of five bases of power.
Table 6.2 Bases of Power
Legitimate Power – based on a person’s right in the formal hierarchy to make demands.
Reward Power – based on a person’s ability to compensate another for compliance.
Expert Power – based on a person’s skill and knowledge.
Referent Power – based on a person’s perceived attractiveness, worthiness and a right to others’ respect.
Coercive Power – based on the belief that a person can punish others for noncompliance.
Informational Power – based on a person’s ability to control the information that others need to accomplish something.
Source: French and Raven’s Five Forms of Power. Retrieved from http://www.mindtools.com/home/leadersipskills/understandingpower/
146
Business Management
Responsibility
Responsibility refers to the obligation or expectation that all employees have to perform the duties
associated with their jobs. Those duties are assigned by managers who have the authority to assign work
to employees. Therefore, responsibility is shared by the
subordinate (to perform the duties) and his or her manager
for the completion of the task. There is a need to clearly
Responsibility refers to the obligation or
divide and clarify the duties or job activities to be performed
expectation that all employees have to perform
so that subordinates can focus their efforts on those issues
the duties associated with their jobs.
that are important for successful completion.
The most basic method to divide job activities for managers is to follow the sequence of activities:14
➢ Examine objectives,
➢ Design job activities to reach those objectives,
➢ Group similar activities to specific jobs, and
➢ Assign individuals to those jobs.
Employees are held accountable for their performance which can mean that some type of penalty or
punishment is justifiable if the obligation is not met. When an employee meets or exceeds certain expectations,
some kind of reward is implied to follow. Employees are expected to report on their work to those about them
in the chain of command.15 For example, an employee’s use of resources in his or her work can be measured in terms
of cost, quantity, quality and timeliness.
Delegation
Delegation occurs when a manager divides work among subordinates and gives them the responsibility and
authority to accomplish tasks. A manager is responsible for all work in an area and can only complete the work by
delegating part of the work to subordinates. This process continues down the chain of command. In general, the
delegation process involves:16
➢ Assign responsibility or the duty to perform certain tasks,
Delegation occurs when a manager divides
➢ Give authority to complete those tasks, and
work
among the subordinates and gives
➢ Create accountability for successful completion of
them the responsibility and authority to
the tasks.
accomplish the tasks.
To be more effective at delegation, managers should keep in
mind to select the right person for the job, to ensure that authority
equals responsibility, to maintain feedback and to evaluate
and to reward performance.17 In today’s dynamic business
environment, managers may need to delegate more to lower level
employees especially those who regularly face customers. This Managers at all levels need to have delegation skills
way, organizations can be more responsive to customer needs in order to enlist the help of others to efficiently
while becoming more flexible and adaptable to the changes in the and effectively complete the work activities.
environment. Table 6.3 summarizes the importance of delegation.
Table 6.3 Importance of Delegation
Effective management – Managers can pass routine work activities to subordinates so they can focus on
important issues. Delegation reduces the workload of managers.
Employees’ development – Employees have opportunities to develop their skills, utilize their talents and
gain work experience.
Employee’s motivation – When managers share their responsibilities and authority, employees may gain
the feeling of belongingness and trust and become more motivated.
Organizational growth – Delegation leads to division of labor and work specialization that brings
effective coordination within the organization, which is important for organizational growth.
Basis of hierarchy – Delegation establishes manager/employee relationship that is a basis for
management hierarchy.
Source: Retrieved from http://www.yourarticlelibrary.com/management/importance-and-elements-of-delegation-ofauthority-business-management/8650/
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Organizational Design, Teamwork, and Organizational Change
Span of Control
Another issue in designing organization structure
is the span of control or span of management which
The span of control refers to the number of
refers to the number of employees directly supervised by
employees directly supervised by a manager.
a manager. The question is the appropriate number of
subordinates each manager can efficiently and effectively
manage in the hierarchy. Figure 6.2 illustrates the span of control: manager A supervises two employees
while manager B supervises five employees. Manager A is said to have a narrow span of control.
To use human resources effectively, managers should manage as many employees as they can. However,
if they supervise too many subordinates then they may lose part of their effectiveness. Therefore, managers
should limit the size in order to maintain closer control. There is no magic number of how many employees
a manager should supervise. In today’s organizations, the span of control is believed to be determined
by various contingency variables. In other words, organizations, employees and situations are different
therefore require different spans of control for managers.
Figure 6.2 The Span of Control
President
Manager
A
Employee
1
Employee
2
Manager
B
Employee
1
Employee
2
Employee
3
Employee
4
Employee
5
In a mass production setting for example, workers perform similar tasks and those tasks are simple. In
this case, a supervisor can manage larger numbers of workers. However, a CEO of a large firm probably
cannot effectively manage many top executives all at once as their work is complex and interrelated.
Therefore, in general, a manager’s ability to directly control subordinates is limited by the complexity of
tasks and the interrelatedness of the subordinates’ tasks.18
If the physical locations of subordinates are distant or if they need much coordination then the spans
of control should be narrow.19 Also, when subordinates and/or supervisor are knowledgeable these factors
would tend to widen the span of control.20 Managers can further implement some other forms of control
within the company’s information systems used by employees in their jobs. This way, managers are able
to widen the spans of control. For the same reason, the use of standard operating procedures would lead
to a higher level of standardization of work activities and allow managers to supervise larger numbers of
employees.
Flat and tall organizations
The span of control in a company influences the height of its hierarchy. A flat organization structure
has relatively fewer layers of management while a tall structure has multiple layers. Generally, the lower the
height of the structure, the wider the span of control as shown in Figure 6.3A. It shows a typical consulting
firm structure where partners/managers can supervise relatively large numbers of associates, i.e. wider span
of control. This is because in these types of firms, both partners and associates are knowledgeable about
the topics in which they specialize.
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Business Management
Figure 6.3A Flat Organization Structure
Senior
Partner
Partner
Partner
Associate Associate Associate Associate Associate
Associate Associate Associate Associate Associate Associate Associate Associate
tend to make decisions at a slower rate because
the decisions need to pass through more layers
of management in the hierarchy. Today’s business
environment requires that organizations speed
up their decision making and therefore have
been flattening their structures. Also, businesses
with fewer numbers of managers can reduce the
human resources expenses. Larger spans of control
and flattening of structures are consistent with
managers’ efforts to speed up decision making, to
increase flexibility and to reduce costs.21
A flat organization structure has relatively
fewer layers of management while a
tall organization structure has more
hierarchical levels.
Figure 6.3B shows a tall organization
structure with narrow spans of control with
managers overseeing fewer numbers of employees.
We can see that companies with tall structures
Figure 6.3B Tall Organization Structure
CEO
Senior VP
VP
Employee
Employee
Senior VP
VP
Employee
Employee
VP
Employee
Employee
Centralization Versus Decentralization
Another issue to consider when organizing is how much to centralize or decentralize the authority to
make decisions. Centralization is when most important decisions are made by managers at the top of
the hierarchy. When the decision authority is pushed down to lower levels of the hierarchy, this means
decentralization. These two approaches should be thought of as degree and not as an either/or approach.
In this view, a centralized organization implies few or no delegation of job activities and authority while a
decentralized organization means maximum delegation.22 Most companies will fall in between these as a
continuum (i.e. a mix of both).
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Organizational Design, Teamwork, and Organizational Change
Centralization indicates that most
important decisions are made by managers
at the top of the hierarchy.
Decentralization occurs, when the decision
authority is pushed down or delegated to
lower levels of the hierarchy.
Companies that tend toward centralization
can use it as a way to maintain standardization
across various units of a company. For example,
McDonald’s is known for its centralized structure
in order to control and to maintain consistency
across thousands of its outlets in many countries
around the world. Therefore, centralization can
lead to efficient use of resources to coordinate
large undertakings and to reduce the number of
overlapping capabilities.23 When an organization
grows larger, the concentration of expertise at
the headquarters (HQ) can further increase the
knowledge, skill level and its core competence.
Also, the firm can take advantage of economies of
scale in purchasing and using centralized systems
such as information technology resources and
research & development.24
However, too much centralization can stifle
innovation, constrain the ability to customize
products and services for local customers and
burden business units with high costs and poor
service.25 Top managers may have too many
decisions to make on a day-to-day basis and not
enough time for more important strategic decision
making and planning. When expertise is centralized
at the headquarters, local knowledge may not be
taken into account throughout the firm. Also, the
company may be slow to respond to the changes in
local market/consumer conditions.
Decentralization can help improve responsiveness
to consumer demands as decisions can be made
quickly without having to go up the hierarchy. Further,
today’s organizations are much more complex and
the business environment can change more often,
therefore requiring companies to be more flexible
and responsive. In large firms that operate globally,
local managers should be able to make decisions
concerning their specific locations regardless of their
levels in the overall management hierarchy.
150
However, if many of the decisions can be
made by managers at all levels then planning
and coordination problems may arise.26
Further, managers may pursue their own
functional or business unit goals at the expense
of organizational goals. Therefore, the best
situation is a balance between centralization and
decentralization of authority. In general, there
are some factors influencing centralization versus
decentralization:27
• Higher level of environmental dynamism
(greater change and uncertainty) is associated with decentralized decision making
while a stable environment is associated
with centralization.
• In time of crisis or risk of failure, authority
may be centralized at the top.
• Adaptive organizational culture is more
appropriate for decentralization.
• Risk taking and innovation and associated
with decentralized authority.
Although many organizations have been moving
toward higher levels of decentralization, a certain
degree of centralized decision making is needed
depending on each firm’s needs.
Formalization
Another key building block of organizations
is formalization which refers to the use of
written or computerized documents to describe
and guide behaviors and activities of employees.
Documentation includes rules, procedures,
regulations, policy manuals and job descriptions.
In highly formalized organizations (formal
organizations) such as large public universities and
government agencies, there are numerous rules
and procedures covering work processes over what,
when, and how activities should be done.
Formalization refers to the use of written
or computerized documents to describe and
guide behaviors and activities of employees.
Business Management
In other words, formalization is used
to standardize operations in organizations.
Standardization allows managers to substitute
face-to-face contacts and direct supervision. In
informal organizations such as small family-owned
businesses, there will be very few written rules (if
any) and employees can have more discretion in
the way they go about doing their tasks. Direct
supervision is a more natural form of control in
informal organizations.
Formalization is aligned with Weber’s bureaucratic
organizations. Therefore, a degree of formalization
is necessary especially in large organizations in
order to maintain control. However, problems can
emerge over time when an organization becomes
overly bureaucratic, highly formalized and inflexible.
Therefore, in today’s dynamic environment,
employees should be allowed some autonomy in
their work activities and decision making.
Departmentalization
Lastly, another key issue in organizational design
is how to group common work activities together
so that work gets done in a coordinated fashion.
Departmentalization is the basis for grouping of
jobs into logical units. Managers group employees
into departments, each a unique group of resources
to perform certain related tasks. Departments are
grouped into a total organization. In the following
sections, we will discuss five common types of
departmentalization: functional, product, customer,
geographic, and process. Note that organizations
can also use any combinations of these types.
offered by an organization. Each product line can be
managed by a senior manager who specializes in the
particular product/service. Therefore, the product
performance can be accountable by a manager of
that product line as s/he has the authority to control
all aspects involved. However, if there are several
product lines then different business units may have
similar activities which may result in duplication of
efforts and therefore, higher costs.28
Each type of departmentalization offers
advantages and disadvantages. Therefore,
companies can choose various combination
of these different types in order to group
work activities according to different needs.
Customer departmentalization
Here, each department targets a specific
customer classification in order to serve the needs
of identifiable customer groups. Each group
would have the needs that can best be served by a
certain set of specialists. For example, large clothing
stores are often grouped according to men’s, women’s,
children’s and baby’s departments. This way, shoppers
can readily identify where to go for specific items.
Sales associates can specialize in products for each
particular customer’s interest. Similar to product
departmentalization, there may be redundancies and
increased costs because of the duplication of efforts.
Geographic departmentalization
Departmentalization is the basis for grouping
of jobs into logical units.
Functional departmentalization
One of the most widely used forms of group
work activities is by the functions employees
perform such as production and sales. Functional
departmentalization can be used in all types of
companies including new businesses or startup
firms. Functional departments often reflect the
objectives and activities of each organization. Since
employees in the same function have common
skills and knowledge, each function promotes
work specialization and economies of scale.
Product departmentalization
Product and service departmentalization groups
resources according to specific products or services
An organization may be based on geographic
markets or the locations where work is done. For
example, the sales function shown in Figure 6.1 is
grouped according to three broad geographic areas:
Asia, North America and Europe. This helps the firm
to focus their sales efforts on each region of the world
(or countries or territories).
Process departmentalization
Manufacturers and service providers can
use process departmentalization to divide the
organizations according to production processes
of goods or services. This way, resources such as
equipment and specialized workers are grouped
together to complete a certain process or customer
flow. Many government agencies and health care
clinics are often arranged by units that are organized
along work processes.29 Table 6.4 summarizes the
five types of departmentalization.
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Organizational Design, Teamwork, and Organizational Change
Table 6.4 The Types of Departmentalization
Functional departmentalization groups work activities together by the functions employees perform.
Product departmentalization groups resources according to specific products or services offered by an
organization.
Customer departmentalization targets specific customer classifications in order to serve the needs of
identifiable customer groups.
Geographic departmentalization is based on the geographic markets or the locations where work is
done.
Process departmentalization is used to divide the organizations according to production process of
goods or services.
Mechanistic Versus Organic Design
The combination of the six key elements we discussed above have resulted in two basic organization
forms: mechanistic and organic design.30 A mechanistic structure is characterized by a rigid bureaucratic
structure that is controlled by rules and procedures in a clear
hierarchy of authority or chain of command. It is tightly
controlled or that the span of control is narrow which
An organic structure is the opposite end of
leads to a relatively tall structure. As mentioned earlier, a
design choices where the structure is more
tall organization requires a higher level of formalization
adaptive and flexible with looser chain of
as rules and procedures are used instead of face-to-face
command.
supervision. Work activities are standardized with high
degree of specialization.
An organic structure is the opposite end of design
choices where the structure is more adaptive and flexible
with looser chain of command.31 This means a lower
An understanding of the differences between
level of formalization as rules and regulations are flexibly
organic and mechanistic design components is
applied as employees can figure out what to do. Instead
important as the designs influence organizational
of standardization of work activities, employees are often
structures with implications for corporate
proficient and trained to handle their tasks and solve
culture and the way employees behave.
problems with minimal supervision. Therefore, the spans of
control tend to be wider leading to a flatter organization.
Under organic design, decision-making authority is
decentralized and distributed throughout the hierarchy.
Employees play empowered roles. This is in contrast to
A mechanistic structure is characterized by a
highly specialized tasks performed by employees under
rigid bureaucratic structure that is controlled
mechanistic design.32 Employees are allowed discretion
by rules and procedures in a clear hierarchy of
and responsibility in their roles, often in collaborative
authority or the chain of command.
team settings. Therefore, greater emphasis is on sharing of
information within and across departments and up and
down the hierarchy. Since organic design leads to highly adaptive structures, organizations today tend to
become more organic in order to respond to increasing environmental change and uncertainty.33
Table 6.5 summarizes mechanistic and organic structures. It is clear that the two structures would have
very different implications for the way employees behave.34 For example, if a company wants to encourage
innovative behaviors in order to improve quality, customer services and product development, then the organic
form would be more appropriate. However, to have a more stable and efficient structure then mechanistic
design is more appropriate. Therefore, the decisions of organic versus mechanistic design choices depend
on various contingency factors that we will discuss in detail later on in this chapter.
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Business Management
Table 6.5 Mechanistic Versus Organic Form
Design Choices
Mechanistic Form
Organic Form
Decision making
Centralized
Decentralized
Chain of Command
Clear cut
Looser
Spans of Control
Narrow
Wide
Formalization
High
Low
Work Activities
Rigid departmentalization
Collaborative teams
2
Discuss the three elements of the chain
of command.
ORGANIZATIONAL STRUCTURE
Entrepreneurs and business owners need to
address one key decision which is how best to
structure their businesses. A small business startup
with few employees needs only a simple structure:
centralized decision making with the owner(s),
low or no departmentalization and wide span
of control.35 This allows the owner to have tight
control over the firm’s operation and decisions can
be made quicker without layers of management.
However, the workload of the owner(s) and
the level of expertise needed place a limit on the
effectiveness of a simple structure. When a business
starts to hire employees on a regular basis or when
specific areas of in-house expertise are needed as
the business grows, a simple structure becomes
inadequate. Often bureaucratic characteristics
emerge when a small company grows larger
and does not remain as a simple structure. In
the following sections, we will discuss common
organization structures that managers can choose
from: functional, divisional, matrix, virtual
network, team, and hybrid structures.
Functional Structures
In a functional structure, activities are
grouped according to their similar or related
skills, expertise and use of the same resources. It
is often used by SMEs (small and medium-sized
enterprises) around basic business functions such
as production, marketing and sales, and finance
and accounting. We can readily see the benefits of
grouping by specialization: it encourages in-depth
skills development and core competence, high
standards and efficient use of resources. Centralized
operations within each function enhance the
coordination of work activities.
However, coordination between different
functions (horizontal coordination) may be
problematic especially when an organization grows
larger and finds that it is increasingly more difficult
to keep control of more complex activities. Therefore,
if there is a greater need for horizontal coordination
across the functions or departments then a functional
structure is less effective. In other words, the weakness
here is a slow response to environmental changes.
In a functional structure, activities are grouped
according to their similar or related skills, expertise
and use of the same resources.
Further, poor horizontal coordination results
in less innovation. To solve coordination problems
in a functional structure, companies can use
cross-functional teams as one of the integrating
mechanisms between departments. Figure 6.1
shows a functional structure with four departments
or functions (Sales, Production, Finance and HR).
Divisional Structures
A divisional structure is made up of separate
divisions according to similarities or demands of
product, customers, or geography. Each division
has some autonomy; with a divisional manager
who is responsible for its performance. In some
companies, the divisions may be given a high level
of autonomy and are often called business units.36
Some of the business units in very large firms may
be totally independent businesses altogether.
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Organizational Design, Teamwork, and Organizational Change
Figure 6.4A illustrates a product division structure;
grouping is around the firm’s family of products (canned
A divisional structure is made up of separate
goods, baked goods and frozen food). Each division
divisions according to similarities or demands
has its own functional departments therefore, allowing
of product, customers, or geography.
managers to focus on the specific products sold by
the company. However, it also more expensive as the
company needs multiple sets of support functions. Therefore, some central support functions can be
used to provide support services for all divisions. For example, Information Technology and Finance
departments may be centralized at the top (headquarters) such that all business units can make use of those
functions as shown in Figure 6.4B.
Figure 6.4A Divisional Structure – Product Group
CEO
Canned goods
Division
Production
Frozen food
Division
Baked goods
Division
Sales
Production
Sales
Production
Sales
Figure 6.4B Divisional Structures – Product Group with Central Support Functions
CEO
Senior VP
Finance
Canned Goods
Division
Senior VP
Information
Technology
Baked Goods
Division
Frozen Food
Division
Divisional responsibility can also be assigned to certain geographic regions such that each division
represents a location (North America, Far East, Europe, and Middle East) as shown in Figure 6.5. This
way, each division focuses its unit on activities for local market conditions and products/services can be
adapted to each region. It is effective when the products or services need to be tailored to local tastes,
customs or cultural values.
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Business Management
Figure 6.5 Divisional Structure – Geographic Group
CEO
Far East
Division
North America
Division
Another approach is to concentrate divisional
responsibility for specific groups of customers
(consumer, government and corporate) as shown
in Figure 6.6. Each division develops and markets
the products or services to suit the needs of its
specific customer groups. This way, the company
can be very responsive to any changing needs of
the customers. Similarly, some central support
functions at the HQ can also be used to take
advantage of economies of scale.
Figure 6.6 Divisional Structure – Customer Group
CEO
Consumer
Division
Government
Division
Corporate
Division
A divisional structure is more flexible in an
unstable business environment; therefore it is more
responsive as it encourages decentralization. Top
managers are freed from day-to-day operations
and can then focus more on the long-term and
strategic planning issues. Also, if one division does
not do well, it may not directly threaten the other
divisions. Resources can be relocated to successful
divisions and less to unsuccessful ones.
Europe
Division
Middle East
Division
Divisional structures are especially appropriate
for large organizations as they have the resources
to handle operational inefficiency from separating
specialized functions and duplications of efforts.
Top managers must make sure that divisions
do not focus too narrowly on their own goals at
the expense of the company’s overall objectives.
Further, divisional rivalries (e.g., competing with
each other for resources and customers) should be
limited as not to hurt the whole organization.
Matrix Structure
From the discussion above, we learn that there
are advantages and disadvantages to different
organization structures. Organizations facing
a dynamic environment would want to have a
structural design that would lead to better and
faster ways to respond to customer needs. A matrix
structure combines advantages of both functional
and divisional structures simultaneously in order to
be highly responsive to changing external business
environments. In other words, a matrix structure
groups people and resources by function and by
product or project as shown in Figure 6.7.
A matrix structure combines people and
resources by function and by product or project.
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Organizational Design, Teamwork, and Organizational Change
Figure 6.7 Matrix Structure
CEO
VP
Sales
VP
Production
VP
R&D
VP
Finance
Product
Manager
A
Product
Manager
B
Product
Manager
C
This matrix structure shows that there are four functional departments (Sales, Production, R&D and
Finance) and three product groups (A, B and C). Here, employees from different functions would work
together in a product team under a product manager. Therefore, they would have two bosses: one from
the functional department and a product manager. This is a unique aspect of a matrix; dual lines of
authority where the vertical structure provides management control within functional departments and
the horizontal structure provides coordination across departments.37
An organization can have a permanent matrix structure in which case it is said to be a flat organization
as there are minimal hierarchical levels within each function and decentralized authority.38 A matrix can
also be established for a specific project within a functional or a divisional structure. One of the main
advantages is that matrix structure facilitates communication, coordination and information sharing.
However, with dual lines of authority, employees can get confused having two bosses. They must be
able to cope at times with conflicting demands from the matrix bosses. Also, a matrix structure can result
in internal complexity and requires much effort to maintain. Therefore, the sparse use of a matrix is called
for or when for example, there is a major need for managers from different units or teams to coordinate
intensely important business matters on a daily basis.39
Virtual Network Structure
There are two developments that help organizations extend collaboration beyond their traditional
organizational boundaries. The first is the use of computer and communication technologies including
cloud computing. The second is the outsourcing of various parts or processes of an organization to outside
partners. Outsourcing is a practice of contracting out portions of work activities or functions to outside
firms. The major advantages to outsourcing are cost reduction and the ability to focus on core aspects of a
business (i.e., by outsourcing noncore activities).
For example, a production process can be outsourced to countries with lower labor costs such as in Asia
and elsewhere. Some companies can outsource services such as information technology services and call center
services to those with the expertise in the areas. Many of the outsourcing firms are located abroad: Managing
those distant outsourcing partners is made possible because of the widespread use of information and
communication technologies (ICT).
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Business Management
An organization can use outsourcing to the extreme
to create a virtual network structure where most major
functions or business processes are subcontracted to
other firms. A small headquarter is used to coordinate
those activities.40 Figure 6.8 illustrates how a virtual
network organization can be structured. It shows a loosely
connected group of companies to provide various services
and the manufacturing of the firm’s products.
A virtual network structure is where most
major functions or business processes are
subcontracted to other firms.
Figure 6.8 Virtual Network Structure
A virtual network structure is very fluid and flexible because the core organization can add or take
away parts of the network in order to meet a changing environment. However, companies need to keep
and protect their core or fundamental tasks in-house because core competence gives them competitive
advantage. Also, Miles & Snow suggested that core organizations not over utilize any given suppliers
(partners) as to be too dependent on them.41
Managers within the core organization must be able to integrate the activities of the whole network
effectively. This requires that the companies have a high level of mutual adjustment, i.e. they use their best
judgement of events rather than standardized rules to address problems, to guide decision making and
to promote coordination.42 In other words, mutual adjustment instead of standardization is needed here
because the structure is highly decentralized.
Team Structure
Another popular new form of structure is based on
teams. A team structure emphasizes work groups or
project type teams with little or no functional hierarchy
and with team authority as its building block. Work
activities are divided into projects or units; each with a
team that is responsible and accountable for the assigned
project. Members work together to utilize their skills and
knowledge to achieve common goals.43
A team structure emphasizes work groups or
project type teams with few or no functional
hierarchy and with team authority as its
building block.
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Organizational Design, Teamwork, and Organizational Change
Team members should have complementary skills to support each other and be able to work together
effectively through mutual trust and communication. Team structures therefore, provide the flexibility needed
in today’s dynamic business environment. However, an unclear chain of command may lead to difficulties
in coordinating across various teams. We will discuss teams and teamwork in detail later on in this chapter.
Hybrid Structure
We had discussed in the previous sections the five common organization structures, each with
advantages and disadvantages. A large and complex organization in particular often operates with a
hybrid structure. A hybrid structure has several business units or divisions and makes use of different
forms of structures in order to tailor to an organization’s specific needs as shown in Figure 6.9.
This figure shows a firm with three divisions based on product group A, B and C. Each division is
organized into a structure that best meets the needs of its business environment and other contingency
factors. For example, Product A Division is organized by
functions while Product B Division uses a matrix structure.
Further, as a large organization is divided into smaller
Internet
divisional units, it is much easier to change the structure of
44
http://www.businessinsider.com/google-neweach unit when the need arises. Readers can take a look
at an article about Google’s reorganization in 2015 as an operating-structure-2015-8
example.
Figure 6.9 Hybrid Structure
CEO
Corporate
Managers
Product
Manager
A
Product
Manager
B
Product
Manager
C
Functional
Structure
Divisional
Structure:
Geographic Group
Matrix
Structure
3
Discuss the advantages and disadvantages of the
functional structures.
158
A hybrid structure has several business
units or divisions and makes use of different
forms of structures in order to tailor to an
organization’s specific needs.
Business Management
CONTINGENCY FACTORS AND ORGANIZATIONAL STRUCTURE
Earlier we discussed mechanistic and organic forms and their organizational design choices (See Table 6.5).
An organization can focus its design for control and efficiency (i.e. mechanistic form) or the focus can be on
innovation and flexibility (i.e. organic form).45 These two forms represent opposite design choices such that an
organization’s design choice would tend towards one or the other.
In general, a functional structure is the result of choosing a mechanistic form on one end of the
continuum; the virtual network structure is the choice for the organic form at the opposite end of the
continuum. Other types of structures would fall in between the two as shown in Figure 6.10. In this
section, we will discuss three important contingency factors that affect design choices: strategy, environment
and technology. There is no one best way to organize and to be effective, managers should design an
organization to fit with its various contingency factors.46
Figure 6.10 Mechanistic and Organic Forms
Divisional
Structure
Team
Structure
Mechanistic
Form
Functional
Structure
Organic
Form
Matrix
Structure
Virtual
Network
Structure
Strategy: Porter’s competitive strategies (See Chapter 5) are associated with a cost leadership or a
differentiation strategy.47 A company can use its skills and knowledge to produce low-priced goods or
services as a cost leadership in its industry. In this case, there is a need for close control and monitoring of
its functional activities in order to be more efficient (to earn reasonable profits while offering comparable
quality but lower priced goods). Therefore, firms should follow the mechanistic design.
An organization can use its skills and knowledge (core competencies) to produce unique or differentiated
products or services following a differentiation strategy. In this case, it should develop new and innovative
products and bring them to market quickly. This requires organizational flexibility and innovations with a
high level of communication and coordination among important functions such as production, marketing
and R&D. Therefore, firms should follow organic design.
Environment: Environmental factors (See Chapter 3) create
uncertainty for managers. To be effective, managers need to
Environmental uncertainty is a
manage those uncertainties. Environmental uncertainty is a
situation where the management of
situation where the management of a firm has little information
a firm has little information about
about its external environment.48 Two characteristics influencing
its external environment.
uncertainty are:49
• The number of factors in the external environment.
• The rate of change of those factors in the environment.
The higher the number of factors and rate of change an organization faces, the higher the uncertainty.
Organizations in highly uncertain environments should make more effort to adapt to those changes by
adjusting their structures. In order to be more responsive, an organization needs the flexibility of an organic
design. On the other hand, a mechanistic design is more appropriate for a firm with stable or low uncertainty
in its external environment. Note that today’s environmental factors facing many businesses lead to more
uncertainty. Therefore, firms tend to be more flexible and adaptable, that is tending toward a more organic
form.
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Organizational Design, Teamwork, and Organizational Change
Technology: The term technology is used
here to include computers, machines, skills and
knowledge, procedures, techniques and work
methods. Manufacturing and service organizations
employ different sets of technologies. Many service
firms need to be physically close to their customers
who are often in several geographic areas. Those
firms would disperse their facilities into several
smaller units or offices in order to provide faster
and better service to their customers.50 Therefore,
service firms tend to be decentralized and flexible
with an overall organic structure.
Joan Woodward’s research looked at the
relationship among the technologies, structures,
and effectiveness of manufacturing firms.51 She
found a pattern between technical complexity of
the manufacturing process and the companies.
Technical complexity is categorized according to
the level of mechanization of the manufacturing
process. Low technical complexity means
that workers perform much of the work in
the production process. Three categories of
Woodward’s classification of the systems of
production are:
• Unit production – items are produced in
units or small batches often for custom
work that rely heavily on people.
• Mass production – large number of standard products such as assembly lines.
• Process production – continuous process
that is almost completely mechanized and
automated such as in chemical processing.
Technical complexity is categorized
according to the level of mechanization of
the manufacturing process.
Findings suggest that different technologies are
associated with certain organizational design. Mass
production or assembly line work is standardized;
requiring less direct supervision. The span of
control is wide and decision making is centralized.
Therefore, the overall structure is mechanistic. Both
the unit production and process production require
a higher level of direct supervision and decentralized
decision making, that is it needs to be responsive to
customers. The overall structure is organic.
Another model by Charles Perrow that identifies
the nature of technology as routine and non-routine
160
also has implications for a firm’s structure.52
Routine technologies are characterized by work
tasks that are repetitive with work procedures,
such as in an assembly line. Routine tasks are
high in standardization and formalization with
centralized authority. A firm that has a routine
technology should follow a mechanistic design.
Nonroutine tasks (such as in applied research) are
not standardized and low in formalization with
decentralized authority. Therefore in general, an
organization should move from a mechanistic form
to an organic form as the tasks become less routine.
Routine technologies are characterized
by work tasks that are repetitive with work
procedures, such as in an assembly line.
Note that other contingency variables such
as organization size, life cycle and culture also
influence structures. For example, a firm that grows
larger tends to add more bureaucratic characteristics:
higher level of specialization, departmentalization,
and formalization with centralized authority (i.e.
mechanistic structure). Mechanistic and organic
forms also give rise to different sets of cultural
values.53 For example, values of predictability and
stability are desired in a mechanistic structure while
values of creativity, risk taking, and innovation
are desired in an organic structure. In order to
accommodate the fast pace of technological
and other changes along with intense global
competition, many organizations are moving
away from rigid organizational designs and toward
more flexible and agile organizational forms.54
Readers may look at an article from the Internet (The
Decision Driven Organization) to learn more about
organizational structure and management decisions.
Internet
https://hbr.org/2010/06/the-decision-drivenorganization
4
Analyze the relationship between corporate
strategy and organizational design.
Business Management
TEAMWORK
In this section, we focus on teams and their uses within organizations. We had earlier discussed team
structures where team authority is the building block of an organization. Teams can be used (in some
cases extensively) in various functional departments during
day-to-day operations. As organizations need to solve
increasingly complex problems at an even faster pace,
teams are the future of work, not individuals.55 We define Many of today’s organizations are very
the most common types of teams, team characteristics and complex such that work activities cannot be
team processes in the following sections.
done effectively by individual employees or
Team-Definition
managers. They must work together in teams
to solve difficult problems and decisions.
Although a team is made up of a group of people, a group
is not a team nor is a team just any group working together.
An example of common work groups in organizations is
a committee to perform specific activities that often recur
A team is a group of people who interact and
regularly. Committees are pervasive especially in large
coordinate their work together to achieve
organizations to allow members to exchange ideas, to
shared goals.
generate suggestions and recommendations, and to develop
organizational policies.56
A team is a group of people who interact and coordinate their work together to achieve shared goals.
Katzenbach and Smith assert that a team should have a small size and must contain four elements:57
• Common commitment and purpose – team members do not perform as individuals but as a
powerful unit of collective performance with a purpose they can believe in.
• Performance goals – a common purpose is translated into specific and measurable performance
goals which help define work products, facilitates clear communications and maintains focus.
• Complementary skills – a team should develop the right mix of skills or the complementary skills
necessary to do the team’s job.
• Mutual accountability – a team must hold itself accountable as a team.
Types of Teams
Several types of teams can exist within an organization. Five common classifications: problem-solving
teams, self-managed teams, cross-functional teams, virtual teams, and global teams. Note that in practice,
a problem-solving team may be global and cross-functional.
Problem-solving teams
A problem-solving team is a team that is involved
in efforts to improve work activities (such as quality and
efficiency) or to solve specific problems.58 Members share
ideas or offer suggestions on how a work process or a work
method can be improved. Often, a problem-solving team
is a temporary team that disbands when the solution is
presented or implemented. Some teams continue to meet
over time to solve new problems.
Self-managed teams
A self-managed or self-directed team is a small selforganized group of employees whose members determine,
plan and manage their day-to-day activities under reduced
A problem-solving team is a team that is
involved in efforts to improve work activities
or to solve specific problems.
A self-managed team is a small self-organized
group of employees whose members determine,
plan, and manage their day-to-day activities
under reduced or no supervision.
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Organizational Design, Teamwork, and Organizational Change
or no supervision.59 Often, an elected team
member supervises the team and members take
responsibility for their work. Self-managed teams
typically include the following elements:60
• Complementary skills that are sufficient
to perform a major task, e.g. to produce a
product or service.
• Access to resources such as equipment,
suppliers, and information.
• Empowered to make decisions such as select own
members, solve problems, and spend money.
•
•
•
Cross-functional teams
A cross-functional or horizontal team is
composed of employees from different departments
or functions. Members are brought together to
deal with a specific activity or to solve mutual
problems. In large companies, members can come
from different business units or divisions. Crossfunctional teams may be involved in a form of
matrix structure. Therefore, team members report to
their functional departments and to the team leader.
A cross-functional team is a team composed
of employees from different departments or
functions.
A study reported that the majority of crossfunctional teams failed in several criteria such as
meeting planned budgets, staying on schedule, adhering
to specifications, meeting customer expectations, or
maintaining alignment with the firm’s goals.61 Often
a successful cross-functional team benefits from
executive support such as a champion or a strong
leader who is accountable for an end-to-end project
with clear goals.
Virtual teams
A virtual team is composed of members who
are geographically dispersed, often interacting by
electronic means (such as e-mail, videoconferencing,
and social networking) and engaged in
interdependent tasks.62 To create effective virtual
teams, managers need to consider four critical issues
to maximize the productivity of teams:63
162
•
The right team composition in the
right size (small) and dividing the labor
appropriately. Members should have good
communication skills and ability to work
independently.
The right leadership with prior experience
working in virtual teams that encourages
values such as respect, empathy and trust
among members. Note that open discussions
and reducing uncertainty would build trust.
The right touch points or the ability to meet
face-to-face at certain times such as during
the initial meeting, when new members
join, and at various team milestones.
The right technology that integrates all
types of communications such as conference
calling, videoconferencing, text messaging,
discussion forums, or virtual team rooms.
A virtual team is composed of members
who are geographically dispersed, often
interacting by electronic means and engaged
in interdependent tasks.
Global teams
Because of globalization, more organizations are
operating globally. Increasingly, the work is done by
teams of dispersed workforce who can offer the best
skills and knowledge (including local knowledge)
from around the world. A global team is made up
of people from different nationalities operating in
multiple countries.64 Because of its diversity from
several cultures and work experiences, a global team
can offer a greater variety of ideas and perspectives.
A global team is made up of people from
different nationalities operating in multiple
countries.
However, global teams present challenges for
team leaders as members come from different
backgrounds and from different locations. To make
a global team work, organizations should recognize
that each country does business differently, and
Business Management
that employees from different cultures work differently.65 Although employees should share common
organizational values and culture with some adjustments for local differences, the focus can be on what is
common among the members such as shared objectives or tasks while highlighting that global collaboration
is needed to succeed.
To be successful at your job, you should understand the nature of
teams and how you can position yourself to become an active and
productive member.
A team role is how members the
tendency for members to behave,
contribute and relate with others in a
particular way.
Team Composition
One of the most important composition factors to a team’s effectiveness is the concept of team role. Belbin
identified nine different roles; a team role is the tendency for members to behave, contribute and relate with
others in a particular way.66 For a team to be successful, it needs to have the right mix of people so that all nine
behaviors are represent to complement each other. Table 6.5 lists the nine team roles and the strengths of each.
Table 6.6 Belbin Team Roles
ROLES
Resource investigator – uses an inquisitive
nature to find ideas to bring back to the team.
Teamworker – identifies the work required and
completes it on behalf of the team.
Coordinator – focuses on the team’s objectives,
draws out team members and delegates work
appropriately.
Plant – tends to be creative and good at solving
problem in unconventional ways.
Monitor evaluator – makes impartial judgements
where required and weighs up the team’s options
in a dispassionate way.
Specialist – brings in-depth knowledge of a key
area to the team.
Shaper – provides the necessary drive to ensure
that the team keeps moving and does not lose
focus or momentum.
Implementer –plans a workable strategy and
carries it out as efficiently as possible.
Completer Finisher – most effectively used at the
end of tasks to polish and scrutinize the work for
errors, subjecting it to the highest standards of
quality control.
STRENGTHS
Outgoing, enthusiastic, explores opportunities and
develops contacts.
Cooperative, perceptive, diplomatic, and listens and
averts friction.
Mature, confident, identifies talent and clarifies
goals.
Creative, imaginative, free-thinking, generates ideas
and solves difficult problems.
Sober, strategic and discerning, sees all options and
judges accurately.
Single-minded, self-starting and dedicated,
provides specialist skills and knowledge.
Challenging, dynamic, thrives on pressure, has the
drive and courage to overcome obstacles.
Practical, reliable, efficient, turns ideas into actions
& organizes work that needs to be done.
Painstaking, conscientious, anxious, searches out
errors, polishes and perfects.
Source: Belbin, M. Belbin Team Roles. Retrieved from http://www.belbin.com.
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Organizational Design, Teamwork, and Organizational Change
Other important team composition factors include size, ability, personality and diversity. A large team
size is possible. However, it is more likely to break into subteams rather than function altogether as one unit.
Therefore, it was observed that the majority of effective teams have a small size of less than ten members.67
Nevertheless, the size of teams has grown considerably in recent years as new technologies help firms to
extend participation to a greater number of employees, especially to deal with very complex tasks.68
A small team must still have the necessary skills to do the team’s job. These skills include:69
• Technical skills in a specific discipline such as finance or market research.
• Problem-solving skills to be able to analyze difficult
situations and to craft solutions.
• Interpersonal skills especially the ability to collaborate with others effectively.
One of the most powerful management tools
• Organizational skills including networking, is the use of teams at work. Teams develop
communicating well with other parts of the firm, in different stages over time as they change.
ability to navigate political landscape, and to avoid Teams can be influenced by managers/team
conflict.
leaders therefore, they should be effectively
managed.
Team Processes
In this section, we deal with internal team issues that can be changed and influenced by managers or
team leaders. We will discuss the stages of team development, conflict, norms and cohesiveness.
Stages of team development
Teams generally pass through several developmental stages, therefore, managers should understand this
process so that they can facilitate and guide teams to become more productive. The rate that a team moves
from one stage to the next depends on the team members, their individual skills, work activities and the
type of team leadership.70 A popular five stage model is summarized below:71
➢ The forming stage is when the team is formed and members get acquainted and oriented to the
task and to each other. They learn what is expected and what is acceptable, i.e. the grand rules.
Members may feel stress as there is high uncertainty at this stage. Team leaders should encourage
informal social discussions to help members adjust to new work situations.
➢ The storming stage is marked by competition and conflict as members may disagree on the team’s
mission and goals or how to achieve them. The team leader should guide the team towards clear goals
and agreements to reach the team’s objectives.
➢ The norming stage is reached when conflict is resolved and agreements about the roles of members, values,
and acceptable behaviors are reached. The team leader should emphasize unity and harmony within the team.
➢ The performing stage is reaching a productive stage where members are committed to the team’s
mission. The team leader becomes a facilitator aiding the team towards task accomplishment.
➢ The adjourning stage is the last stage when the team is finishing its job. If it is a temporary team then
it prepares to disband. There may be some regret over the dissolving of the team relationship. The team
leader should recognize team achievement and bring closure to the members.
Team cohesiveness and norms
Team cohesiveness is the extent to which
members remain united and committed to
the team’s goals.
164
A team develops a certain level of team cohesiveness which
is the extent to which members remain united and committed
to the team’s goals. High cohesiveness is generally considered
positive as members have high interaction and communications
with each other and are more committed to the team.72 If the
team’s goals align with members’ goals then they will be more
cohesive. Having similar attitudes and values among members
Business Management
also increase cohesion. If the organization recognizes the team’s efforts and accomplishments and supports its
objectives, members tend to be more committed to the team’s goals and more productive.73
A team also develops team norms as it goes through the stages of team development. Team norms are
a set of guidelines or expectations shared by team members such as norms that focus on team effort and
performance. In other words, they set the foundation for how
the team operates and how members behave. Since norms
Team norms are a set of guidelines or encourage consistent behaviors, they increase efficiency
of teams. Therefore, team leaders should emphasize such
expectations shared by team members.
behaviors that would help teams succeed.
Team conflict
Conflict is defined by the Business Dictionary as “the friction or opposition resulting from actual or perceived
differences or incompatibilities”.74 During the second stage of team development (the norming stage), conflict
often arises as differences in viewpoints escalate. Common techniques such as negotiation and compromise can
be used as conflict should be dealt with constructively.75 Although conflicts are mostly seen as negative; they are
not necessarily destructive to teams. Conflicts can lead to new ideas and can facilitate the surfacing of important
problems that should be addressed. A longitudinal study found
that a higher level of team performance was associated with a
Conflict is defined as “the friction or
particular pattern of conflict; for example, when there is a low but
opposition resulting from actual or perceived
increasing level of process conflict and a low level of relationship
differences or incompatibilities”.
conflict.76 Therefore, team leaders and managers should engage
in constructive conflict and avoid destructive conflict.
There are several types of conflict that teams experience: conflict over positions, strategies or opinion,
mistrust or uneven communication, personality clashes and power issues and personal agendas.77 Differences
in personality and attitudes of team members, for example, can lead to personality clashes such that they are
not able to work effectively together. Team leaders can use behavioral assessment tools (such as Myers-Briggs
Types Indicator or MBTI) to help members better understand each other and be able to work together.78
Companies such as Twitter and Google have worked
in a team-oriented environment successfully under intense
competition. Twitter employees receive many perks and
5
benefits that are provided to many successful tech companies.
What sets it apart is how employees like working with other How does an understanding of team cohesiveness
people; team members are pleasant and friendly to each and team norms help team leaders and members
other, love what they are doing, and believe that they are to work well together?
doing something that matters.79
ORGANIZATIONAL CHANGE
Today’s organizations are facing a more dynamic business environment, i.e. there has been a large
number of significant changes and they have taken place rapidly. This presents one of the most important
challenges for managers, which is how best to respond to and adjust to those changes in order to stay
competitive. Managers may also want to initiate organizational change internally in order to improve the
performance in some ways.
In other words, there are external and internal forces for change that result in several types of change
which organizations must address. In the next section, we define organizational change then discuss
the types of change. We will examine models of change and finally we discuss the management and
implementation issues of change in organizations.
Organizational Change: Terms and Definitions
Organizational change is the process by which organizations adopt new ideas or behaviors to increase
organizational effectiveness. Almost all organizations have been changing in some way; even those high-
165
Organizational Design, Teamwork, and Organizational Change
performing companies such as Google need to
change over time to meet ongoing challenges or to
take advantage of opportunities. Note that some
degree of stability is needed for organizational
change to succeed in the long-term, that is when
both stability and change are high then the
probability for organizational survival and growth
are also high.80
Organizational change is the process by
which organizations adopt new ideas or
behavior to increase their effectiveness.
Forces for change
Organizations face change from the environment
and from within. External forces include changing
demographics and characteristics of consumers
(e.g. needs, taste, age, etc.), new governmental laws
and regulations, global competition, and changing
technology, among others. In other words, the changes
can be brought on by all environmental sectors:
technology, economics, customers, competitors, legal
and global environment.
Internal factors creating the need for change
can come from new corporate goals and objectives,
for example, a goal of rapid company expansion.
This would lead to new or updated internal
activities to meet the new goal. Other factors arise
from employees such as the change in managerial
personnel or in composition of the workforce.
Deficiencies in existing processes or declining
effectiveness of the organization can also create the
need for organizational change.
Computerization and the use of digital technologies
are some of the most visible technological changes
that we have seen over the past decades. They have
impacted organizations of all sizes, at every level
and in every industry.
Technology change deals with how the work
is done such as the use of new equipment,
tools, machines, work methods, and work
processes.
Technological
capabilities
allows
an
organization to change itself to exploit market
opportunities, to develop new or modify existing
products/services, and to increase the quality and
reliability of products.81 For example, Enterprise
Resource Planning (ERP) systems are being used by
managers and employees in most large firms in order
to organize, plan and control a company’s activities
across product lines, functions or departments, and
geographic locations. Many of these systems are also
connected to each firm’s suppliers and customers
in order to better integrate and manage its supply
chain activities.
Structure change
A structure change pertains to the organization’s
structural variables such as procedures and
policies, job tasks, the degree of centralization
or decentralization, and authority relationships.
A structural change is often needed because of
the changes in a firm’s external environment or
its strategy. For example, a firm may see the need
to adjust its mission (though rarely), its goals, and
objectives, or the markets it serves.
Types of Change
In this section, we describe three types of
change: technology, structure and people change.
Note that these areas are related, which means that
when an organization attempts to make changes
in one area, it often needs to institute changes in
other areas also.
Technology change
Technology change deals with how the work
is done such as the use of new equipment, tools,
machines, work methods, and work processes.
166
A structure change pertains to the
organization’s structural variables such as
procedures and policies, job tasks, the degree
of centralization or decentralization, and
authority relationships.
As the business environment changes,
organizations often transfer their resources to the
units where the most value can be created.82 This
may involve changing the relationships and the
coordination between people and/or functions. In
Business Management
other words, a firm may change some structural
characteristics or a change in organization structure.
For example, an organization’s rapid growth often
leads to the shift from a functional structure to a
divisional structure.
People change
People change refers to changes in attitudes,
expectations, perceptions and behaviors of
employees in an organization.83 Changes in people
often involve changes in organizational culture as
well. However, a culture change would impact the
whole organization while the people change may
impact only some of its employees. Training and
development programs can be used such as team
building efforts and training for quality focus.
Organization development (OD) is another tool
for changing people and culture which we will
discuss later on in this chapter.
People change refers to changes in attitudes,
expectations, perceptions and behaviors of
employees in an organization.
More than one type of change may often be
necessary. For example, a new organizational
design and people change may be needed as a
result of a company’s adoption of new technology.
Resistance to Change
Resistance to change is expected from within
the organization because people often try to
maintain the status quo. However, resistance to
change lowers a firm’s effectiveness therefore,
managers need to understand this issue in order to
implement change more effectively. Resistance to
change can come from individual employees as a
change leads to uncertainty about its outcome so
employees can feel insecure.
Changes often lead to new ways of working and
new roles and relationships. Some may perceive
these changes to affect them negatively, e.g. some
workers may have to be retrained or worse, lose
their jobs. Managers’ responsibilities also often
increase and some would need to lead the change
themselves. Others may fear losing their status,
pay, or power with the changes. Perhaps the fear
of personal loss is one of the biggest obstacles to
organizational change.84 Also, habits or people’s
preferences for familiar things and events can
further impede organizational change.
At a group or team level, resistance to change
may result from the change that disrupts group
norms (e.g. when the change alters tasks and
role relationships) and group cohesiveness (i.e. it
may stifle opportunities for the group to change
and adapt).85 Loss aversion or a tendency for
people to avoid losses lead them to prefer the
status quo, even when the change is in their
best interests. At an organizational level, this
loss aversion tends to increase exponentially.86
Therefore, the compounding effect of this
tendency generates overwhelming forces to resist
organizational change. In the next section, we
discuss ways to manage change in order to deal
with the resistance to change including some
implementation tactics.
Managing Change
When managers perceive resistance to change
as a threat or when the change effort is in serious
trouble; they may become competitive, defensive
and uncommunicative.87 Instead, managers should
see the resistance as a form of feedback because
employees know about day-to-day operations first
hand. Managers can use resistance to effect change
more productively, for example by providing
employees participation and engagement.
167
Organizational Design, Teamwork, and Organizational Change
Organizations are facing rapidly
changing environments such that
managers need to respond and to
adjust to those changes effectively to
stay competitive.
Implementing tactics
Kolter and Schlesinger provide ways that managers
can positively influence organizational change:88
• Education
and
communication:
Employees should be educated and
communicated about any changes
beforehand through discussions (oneon-one), presentations (groups) or with
memos and reports. They need adequate
and accurate information and analysis to
understand change.
• Participation and involvement: Managers
can use employees’ advice about some
aspects of change that may lead to potential
problems. Participation often leads to
commitment and increasing the chance of
successful change.
• Facilitation and support: Managers should
provide support through employees training
of new skills and emotional support in order
to deal with personal fear and anxiety that
cause the resistance in the first place.
• Negotiation and agreement: Managers
can offer incentives such as higher wages or
better benefits for employees. Negotiation
is needed to win acceptance and approval,
especially when someone may lose out as a
result of change.
168
•
•
Manipulation and cooptation: Managers
can try to influence others by the selective
use of information or the structuring of
events. Cooptation involves giving an
individual or a group desirable roles in the
change process.
Explicit and implicit coercion: Managers
can force people to accept a change or lose
something (such as rewards, promotions
or loss of jobs). This can be used when the
firm is in a crisis situation or when there are
no other options.
Organizational development (OD)
OD is a field of research, theory and practice
techniques to expand the knowledge and
effectiveness of people to accomplish successful
organizational change and performance.89 While
human resources development focuses on the
personal growth of individual employees, OD
focuses on developing the structures, systems
and processes within an organization.90 Recent
works on OD focus on aligning organizations
with the rapidly changing and complex business
environment and improving their capacities to
solve problems, to increase organizational learning
and to manage future change.
Business Management
Organizational development is a field of
research, theory, and practice techniques
to expand the knowledge and effectiveness
of people to accomplish successful
organizational change and performance.
There are several OD techniques to promote
change that are suitable for different types of change;
which can be used at different organizational levels
(e.g. individual, group or team, and organization).
Some of the popular techniques are the following:91
• Team building: Team building activities
are designed to improve the capacity
of the members to work together in a
harmonious environment and to function
as a team. Interpersonal interactions and
communications play a significant part of
team building to increase the sensitivity of
the members’ behaviors and to promote a
healthy and functional team.
• Survey feedback: Data is collected via a
questionnaire on topics such as the quality
of work, working conditions, employees’
attitude, cohesion, etc. The data is processed
and analyzed to identify problems with the
employees’ engagement in problem solving.
• Sensitivity training: Technique where
employees interact, get better acquainted
and form relationships in order to
understand each other better. Members can
•
express themselves in a safe and controlled
environment to increase trust and comfort
with each other.
Large groups intervention (LGI) approach:
A planned meeting of organization members
and outside stakeholders to address
organizational problems and opportunities.92
LGIs can vary in size, purpose, composition,
structures and numbers. Although they tend
to focus on the future, broad participation,
intense prior planning and information
sharing. LGIs are often used for large scale
changes, therefore, the importance of
dealing with the whole system (i.e. the entire
organization) is significant.
6
Discuss the reasons that organizational change is
important for organizations of all sizes and industries.
In this chapter, we discussed an important
topic of management, the organizing process
including teamwork and organizational change.
Managers come up with a company’s strategy
to identify what it aims to do while organizing
how the company can go about assigning and
coordinating all the necessary jobs that must be
effectively and efficiently done.
Further Reading
The Importance of Conglomerates as Company
Structures in Emerging Markets
A conglomerate is a corporation that is made
up of a number of entirely different businesses;
usually involving a network of independent
companies (called affiliates) that are held together
by a core owner (called a parent company or a
group center). These conglomerates are called
holdings in Turkey; chaebol in South Korea, or
business houses in India. Although unpopular
in Europe and the U.S., conglomerates have
significant impact on emerging economies.
For example, holding companies are among
the largest in Turkey such as Koç Holding and
Sabancı Holding among others. In emerging
economies, these holding companies have grown
to include companies from several diversified
industries. For example, Sabancı Holding affilate
companies include financial services, energy,
cement, retail, and industrial sectors operating
in several countries. The Sabancı Holding
also has established several joint ventures with
multinational business partners.93
Many of the conglomerates in emerging
markets are still owned in part by founding
families. However, most successful ones have
created formal management layers or established
group centers instead of relying on family members
and associates to oversee their companies. At the
same time, many conglomerates are able to seek
opportunities and to capitalize on them while
retaining their values and identities. Sabancı
169
Organizational Design, Teamwork, and Organizational Change
Holding, for instance, has experienced growth in
its core businesses as a result of its reputation and
strong positive image of its organizational identity.
In general, there is a high level of involvement
between an ownership of a conglomerate and the
top management of its affiliates. The relationships
are long-term with core owners having a
rich understanding of affiliates’ capabilities,
knowledge and assets. Therefore, more crossbusiness innovations are possible.
Source: Ramachandran, J., Manikandan, K. S., &
Pant, A. (December, 2013). Why conglomerates
thrive (Outside the U.S.). Harvard Business
Review, pp. 111 – 121.
In Practice
HolacracyVersusTraditional Hierarchy Organizations
We discussed in this chapter various traditional
organizational design elements and the working
of teams in organizations. Recently, some firms
have adopted and implemented in varying degrees
a holacracy structure. Holacracy is a form of selfmanagement that confers decision power on fluid
teams or “circles” and roles rather then individuals.94
Business press has identified holacracy as having no
job titles, no managers and no hierarchy or structure.95
Words that have been associated with the structure
are: postbureaucratic, flat structure, poststructuralist,
information-based, organic, and next generative selfmanaged team among others.
The idea behind this self-management model is
not new; a firm in a highly competitive and dynamic
environment needs to have a balance between
standardization (reliablity and stability) and flexibility
(adaptability). Reliability includes meeting customers’
expectations, generating predictable return on
investment (ROI) for shareholders, obeying laws and
regulations and maintaining stable levels of employment.
Adaptability is needed to quickly and effectively
respond to changes in internal requirements (such as
a shift in strategy) and external environment. Many
traditional organization structures often favor reliability
and create a higher level of bureacracy. Holacracy is one
of the ways for employees and management to maintain
a balance through self-management. The goal is to foster
flexibility, engagement, productivity and efficiency.
What does a self-management organization look
like? According to Bernstein et. al., that holacracy has
no organizational structure is a myth; a holacracy circle
contains subcircles, each with subcircles of its own.
Holacracy should be thought of as a comprehensive
practice for structuring, governing, and running an
organization in the following ways:96
In a holacracy, dynamic roles replace static
job descriptions; they are defined around the
work and not the people.
Decision-making authority is distributed to
teams and roles which replace delegated authority
of managers.
Rapid iterations of structure (in each circle)
replace big and infrequent reorganizations.
In summary, this new form leads to a fundamental
shift in balancing reliability and adaptability. This
structural design is composed of teams which design
and govern themselves while leadership is distributed
to roles. Bernstein et. al., conclude that elements of
self-organization are valuable tools for companies of all
kinds while using a holacracy approach across an entire
enterprise would lead to real and difficult challenges
and too much uncertainty for firms. Zappos is one of
the best known firms to implement holacracy. Readers
can search the Internet about Zappos (an online
retailer) about its use of holacracy and discuss it below.
Source: Bernstein, E., Bunch J., Conner, N., &
Lee, M. (July-August, 2016). Beyond the holacracy
hype. Harvard Business Review, pp. 38 – 50.
Discuss:
1. What are the advantages and the disadvantages
of using a holacracy structure in organizations
such as Zappos and others?
2. How can a growing company use elements of
holacracy to combat bureaucracy? What about a
start-up firm?
Internet
https://www.zapposinsights.com/about/holacracy
170
Business Management
LO 1
Defining the basics of organizing
function
LO 2
Summary
The organizing function is concerned with arranging and assigning tasks, allocating resources, and
structuring work in order to reach organizational objectives. The purpose of organizing can be summarized
as dividing work into specific jobs, assigning tasks and responsibilities for each job, coordinating those
tasks, grouping jobs into units and departments, establishing relationships and formal authority among
individuals and allocating resources. Organizational structure is a system that consists of rules and
policies to outline work roles, responsibilities and reporting relationships and how they fit within the
overall system. A visual representation of an organization structure is an organization chart. It shows
the tasks or major activities and how employees and tasks are grouped, the line of authority (who people
report to) including the flow of communication and the levels in the hierarchy.
Describing the key elements of
organizational design
The key elements in organizational design include division of labor, chain of command, span
of control, centralization/decentralization, formalization and departmentalization. Division
of labor or work specialization is the degree to which work activities are divided into separate
jobs. The chain of command is defined as the hierarchy of authority and the reporting
relationships from one management level to the next. We need to have an understanding
of the concepts of authority, responsibility and delegation to better understand the chain of
command. Authority refers to the right of a person to give instructions, make decisions and
allocate resources. There are two forms of authority: line authority and staff authority. Line
authority takes the form of employer-employee relationships that move from top to bottom
according to the chain of command. Staff authority on the other hand, is created to assist,
support and advise the work of line managers.
Responsibility refers to the obligation or expectation that all employees have to perform the
duties associated with their jobs. Delegation occurs when a manager divides work among
the subordinates and gives them the responsibility and authority to accomplish the tasks. The
span of control or span of management refers to the number of employees directly supervised
by a manager. The span of control in a company influences the height of its hierarchy. A flat
organization structure has relatively fewer layers of management while a tall structure has
multiple layers.
Centralization is when most important decisions are made by managers at the top of the
hierarchy. When the decision authority is pushed down to lower levels of the hierarchy, this
means decentralization. Formalization refers to the use of written or computerized documents
to describe and guide behavior and activities of employees. Departmentalization is the basis
for the grouping of jobs into logical units. There are five common types of departmentalization:
functional, product, customer, geographic, and process.
The combination of the six key elements we discussed above has resulted in two basic
organization forms: mechanistic and organic design.97 A mechanistic structure is characterized by
a rigid bureaucratic structure that is controlled by rules and procedures in a clear hierarchy of authority
or chain of command. An organic structure is at the opposite end of design choices where the structure
is more adaptive and flexible with a looser chain of command.
171
Organizational Design, Teamwork, and Organizational Change
Summary
LO 3
Identifying various organization
structures
Six common organization structures that managers can choose from are: functional, divisional, matrix,
virtual network, team, and hybrid structures. In a functional structure, activities are grouped according
to their similar or related skills, expertise and use of the same resources. A divisional structure is made up
of separates divisions according to similarities or demands of product, customers or geography. A matrix
structure combines advantageous aspects of both functional and divisional structures simultaneously
in order to be highly responsive to changing external business environments. An organization can
use outsourcing to the extreme to create a virtual network structure where most major functions
or business processes are subcontracted to other firms. A team structure emphasizes work groups or
project type teams with some or no functional hierarchy with team authority as its building block. A
hybrid structure has several business units or divisions and makes use of different forms of structures
in order to tailor them to an organization’s specific needs.
LO 4
Explaining the contingency
factors and their effects on
structural choices
There are three important contingency factors that affect design choices: strategy, environment and
technology. There is no one best way to organize and to be effective; managers should design an
organization to fit with its various contingency factors. Porter’s competitive strategies are associated
with a cost leadership, a differentiation and a focus strategy. A company can use its skills and knowledge
to produce low-priced goods or services as a cost leadership in its industry by following a mechanistic
design. An organization can use its skills and knowledge (core competences) to produce unique or
differentiated products or services following a differentiation strategy and follow an organic design.
Environmental uncertainty is a situation where the management of a firm has little information about
its external environments that is largely unpredictable. Organizations in a highly uncertain environment
should make more effort to adapt to those changes by adjusting their structures. A mechanistic design is
more appropriate for a firm in a stable or low uncertainty external environment. Technical complexity
is categorized according to the level of mechanization of the manufacturing process. Mass production
or assembly line work is standardized, requiring less direct supervision. The overall structure should
be a mechanistic form. Both the unit and the process productions require higher level of direct
supervision and decentralized decision making so the overall structure should be an organic form.
Routine technologies that are characterized by repetitive work tasks such as in an assembly line should
follow a mechanistic design. Nonroutine tasks that are not standardized and low in formalization with
decentralized authority should follow an organic design.
172
Business Management
LO 5
Defining work teams and their
characteristics
LO 6
Summary
A team is a group of people who interact and coordinate their work together to achieve shared
goals. Five common classifications are: problem-solving teams, self-managed teams, cross-functional
teams, virtual teams and global teams. A problem-solving team is a team that is involved in efforts
to improve work activities or to solve specific problems. A self-managed or self-directed team is a
small self-organized group of employees whose members determine, plan and manage their day-to-day
activities under reduced or no supervision. A cross-functional or horizontal team is a team composed
of employees from different departments or functions. A virtual team is composed of members who
are geographically dispersed, often interacting by electronic means. A global team is made up of people
from different nationalities operating in multiple countries.
One of the most important organizational factors to a team’s effectiveness is the concept of team role.
A team role is the tendency for members to behave, contribute and relate with others in a particular
way. Other important team composition factors include size, ability, personality and diversity. Teams
generally pass through several developmental stages.Therefore, managers should understand this
process so that they can facilitate and guide teams to become more productive. The five stages are:
forming, storming, norming, performing, and adjourning stages. A team develops a certain level of
team cohesiveness which is the extent to which members remain united and committed to the team’s
goals. Conflict is defined as “the friction or opposition resulting from actual or perceived differences
or incompatibilities”. There are several types of conflict that teams experience: conflict over positions,
strategies or opinion, mistrust or uneven communication, personality clashes and power issues, as well
as personal agendas.
Describing the basics of
organizational change and
managing change
Organizational change is the process by which organizations adopt new ideas or behavior to increase
their effectiveness. There are three types of change: technology, structure and people change. Technology
change deals with how the work is done such as the use of new equipment, tools, machines, work
methods and work processes. A structure change pertains to the organization’s structural variables such
as procedures and policies, job tasks, the degree of centralization or decentralization, and authority
relationships. People change refers to changes in attitudes, expectations, perceptions and behaviors
of employees in an organization. Resistance to change is expected from within the organization
because people often try to maintain the status quo. When managers perceive resistance to change as
a threat or when the change effort is in serious trouble, they may become competitive, defensive, and
uncommunicative. Managers can use resistance to effect change more productively, for example by
providing employees participation and engagement. Organizational Development is a field of research,
theory and practice techniques to expand the knowledge and effectiveness of people to accomplish
successful organizational change and performance.
173
Organizational Design, Teamwork, and Organizational Change
Test yourself
1
Organizing function concerns _________.
a. allocating resources
b. maximizing revenues
c. arranging and assigning tasks
d. b and c
e. a and c
2
Which of the following are not the key
elements in organizational design?
a. Centralization and decentralization
b. Span of control and division of labor
c. Departmentalization and span of control
d. Formalization and teams
e. Chain of command and formalization
3
Which statement
responsibility?
accurately
defines
a. It occurs when a manager divides work among
subordinates.
b. It refers to the right of a person to make
decisions.
c. It refers to the obligation that employees have
to perform their assigned duties.
d. It is the degree to which work activities are
divided into separate jobs.
e. None of the above.
4
Functional departmentalization
jobs by_________.
groups
6
Which type of organization structure is most
appropriate for a medium-sized manufacturing
firm of machine parts?
a. Functional structure
b. Divisional structure
c. Matrix structure
d. Team structure
e. None of the above.
7
The line of authority and the reporting
relationships from one management level to the
next is termed the _________.
a. work specialization
b. division of labor
c. chain of command
d. span of control
e. decentralization of authority
8
Which type of organization structure is
most appropriate when a large organization facing
a dynamic environment wants to have a structural
design that would lead to faster and better ways to
respond to customer needs?
a. Functional structure
b. Divisional structure
c. Matrix structure
d. Team structure
e. None of the above.
9
Which is not an important contingency
factor in organizational design?
a. specific products or services offered
b. identifiable customer groups
c. geographic markets
d. production processes
e. the tasks they perform
a. Strategy
c. Technology
e. None of the above
5
a. Conflicts are always destructive.
b. Organizations do not need to change with their
environment.
c. Environmental uncertainty is a situation where
the management of a firm has little information
about its environment.
d. Organizational development is a tool for
changing structure.
e. None of the above.
Which design choices are not part of the
organic form?
a. Centralized decision making
b. Looser chain of command
c. Wide spans of control
d. Low formalization
e. None of the above.
174
10
b. Environment
d. Culture
Which of the following statement is true?
Business Management
1. e
If your answer is incorrect,
“Organizing Function Definition”.
review
6. a
If your answer is incorrect,
“Functional Structures”.
2. d
If your answer is incorrect, review “The Key
Elements in Organizational Design”.
7. c
If your answer is incorrect, review “The
Chain of Command”.
3. c
If your answer is incorrect,
“Responsibility Definition”.
review
8. c
If your answer is incorrect, review “Matrix
Structures”.
4. e
If your answer is incorrect,
“Functional Departmentalization”.
review
9. e
If your answer is incorrect, review
“Contingency Factors and Organizational
Design”.
5. a
If your answer is incorrect, review “Table
6.5: Mechanistic Versus Organic Form”.
10. c
If your answer is incorrect,
“Environmental Uncertainty”.
review
your turn 1
An organization chart illustrates a visual representation of an organization
structure. Larger firms would have many charts, each representing a part
of the overall organization. Most charts shown in this chapter represent
management structures and not a total organization. They show people and
their positions including reporting relationships (who reports to whom) and
how they fit within the overall system. Higher-level managers are placed at
the top (top down structure). The tasks or major activities and how people are
grouped are shown in the hierarchy.
Suggested answers for “Your turn”
Discuss the elements that can be identified from an
organization chart.
Answers for “Test yourself”
review
175
Organizational Design, Teamwork, and Organizational Change
Suggested answers for “Your turn”
Discuss the three elements representing the chain of
command.
your turn 2
The chain of command is defined as the hierarchy of authority and the
reporting relationships from one management level to the next. We need
to have an understanding of the concepts of authority, responsibility and
delegation to better understand the chain of command. Authority refers
to the right of a person to give instructions, make decisions and allocate
resources. In an organization, a manager has the formal authority from his
or her position that is accepted by subordinates. There are two forms of
authority: line authority and staff authority. Line authority takes the form of
employer-employee relationships that move from top to bottom according to
the chain of command. Staff authority, on the other hand, is created to assist,
support and advise the work of line managers.
Responsibility refers to the obligation or expectation that all employees have
to perform the duties associated with their jobs. Those duties are assigned by
managers who have the authority to assign work to employees. Delegation
occurs when a manager divides work among subordinates and gives them the
responsibility and authority to accomplish the tasks. A manager is responsible
for all work in an area and can only complete the work by delegating part of
the work to subordinates. This process continues down the chain of command.
Discuss the advantages and disadvantages of the
functional structures.
your turn 3
The benefits of grouping by specialization in the functional structures are
that it encourages in-depth skills development and core competence, high
standards and efficient use of resources. Centralized operations within each
function enhance the coordination of work activities. However, coordination
between different functions (horizontal coordination) may be problematic
especially when an organization grows larger and finds that it is increasingly
more difficult to keep control of more complex activities.
Analyze the relationship between corporate strategy and
organizational design.
your turn 4
176
A company follows a cost leadership or a differentiation strategy. For example,
it can use the skills and knowledge to produce low-priced goods or services as a
cost leadership in its industry. In this case, there is a need for close control and
monitoring of its functional activities in order to be more efficient. Therefore,
firms should follow the mechanistic design.
An organization can use its skills and knowledge (core competencies) to
produce unique or differentiated products or services following a differentiation
strategy. In this case, it should develop new and innovative products and
bring them to market quickly. This requires organizational flexibility and
innovations with a high level of communication and coordination among
important functions such as production, marketing and R&D. Therefore,
firms should follow organic design.
Business Management
your turn 5
Suggested answers for “Your turn”
How does an understanding of team cohesiveness and
team norms help team leaders and members to work well
together?
High cohesiveness is generally considered positive as members have high
interaction and communication with each other and are more committed to
the team. If the managers recognize the team’s efforts and accomplishments
and support its objectives, members tend to be more committed to the team’s
goals and more productive. Team norms set the foundation for how the
team operates and how members behave. Since norms encourage consistent
behaviors, norms increase efficiency of teams so team leaders should emphasize
behaviors that would help teams succeed.
Discuss the reasons that organizational change is
important for organizations of all sizes and industries.
your turn 6
Today’s organizations are facing a more dynamic business environment, i.e.
there has been a large number of significant changes and they have taken place
rapidly. This presents one of the most important challenges for managers: how
best to respond to and adjust to those changes in order to stay competitive.
Managers may also want to initiate organizational change internally in order
to improve the performance. In other words, there are external and internal
forces for change that result in several types of change which organizations
must deal with. Almost all organizations have been changing in some way;
even those high-performing companies such as Google need to change over
time to meet ongoing challenges or to take advantage of opportunities.
endnotes
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multiunit enterprise. Harvard Business Review,
pp. 106-119.
9
Robins, S. P. & Coulter M. (2016). Management
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10
1
2
Certo, S. C. & Certo, S. T. (2016). Modern
Management: Concepts & Skills (14th ed.). Pearson
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Daft, R. L. (2008). New Era of Management (2nd ed.).
Thomson South-Western, p. 310.
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Walton, E. J. (2005). The Persistence of bureaucracy:
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6
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Certo & Certo, op.cit., p. 272.
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17
Daft, op. cit., p. 312.
Jones, G. R. (2013). Organizational Theory, Design, and
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Robins & Coulter, op. cit., p. 329.
22
Certo & Certo, op. cit., pp. 280-281.
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Bovee, op. cit., p. 220.
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Boddy, op. cit., p. 322.
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Campbell, A., Kunisch, S., & Muller-Stewins G.
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Jones, op. cit., p. 127.
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Daft (2008), op. cit., p. 314.
28
Certo & Certo, op. cit., p. 218.
29
Robbins, S. P., Coulter, M., & Decenzo, D. A.
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Jones, op. cit., p. 128.
42
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43
Jones, op. cit, p. 192-193.
44
Daft (2013), op. cit. p. 72-74; 107-108.
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Environmental Uncertainty. Retrieved from http://
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Daft, R. L. & Marcic, D. (2007). Management: The New
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Daft (2008), op. cit., p. 337.
50
Woodward, J. (1980). Industrial Organisation: Theory
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Perrow, C. (1970). Organizational Analysis: A
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Jones, op. cit., pp. 208-218.
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Bahrami, H. (Summer, 1992). The emerging flexible
organization: Perspectives from Silicon Valley.
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54
Burns, T. & Stalker, G. M. (1961). The Management
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55
Daft, R. L. (2013). Understanding the Theory &
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56
32
Ibid, p. 30.
57
33
Daft (2013), op. cit., p. 266.
34
Jones, op. cit., p. 133.
30
31
Ashe-Edmunds, S. Simple Organizational Structure.
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35
DeSteno, D. (December, 2016). To make a team
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Certo & Certo, op. cit. p. 377.
Katzenbach, J. R. & Smith, D. K. (July-August,
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Problem-solving Team. Retrieved from http://www.
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58
Self-managed Team. Retrieved from http://www.
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59
36
Bovee, op. cit., p. 222.
37
Daft (2008), op. cit., p. 318.
60
38
Jones, op. cit., p. 188.
61
39
Vantrappen, H. & Wirtz, F. (March, 2016). Making
matrix organizations actually work. Harvard
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40
Daft (2013), op. cit., pp. 101-105.
41
Miles, R. E. & Snow C. C. (Summer, 1992). Causes
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Daft (2008), op, cit., pp. 698-699.
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Ibid.
81
Govindaryan, V. & Gupta, A. K. (Summer, 2001).
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82
63
64
Mulkeen, D. (February, 2017). 6 Tips to Make a
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Bilbin, M. Belbin Team Roles. Retrieved from http://
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Katzenbach, op. cit., p. 167.
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Gratton, L. & Erickson, T. J. (November, 2007).
8 ways to build collaborative teams. Harvard
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HBR Staff (November, 2016). Five Critical Roles
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Lee, S. F. Five Stages of Team Development. Retrieved
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Tuckman, B. W. & Jensen, M. A. C. (1977). Stages
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Daft (2008), op. cit. pp. 707-709.
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Bovee, op. cit., p. 233.
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Conflict. Retrieved from http://www.businessdictinalry.
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74
Resolving Team Conflict – Building Stronger Teams by
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75
Jones, op. cit., pp. 296 – 297.
Ibid.
Robbins, op. cit., p. 261.
83
Daft (2008), op. cit., pp. 365 - 367.
84
Jones, op. cit. pp. 300 – 302.
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Ryan, S. (November, 2016). How Loss Aversion and
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94
77
Ibid.
78
Patel, S. (August, 2015). 10 Examples of Companies
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www.entrepreneur.com/article/249174
79
Certo & Certo, op. cit., p. 275.
80
Russo, S. (January, 2014). Holacracy: Pros and Cons of
a Radical Challenge to the Traditional Organization.
Retrieved from http://www.hrreview.co.uk/hr-news/
strategy-news/holacracy-pros-and-cons-of-a-radicalchallenge-to-the-traditional-organisation/50404
Retrieved from http://www.holacracy.org.
96
Burns, T. & Stalker, G. M. (1961). The Management
of Innovation. Tavistock.
97
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Chapter 7
Leadership, Diversity,
and Motivation
Learning Outcomes
After completing this chapter, you will be able to:
1
3
5
7
Analyze the nature of leadership.
Explain the traditional approaches to
leadership.
Understand the content of contemporary
leadership.
Define motivation and explain its significance
in the work place.
Chapter Outline
The Meaning and Nature of Leadership
Leadership and Management
Traditional Approaches to Leadership
Contingency Approaches to Leadership
Contemporary Leadership
Leading Diversity
Motivation in the Work Place
Perspectives on Motivation
180
2
4
6
8
Understand the difference between
management and leadership.
Comprehend the contingency approaches to
leadership.
Grasp the context of diversity in organization.
Compare different perspectives on motivation.
Key Terms
Leadership
Leadership traits
Leadership behaviors
Leadership ethics
Diversification
Mulcultural work force
Motivation
Motivation theories
Business Management
Organizations are subject to constant change which makes the management function increasingly
complex. Sectoral, regional, or international conditions affect the content as well as the extent of change
and developments in different types of organizations. Furthermore, the pace of technology is a significant
determinant of organizational change. Therefore, it has become key to organizational performance and
managerial success including leadership accomplishments.
This book explores essential functions of the management process. Leading is one of these functions
and it is the dynamic face of the management process. It is about understanding the behavioral aspect of
managing people along with technology, methods, measures, and mechanics.
Leadership is critical to goal accomplishment in organizational settings whether business, state, or any nonbusiness environment. It is important for making the best use of resources in emerging economies and cannot
be ignored in developed nations. Leadership and leaders have been the subject of significant scholarly research
and discussion as well as being a major part of higher education curricula and company training program.
Motivation is a critical dimension of leading people in organizations as well as being a constant topic
on the agenda of leaders. Because of its inner nature, it is a challenging process for managers as well as
for leaders to motivate individuals on the same basis using the same tools. Motivation techniques vary by
organizations, circumstances, and by leadership style. The fit between the circumstantial necessities and
motivational practices is a major determinant for creating and maintaining an efficient work place.
This chapter covers the basics of leadership and motivation as significant parts of management process.
First, the meaning and nature of leadership are described and followed by the comparison of leadership
to management. Then traditional, contingency approaches, and the emergence and characteristics of
contemporary leadership are explained.
Moroever, diversity as a critical element in the integrated business environment is examined. Then
the meaning and importance of motivation in the work place is explained, including the analysis of early
approaches to contemporary perspectives for motivating people in organizations to fulfil ultimate goals.
Leadership applies to any type of competitive environment
THE MEANING AND NATURE OF LEADERSHIP
World class leaders are the subjects of not only journalists and historians but also social scientists in general
and especially leadership researchers. In many studies of leadership it’s quite common for authors to cite historical
examples concerning world – class leaders to support their position. But as Bass et. al. indicate studying these
leaders in a more systematic manner could add to the current stock of empirical leadership research.1
During the period of struggle and reform covering the entire Turkish Nation, Atatürk worked and dealt
with diverse groups of people. He had to lead them in a way that they not only contributed to these achievements
but they themselves changed and developed in a way that they became the driving force of change. The whole
reformist movement which was obtained during the independence days and its impact on Turkey’s standing in
the modern world are the indicators of Ataturk’s transformational leadership skills.2
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Leadership, Diversity, and Motivation
Exemplary leadership stories and leaders have been at the core of public attention for all times whether
in business, society, or politics. Societies and organizations have been affected, shaped, and redirected
by leaders, good and bad. The leadership process and its components have been subject to a significant
scholarly research, case studies, academic curricula, and company training programs. Thus, the term
leader and how she or he applies the leadership process is critical to organizational success at all levels of
achievement.
Definition of Leadership
Figure 7.1 Components of Leadership
Leadership is a complex process.
Leadership is the process of influencing
others – a group, employees, or followers
Goal/s
depending on the environment- in dynamic
ways towards attaining goals. Leadership is a
Personal style/Charisma
blend of factors shaped by the environmental
impact, as illustrated in Figure 7.1 Goals are
Leadership (f)
guides for leaders and their followers which
Circumstancesgovern the leadership process. Personality
Economic, political,
and values shape a person’s leadership skills.
social, sectoral,
The latter become most influential when
organizational
charismatic individuals emerge in times of
crisis—whether generated from external
Followers
threats—such as economic crises, changes in
the political environment, or internal threats
such as upending reorganizational change,
succession, and new partnering caused by M&A (mergers and acquisitions), etc. Finally, the acceptance of
followers and/or encouragement is where leaders draw most of their power.
1
Discuss the impact of leadership factors on the
process of infuencing others.
LEADERSHIP AND MANAGEMENT
We defined the leadership process above. Let’s remember the
definition for management: “Achieving goals through planning,
organizing, leading, motivating, and controlling”. These processes
have similarities but they are also much apart from one another.3 We
will discuss these in the following section.
Management and leadership are similar in terms of:
• Focus on attaining goals,
• Group function,
• Process of interaction and influence,
• Practice changing with circumstances.
Leadership is the process of
influencing others – a group,
employees, or followers depending
on the environment- in dynamic
ways towards attaining goals.
The management and leadership roles, which are critical dimensions of the world of business, have
distinguishing characteristics:
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Business Management
•
•
•
Management emerged with the Industrial Revolution.
Management is based on position; leadership is about personal qualifications.
Managers are appointed; a leader is a role model who earns
the title and is embraced by the followers.
A leader is a role model who earns the
title and is embraced by the followers.
• Management aims at formal goals whereas leaders generate
informal goals.
• Management is attaining goals through others; leadership is pursuing goals with others.
• Management is based on rules, leadership is spontaneous and inspirational.
• Managers focus on completing tasks efficiently; leaders focus on goals for development,
improvement, and change.
• Management authority is based on legal authority; leadership power comes from followers.
• Management produces order and consistency; leadership produces change and movement.4
Figure 7.2 illustrates the connection between a leader and a manager. A manager uses legal authority for
attaining goals, whereas a leader possesses power, ability to lead, for accomplishing organizational goals through
followers’ needs and expectations. Leaders and managers may have different personalities in an organization.
Some tend to possess characteristics close to that of a manager. Some stand as a sole leader. As managerial
and leadership atttitudes and skills converge, same person is a manager and a leader which we see as an ideal
situation (See Table 7.1). A team director appointed by the CEO of a company, is a manager due to her/his legal
authority but at the same time the team leader working closely with the team members in an informal setting.
Figure 7.2 Leadership and Management
Manager
Leader
Manager
Leader
Position authority
(Legal right)
Authority
+
Power
Group power
(Ability to lead)
Table 7.1 Managerial Orientation for Leader, Manager, and Leader Manager
Leader
Manager
Leader manager
Tool is her/his power
Tool is her/his legal authority
Leading skills outperform positional authority
Does what is essential
Does things right
Generates and coaches the achievement process
Creates new targets
Does the planned and required
Inspires and enpowers to get things accomplished
Seeks followers’ involvement
Complies with rules and regulations
Primary concern is the subordinates’ acceptance and
involvement
Elected, accepted, and informal Assigned, formal, and impersonal
Elected or assigned
Leads teams
Uses leading skills first
Manages hierarchy
Invisible in the formal structure Visible in the organization chart
Formally positioned also perceived as a leader
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Leadership, Diversity, and Motivation
2
Compare leadership and management for effectiveness in accomplishing goals.
TRADITIONAL APPROACHES TO LEADERSHIP
It is not difficult to argue that first leaders emerged when people started living in groups. However, we
prefer to focus on scientific studies that examine the leadership process in organizational as well as formal
settings. Thus, early leadership studies point out to traits and behaviors of leaders.
Traits Approach to Leadership
Early research on leader traits introduced characterisctics
possessed by powerful leaders, which is called Great Man
Traits approach focused on identifying
theory. Traits approach focused on identifying innate
innate qualities and characteristics possessed
qualities and characteristics possessed by great social,
5
by great social, political, and military leaders
political, and military leaders in history. The logic is to
in history.
analyze what such leaders did to achieve highly challenging,
at times impossible tasks. Atatürk, Lincoln, Napoleon, and
Gandhi are examples of such traits.
Leadership traits, as mentioned above, are sought for distingusihing leaders from non-leaders. However,
as circumstances changed especially for business, leadership traits were developed and enhanced. It has
been acknowledged that not one person can possess all positive traits. It has become more complicated to
determine one set of traits for successfuly leading in all types of envrironments.6
Leadership traits have changed in time under the impact of changing environmental forces from
technology to education, from social interaction to globalization. As a result, recent research on leadership
focuses on more sophisticated traits and more importantly on skills. Business leaders are sought for
possessing skills such as social interaction, entrepreneurial traits, cognitive abilities, flexibility, or cultural
sensitivity and many others relevant to environmental and global developments.
Behaviorial Approaches to Leadership
A focus solely on traits was not sufficient for separating leaders from others. Neither was it for analyzing
the leadership process. This led to searching for the behavorial side of leadership characteristics some of
which are explained below.
The Michigan studies
Based on interviews with managers and employees, this
group of studies identified two basic forms of leadership
Task-oriented behaviors indicate a focus on
behaviors: task/production oriented behaviors and people/
production
and technical aspects of a job.
7
employee oriented behaviors. Task-oriented behaviors
indicate a focus on production and technical aspects of
People-oriented behaviors indicate a
a job. Managers who were task-oriented were concerned
supportive approach to subordinates.
about issues such as keeping low costs and scheduling
meetings. People-oriented behaviors indicate a supportive
approach to subordinates. Managers with this type of orientation dealt with high performance goals and
human needs. Today, we must emphasize that the success and effectiveness of different behaviors depend
on the necessity of the circumstances which is influenced by constant change.
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Business Management
The Ohio State studies
The results of this group of research were akin to
Michigan studies. The researchers from Ohio State
University introduced two basic leader behaviors or
styles: initiating structure behavior and consideration
behavior. Initiating structure is parallel to the task
oriented behavior and shows the emphasis on formal
processes such as designing roles and responsibilities.
Consideration behavior is a form of people orientation
and indicates the extent of concern for the relationships
with subordinates and their feelings.
Initiating structure shows the emphasis on
formal processes such as designing roles and
responsibilities.
Consideration behavior is a form of
people orientation and indicates the extent
of concern for the relationships with
subordinates and their feelings.
The Managerial Grid
This model, which was renamed as the Leadership
Grid, intersects two basic leadership behaviors, concern
for people and concern for production. It also indicates the
behavioral pattern of managers.8
The Managerial (Leadership) Grid is about
the behaviorial dimension of leadership.
Figure 7.3 The Managerial Grid
1,9
9,9
Team Management
People oriented
Country Club Management
Middle of the Road Management
5,5
Impoverished Management
1,1
Authority Compliance
9,1
Production oriented
The Managerial Grid, as displayed in Figure 7.3,
consists of five managerial or leadership styles reflected in
The Managerial Grid consists of five
two dimensions which are concern for people (vertical) and
managerial or leadership styles reflected in
concern for production (horizontal): (1,1) Impoverished
two dimensions which are concern for people
and concern for production.
management – low in both dimensions; (1,9) Country
Club management – high in concern for people and low in
concern for production; (9,9) Team management – high
in both concerns; (9,1) Authority Compliance – high in concern for production and low in concern for
people; and (5,5) Middle of the Road management – intermediate in both dimensions.
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Leadership, Diversity, and Motivation
The managerial grid is a useful tool for managers to observe which category in the grid their leadership
style fits. It is also a model that can be used during training programs for organizational development. This
approach has been criticized for simplifying the behaviorial styles to only two dimensions. Also, the factors
that shape the leadership behaviors are not solidly considered.
Therefore, it should be noted that leadership styles are influenced by factors such as: the environmental
circumstances, the product/s, and manager’s/leader’s choices. The following section examines leadership
approaches in different circumstances.
3
List five habits for both what you think as
successful leadership and poor leadership.
CONTINGENCY APPROACHES TO LEADERSHIP
As we read rankings of business magazines and witness successful versus unsuccessful leadership stories,
we may wonder why some fail and display poor leadership. Although there is no “one fits all explanation”
and issues change by circumstances and other than corruption as well as incompetency cases, there is one
common element for failure examples: aligning the organizational facts to environmental circumstances.
From Marissa Mayer, former CEO of Yahoo transferred from Google, to President Donald Trump, a former
businessman, questionable styles of leadership can be observed. BBC Capital notes that the former CEO of
Twitter, Dick Costola, did not have the management potential for a company as big as Twitter, although he had
a successful track record with start-ups.9
Succesful leaders are those who are skilled for
making the best decision in changing circumstances.
In a dynamic business environment, there
is no “one fits all” leadership style.
Contingency models of leadership focus on the match
between environmental factors and leader’s behaviors. Some
of the factors examined are organizational goals, leaderemployee relations, task structure, and position power.
Let’s briefly explain some of the contingency approaches
to leadership: situational leadership; Fiedler’s contingency
theory.
186
Contingency models of leadership focus
on the match between environmental factors
and leader’s behaviors.
Business Management
Situational Leadership
Introduced by Hersey and Blanchard,10 The premise of
the situational leadership model is “Different situations
demand different kinds of leadership”.11 The situational
model carries features of behaviorial approaches to
leadership.
Situational leadership emphasizes that leaders match
their approach according to the degree that subordinates
are ready for the task. In other words, characteristics of
people which impact the leadership behaviors. Hence,
the model introduces two basic parts: leadership styles
and the development level of employees, as illustrated
by Northouse.12 Main leadership styles are identified
in groups such as: supportive (relationship oriented)
and directive (task oriented). Supportive behaviors are
participative, friendly, include two-way communication,
praising, listening, and rewarding. Directive behaviors
include one-way communication, clearly defined goals,
tasks, and roles as well how to achieve them.
Situational leadership emphasizes that leaders
match their approach according to the degree
that subordinates are ready for the task.
The premise of the situational leadership
model is: “Different situations demand
different types of leadership”.
Supportive behaviors are participative,
friendly, include two-way communication,
praising, listening, and rewarding.
Directive behaviors include one-way
communication, clearly defined goals,
tasks, and roles as well how to achieve
them.
Development level or readiness of employees are determined based on: their commitment to their
job (willingness, motivation, confidence) and their competency level (knowledge, skills, confidence,
experience).
Leaders align with their subordinates’
readiness for a task.
Development level of employees are determined
based on their commitment to their job (their
competency level).
Supportive behavior
(People oriented)
Table 7.2 Employees’ Development Level and Leadership Style
SL 3
Employee: Competent; not committed enough
due to lack of confidence
Leadership: Supporting –high supportive, low
directive
SL 2
Employee: Not committed; incompetent
Leadership: Coaching-high supportive,
high directive
SL1
Employee: Committed; competent
Leadership: Delegating-low supportive, low
directive
SL4
Employee: Committed; incompetent due to
lack of skills or experience
Leadership: Directing-low supportive,
high directive
Directive behavior (Task oriented)
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Leadership, Diversity, and Motivation
The situational model demonstrates the
relationship between subordinates’ degree of readiness
and how leaders respond to this. Table 7.2 illustrates
a combination of subordinates’ conditions and
leadership behaviors. As you can read from
Table 7.2, the more committed and competent
subordinates are the more flexible and delegating
the leadership style may be. As an example, think
of a project team in a newly established advertising
company: The team is enthusiastic and determined
for success but not experienced and skilled enough.
The team leader displays a directing style: focuses on
goal accomplishment; gives instructions using oneway communication; and supervises closely. As the
team gains experience and learns the task details,
the leader may apply a more participative behavior
which may be followed by a delegating style.
The more committed and competent
subordinates are the more flexible and
delegating the leadership style is.
The situational leadership model underlines
the idea that a work place includes people with
different approaches to the job itself. The message
for managers and leaders here is that, it is critical
to be informed and observant about subordinates’
connections to their job: how willing they are to
contribute to organizational goals and how capable
as well as qualified they are to accomplish these
goals. Furthermore, the same rule must apply to
the leader or manager her/himself.
Check out this web site and others for Johari
Window as one of the tools that are utilized for
self-awareness and learning more about people that
we work with.
Internet
h t t p : / / w w w. o x f o r d r e f e r e n c e . c o m /
view/10.1093/oi/authority.20110803100021
659?rskey=cmR6Dv&result=3
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Fiedler’s Contingency Model
This model examines the match between the
leadership style and the situation. The difference
from the situational model is that Fiedler’s model
adds organizational aspects to the situational
variables. The focus of the Fiedler’s contingency
model is to detect the leadership style and the
situation correctly, so the most effective match can
be decided. If this match is the right one then the
group is most likely to be successful; if the match
is not appropriate the group performance will be
relatively low. Let’s examine how the leadership
style and the situation is detected.
Fiedler’s contingency model examines the
most effective match between the leadership
style and the situation.
Leadership styles in Fiedler’s contingency
model are people (relationship) oriented and task
oriented styles, similar to the situational model.
What is different is that Fiedler suggests that
leadership styles are pretty much fixed. Therefore,
the leader matches her/his style with the situation
that is most suitable for her/his effectiveness.
Fiedler’s model includes the Least Prefered
Co-Worker (LPC) scale for measuring leader
styles. If a leader scores someone s/he least
prefers high, it means that s/he is willing to
develop good relationships and it is considered
a relationship oriented style. If this score is
low, it means the leader pays more attention
on achieving the task and it is considered a task
oriented style. Therefore, leaders with high LPC
scores are people oriented; those who score low
LPC are task oriented.
According to Fiedler’s contingency model:
leaders with high LPC are people oriented;
leaders with low LPC are task oriented.
After the leadership style is determined as
whether people or task oriented, the stuation
must be examined. By this token, the situational
variables of Fiedler’s contingency model are: the
Business Management
quality of leader-member relations; the degree of
task structure, and the position power.13
• Quality of leader-member relations
involves factors such as the employees’
or group members’ trust and loyalty for
the leader. This relationship can be either
positive and good or negative and poor.
• Task structure is about to what extent
the job requirements as well as the goals
are clearly defined, formalized and
standardized. Thus, a task structure can be
a highly structured routine one or weakly
structured which is out of routine. For
example, the Mc Donalds franchising system
works with highly standardized and clearly
defined tasks of service, cooking, decorating,
and cleaning of stores anywhere in the world.
• Position power is the amount of power
that a leader has over her/his subordinates
in terms of hiring, firing, promotion, and
work orders. Thus, regarding these factors
the power of a leader based on the position
can be strong or weak.
The combination of the variables above shows
the favorability of the leadership situation. A
situation is considered highly favorable if: the
leader-member relations are based on trust and
respect; the task structure is highly structured;
and the leader has strong power over her/his
subordinates. On the other hand, a situation is
mentioned as highly unfavorable if: the leadermember relations are poor; the task and roles
are not clearly defined and standardized; and the
leader has little authority for directing subordinates
and issuing orders.
After determining the leadership style and
the favorability of the situation, Fiedler’s model
attempts to match these two dimensions based on
research findings. Fiedler studied 1200 groups and
concluded:14
• If the situation is highly favorable, task
oriented leadership style was suitable.
Because when all situational variables are
positive then it is expected by the group that
the leader focuses on accomplishing the task.
• If the situation is highly unfavorable, again
task oriented leaders performed better.
Because then the group needs to be trained,
directed, and focused on the task.
•
If the situational variables are moderate,
then
relationship
oriented
leaders
performed more effectively.
The situational variables of Fiedler’s
contingency model: the quality of leadermember relations; the degree of task
structure; and the position power.
The favorability of the leadership situation
determines the suitability of the leadership
style.
For those who are in the position of leading or
managing people, it is critical to apply the most
suitable leadership style to achieve the best results.
Fiedler’s model points out to the necessity for
evaluating the situation regarding group members,
the task itself, and how much power they can apply.
Fiedler’s contingency model was mainly
criticised for his idea that leadership style is fixed.
Leaders must be able to adjust their style. Also, the
impracticality of the LPC was challenged. Despite
the criticism, Fiedler’s model guided the researchers
about the importance of matching leadership style
to the situational factors for the accomplishment of
organizational goals.
4
How would a leader behave if s/he is
incompetent her/himself?
CONTEMPORARY LEADERSHIP
The concept of leadership has been subject to
change in organizational settings. The emerging
dimensions of technology, communication,
human relations, and social interaction force new
leader figures and new ways of leading people.
Consequently, some leadership styles that are
recently introduced are charismatic/visionary
leadership, leader-member exchange theory,
transformational and transactional leadership,
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Leadership, Diversity, and Motivation
servant leadership, team leadership, and authentic
leadership.
Although each contemporary leadership
approach has its own details, one common feature
of different contemporary leadership styles is
the increasing importance of human asset, thus
inclusiveness and communication. In this chapter
we will explain leader-member exchange theory
and transformational leadership.
Leader-Member Exchange Theory
(LMX)
Take a moment to think about your direct or
indirect experiences in any organization or a work
place.
Do you observe leaders, managers, or administrators
being in close work relations with some but not as
much with others, and even almost ignoring a number
of people? Do you happen to be one of your manager’s
favorite co-workers or have you ever or any of your
peers felt left out?
The answers to the questions above describes
leader-member exchange theory (LMX). LMX
suggests that leaders create in-groups and outgroups that they decide at the beginning of their
relationship with their subordinates or followers.15
The leader then trusts the in-group members
more than the others, consults and works closely
with them, brings them to certain authority and
responsibility positions, and also may reward them
more in the form of their appraisals and promotions.
In-groups can be formal or informal. In other
words, they can take place in organizational charts
or not. Business partners, top administration teams,
heads of departments, board of directors, different
committee members, or invisible in-group members
are examples of LMX types of structures depending on
the type and size of the enterprise, whether a business
company or an informal social organization.
Leader-member exchange theory (LMX)
suggests that leaders create in-groups and
out-groups that they decide at the beginning
of their relationship with their subordinates
or followers.
190
Early and simple exchange relations displayed a
vertical dyad between the leader and the followers.
This direct relationship was observed in the form
of: in-group relations with those with expanded
responsibilities based on negotiations; out-group
relations with regular formal responsibilities.16
Personality and other personal characteristics as well
as subordinates’ willingness to negotiate and take
more responsibility played a role in the formation
of in-and-out-group relations. In-group members
get more information and spend more time with the
leader in exchange for investing more effort towards
organizational goals and more dependent.
Later studies on leader-member exchange shifted
the focus from the exchange relationship itself to the
quality of the relationship and how it contributes
to the overall organizational effectiveness. Hence,
according to LMX, in-group members’ performance
is higher; they have more job satisfaction; mostly
support the leader’s practices; devoted to the
organizational goals; and generate less turnover.
According to LMX, in-group members’
performance is higher; they have more job
satisfaction; mostly support the leader’s
practices; devoted to the organizational
goals; and generate less turnover.
Leader’s inner circle is a term that can be discussed
as an example to an in-group. Every leader with real
leadership qualities, or those who are in such positions,
has a narrow group surrounding her/him which we
may refer to as an inner circle: for business leaders
it’s their co-workers with whom they make strategic
decisions, meet, consult with, and have frequent
discussions; for political leaders it’s their aides with
whom they develop political strategies; for a university
rector, it is the top administrative team; and for a
head of a civil society organization her or his close
co-workers. John Maxwell points out to the fact that a
leader’s success is strongly related to the inner circle. He
refers to the qualifications that he believes members
of an inner circle must possess such as: displaying
and exemplary character; bringing complementary
talents to the table; holding a strategic position in the
organization; adding value to the organization and
to the leader; and positively impacting other members
of the inner circle. He also suggests leaders what not
to do: valuing praise instead of honesty and driving
away those with qualifications and talent.17
Business Management
Atatürk, Founder of the Republic of Turkey and one of the greatest leaders in the world.
The message for leaders and managers from the LMX
theory is that people with whom they are partners and
The selection of whom to work with closely
those they work with daily and closely form a team.
is a strategic decision for a leader which
These people are critical to the success of leaders and the
requires deep thinking and analysis.
effectiveness of organizational goals. Therefore, selecting
whom to work with closely is a strategic decision for a
leader which requires deep thinking and analysis. The choice of unqualified people because of political
tactics, protecting closely related informal group members, or trying to avoid people who could become a
threat for the leadership position could work for the short term but certainly creates negative impacts for
the leader and moreover the entire organization.
It is acknowledged that a leader must have a close team, a qualified team. A leader’s greatness on the
other hand is realized with inclusiveness and embracing all members of an organization. This leadership
attitude makes every member of a group or and organization feel valued. The result is job satisfaction,
more contribution, and support from all subordinates and followers.
Transformational Leadership
The introduction of transformational leadership
was initiated by Downton and developed by Burns.18
Charismatic leadership is inspiring and
Transformational leaders differ from others by their charisma
motivating people beyond what they
and the ability to inspire radical change. Transformational
would normally do.
leadership is more than charismatic leadership which is
A transformational leader articulates
“inspiring and motivating people beyond what they would
19
a vision, transforms the thinking of
normally do”.
individuals, brings out their creativity,
A transformational leader articulates a vision,
engages in the organizational atmosphere,
transforms the thinking of individuals, brings out their
and empower followers to accomplish
creativity, engages in the organizational atmosphere, and
goals, and moreoever reach their full
empowers followers to accomplish goals, and moreoever
potential.
to reach their full potential.20 We can think of many
examples of transformational leadership in Turkey and in
the world in all areas. Atatürk is a leading example. As a political leader, he inspired and guided not
only his close followers but also an entire nation through hard times towards gaining independence and
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Leadership, Diversity, and Motivation
becoming a modern society. We will refer to Atatürk’s
achievements more in the following section.
An example from the business world is Steve
Jobs, the deceased CEO of Apple Inc. company. Years
before, Steve Jobs, had been driven out of Apple by
CEO Sculley and his board of directors because of
his visionary projects to develop advanced personal
computers, electronic gagets, and software that
neither businesses nor others were ready to consume.
While Apple struggled to regain its dominance of
the burgeoning consumer electronics industry, Jobs
unleashed his creativity and honed his management
skills as a founder of Pixar, the creator of Toy Story,
Disney’s first full-feature computer generated movie.
He then returned to Apple Inc., transformed the
work atmosphere at Apple, and offered the world
the most innovative products: the I-phone, I-pad,
and I-pod.
Dimensions of transformational
leadership
Transformational leadership is explained
in four I’s: charisma or idealized influence;
inspirational motivation; intellectual stimulation;
and individualized consideration.21
• Charisma or idealized influence is
about transformational leaders deeply
influencing people and being strong role
models. They are trustworthy, visionary,
possess high moral standards, and highly
respected by their followers. An example
of this is a respected team leader who
powerfully respresents her/his team members
in different settings and becomes a role
model.
• Inspirational motivation underlines
transformational leader’s ability to motivate
people for high expectations and inspire
them for accomplishing challenging tasks.
An example for inspirational motivation is
a handicapped athlete running a marathon,
who inspires other athletes with physical
disabilities.
192
Intellectual stimulation is creating an
atmosphere of freedom to let people think
broadly and bringing the innovator out of
people, encourage them to think out of the
box which also supports critical thinking.
An example to this would be a team leader at
Amazon who lets the team members challenge
her/himself for different ideas and come up with
creative ideas. Amazon is one of the leading
electronic commerce and cloud computing
companies. It also competes also competes in
other areas such as supermarket business by
purchasing Whole Foods market chain.
• Individualized
consideration
is
approaching people on an individual
basis acknowledging that each individual
is different regarding their needs,
expectations, and skills, thus they must
be managed and treated differently. This
approach supports an atmosphere that
employees can perform to their highest
potential. As groups get smaller, they are more
effective applying such individual approaches
and leaders can spare more time with their
subordinates. Even with larger groups, what
is important is to ensure people that they are
all valued, that their needs, problems, and
skills are sought individually.
Transformational
leaders
emerge
in
•
Transformational
leadership
is
explained in four I’s: charisma or idealized
influence;
inspirational
motivation;
intellectual stimulation; and individualized
consideration.
organizations, whether business or the nation state,
during periods of crisis, and the need for radical
change brought about by invention or uncertainty,
or upending threats in the external environment.
A study of business graduate students about Atatürk’s
leadership skills showed this young generation also sees
Atatürk as a transformational leader who is a role
model for businesses accomplishing impossible goals.22
Business Management
Transformational versus transactional leadership
Transformational leadership is discussed compared
to transactional leadership for a better analysis.
Transactional leaders are devoted managers
Transactional leadership is employed where the
who aim to accomplish organizational goals
accomplishment of organizational goals is the primary
in an efficient way.
focus and the leader is fixed on the results. We may as
well mention that transactional leaders are devoted
managers who aim to accomplish organizational goals
in an efficient way. Transactional leaders also attach importance to issues such as communication,
developing human resources, and motivation. A division manager, a CEO, a rector, or a supervisor may
perform as transactional managers.
Transformational and transactional leadership are
different in the ways they approach motivating individuals
Transformational
and
transactional
or employees. For the transactional leader the motive
leadership apart in the main motive behind
is the achievement of the organizational goals; for the
approaching the individuals or employees.
transformational leader it is getting the individuals to reach
their fullest potential through inspiration and individual
consideration. See the comparison also in Figure 7.4.
Figure 7.4 Transformational Versus Transactional Leadership Factors
Charisma+Inspirational motivation+Intellectual stimulation+Individual consideration
Transformational leadership
Contingent reward+Management by exceptions
Transactional leadership
Transactional leadership factors are contingent
reward and management by exception.
Transactional leadership factors are
Contingent reward is the basics of the exchange between
contingent reward and management by
a
transactional
leader and the followers. A promotion, an
exception.
appraisal, salary raise, or a good grade are reward examples.
Management by exception (MBE) is the intervention
of managers in the employees performance. A manager uses active MBE when s/he closely watches the
employees for mistakes and takes corrective actions. If the intervention is after the mistakes or defaults
happen, it is then a passive form of MBE.
5
Which brings more effective results during a
period of organizational change, transactional
or transformational leadership? Why?
In this section of the chapter we took a brief ride through different approaches to leadership which
is a critical process for accomplishing any type of organizational goals. For leadership perspectives that
consider ethics, see Chapter 3. All leadership approaches and theories have strenghts and weaknesses. Keep
in mind that the applicability and suitability of any leadership approach depends on the organizational
circumstances and resources.
193
Leadership, Diversity, and Motivation
LEADING DIVERSITY
The term diversity emphasizes a reality that doesn’t require research nor data because individuals,
organizations, and cultures are different more than they are similar. Moreover, the topic of diversity
attracts more attention as the people move and change locations around the world in large numbers.
Factors such as war, terrorism, refugees seeking safety, economic contraction, and political instability force
people migrate from one country to another leading to a shift of demographics. Concurrently, societies
and organizations have become more diversified. Besides the positive connotations of this worldwide
development, some negative impacts tend to put global actors in jeopardy. The result is diversity and
inclusiveness are embraced more by scholars, international organizations, business entities, governments,
non-governmental organizations, and the media.
Diversity simply indicates differences. Diversity is
acknowledging and understanding of differences: gender,
Diversity
is
acknowledging
and
age, background, cultural values, physical condition,
understanding
of
differences:
gender,
nationality, religion, race, sexual orientation, language,
age, background, cultural values, physical
skills, and personality. The term is defined in various sources
condition, nationality, religion, race,
from different perspectives. The Business Dictionary
language, opinions, skills, or personality.
refers to diversity as “Feature of a mixed workforce that
provides a wide range of abilities, experience, knowledge,
and strengths due to its heterogeneity in age, background,
ethnicity, physical abilities, political and religious beliefs, sex, and other attributes”.23
The legal origins of diversity in employment was initiated in the US in the 1960s. This reflected
the upheaval of the Civil Rights movement and federal legislation spearheaded by President Lyndon B.
Johnson following the assasination of John F. Kennedy in 1963. The 1964 Civil Rights Act prohibited the
exclusion of under-represented miniorities, including African-Americans, Asians, Latinos, women, etc.,
from employment in U.S. government agencies. This was followed by subsequent diversity legislation
in the 1960s and 1970s that barred descrimination based on age and handicapping conditions. Since
then federal legislation has expanded and refined a whole regimen of laws addressing human rıghts. Of
parallel and great importance was President Johnson’s decision to radically transform US immigration
law favoring European immgration, by openning the US to the world. This single act had a major impact
on intensifying workforce diversity.24 In time, the focus has shifted from civil rights to recognizing the
overarching economic value of diversity.25 As a result, managing and promoting derivative benefits of
enhancing the efficiency and efficacy of businesses have become of utmost importance.
In this section of the chapter, most common diversity topics such
as workplace diversity, cultural diversity, and gender differences will be
briefly explained.
Diversity is “differences”.
Diversity in the Workplace
Today’s work place is more integrated and reflects globalized societies and markets. The pressure
of the increasing mobility of people with different skills and cultural orientations have led business
enterprises, international organizations, governments, and non-profit organizations to place more
emphasis on inclusion and equality. One example is the Gender, Equality and Diversity Branch (GED), part
of the Conditions of Work and Equality Department of the International Labour Office which is responsible
for promoting equality and respect for diversity in the world of work. GED draws attention to diversity from
around the world by stating, “GED expertise focuses on issues related to equal opportunities and treatment for
all women and men in the world of work, and eliminating discrimination based on gender, race, ethnicity,
indigenous identity and disability”.26
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Business Management
Diversity is richness but needs to be managed well.
The amount of diversity in organizations is
identified by several factors. Some are:
•
The overall legal workplace requirements
in a country such as quotas for women and
underrepresented groups and people with
disabilities.
•
The approach of business owners and top
administration about diversification of the
workforce.
•
The size and extent of cross-cultural operations and global connections.
•
The percentage of customer diversification
in the market for specific goods or services.
•
The pressure from the public opinion and
civil society organizations.
•
The gender, racial, and cultural composition of the labor pool whether regional or
international that companies and organizations draw workers.27
Diversity is a perspective that should be diffused
in regular processes of a business organization.
Hewlett & Packard is one of many examples in the
business world to push for diversity as their “source
code”. “From the beginning, Bill Hewlett and I
have had a strong belief in people. It has always been
important to Bill and me to create an environment
in which people have a chance to be their best, to
realize their potential, and to be recognized for their
achievements.”Dave Packard, HP Founder.28
Global companies in various sectors such as
Google, Apple, CNN, Bloomberg, Novartis, Deloitte,
Disney, or Johnson&Johnson develop strategies and
methods for managing diversity more efficiently
Google “Recently, however, the company has identified
a lingering problem that needs fixing: For a company
built on delivering the rich diversity of human
experience, the tech titan is not itself a diverse place
to work—and it’s moving to change that. Google has
decided to search its soul”.29
Internet
http://fortune.com/best-workplaces-fordiversity/
https://www.microsoft.com/en-us/diversity/
The term diversity indicates a mixed nature of
an environment namely a society, an organization, a
company, or a work group. Diversity as defined above
is an unavoidable reality in today’s social, political,
educational, and economic settings anywhere in the
world. It is moreover critical to business organizations
of any sector whether a single business owner, a
local entrepreneur, an exporter, a multinational, or
a global company. For today’s managers, leading or
managing diversity successfully is a key component
of competitive advantage as it is for effective
accomplishment of goals especially in international
business settings. How can leaders and managers
ignore or not be attentive to the diversification issues
while their work groups are diversified in age, gender,
values, or background? More women are entering
the workforce and creating added value in economic
systems; customers are multicultural as well as
multilingual; Internet interaction is diversified; and
other environmental impacts force an inclusive
approach.
Leading diversity successfully is a key
component of competitive advantage for
internationally oriented businesses.
195
Leadership, Diversity, and Motivation
“Diversity and inclusion is in our DNA says” Carlos
Sabater, Regional Managing Director, Americas of Deloitte
Inclusion is the degree to which each
company”.30 Managers of multinational companies and
member of an organization feels that her or
leaders of diversified work teams are inclined to prioritize
his presence is appreciated.
the issue of creating a work atmosphere where everyone
feels valued and accepted. In other words, one of the main
determinants of successful diversity management is to
obtain an inclusive work atmosphere. Inclusion is the degree to which each member of an organization
feels that her or his presence is appreciated.31
Diversity and inclusion often used together which strenghtens the meaning of both terms, voiced by
leading companies. “A diverse mix of voices leads to better discussions, decisions, and outcomes for everyone”.
Sundar Pichai, CEO, Google.32 “Bloomberg’s diverse workforce and open culture are essential to innovation and
the key to our success. Our efforts help establish an inclusive work environment where all Bloomberg employees
feel respected for their diversity and empowered to impact the business globally”.33
Ingredients of diversity
What makes diversity? There is no one single answer to this question. The ingredients, in other words the
factors of diversity and their weight for the work place vary by: size and type of the company; organizational
goals; and environmental effects.
A diversified work place is a blend of multi-characteristics
possessed by the members of a business organization. Hence,
A diversified work place is a blend of
a diversified work place is: multi-generational; composed of
multi-characteristics possessed by the
a variety of backgrounds, cultures, languages, and ideologies
members of a business organization.
as well as religions; covers different ethnic groups; minorities,
underrepresented and disadvantaged groups; and finally
diversified gender groups.
In this chapter we will refer to the types of diversity that are seen as the most important.
Generational diversity. Demographic
trends around the world indicate two main
variables: an aging work force and an emerging
multi-generation work environment. Between
2015 and 2030, the number of people in the
world aged 60 years or over is projected to grow by
56 per cent, from 901 million to 1.4 billion, and
by 2050, the global population of older persons
is projected to more than double its size in 2015,
reaching nearly 2.1 billion. The aging process is
most advanced in high-income countries. Japan
is home to the world’s most aged population1:33 per
cent were aged 60 years or over in 2015. Japan is
followed by Germany (28 per cent aged 60 years
or over), Italy (28 per cent) and Finland (27 per
cent).34 The issue of an aging workforce is specificaly
being discussed in countries such as Australia35 and
United States.36
196
For a multi-generational work place, watch the
educational videos suggested below and any others
that you may search for.
video
Generational Diversity: Training Point Issues in
Management#4.FilmsMediaGroup,2009,fod.infobase.
com/PortalPlaylists.aspx?wID=16071&xtid=49854;
https://www.youtube.com/watch?v=sfootedt1IE.
Accessed 13 June 2017
Business Management
Other components of generational diversity are the mix of generations. Today’s work force includes
Baby Boomers born after WWII through the early 1960s, GenXs born in the 1960s and late 1970s, GenY,
and now GenZ who are under 16 years of age.37 Generation Y, born in 1980s and early 1990s, is also
named as echo boomers, millenials, or Igen.38
Generations in today’s workforce are not only diversified in age, but most important their technological
orientation and perspectives about the concept of the work environment differs. Aging employees are
sources of the historical memory of organizations, whereas the necessity for creating space for a new
generation with competitive skills is even more critical.
Cultural and ethnic diversity. Members of organizations of any type often come from different
backgrounds and acquire a variety of values either similar or apart from one another. Moreover,
cultural and ethnic diversity becomes a significant aspect of managing organizations with international
operations. Leading organizations in various sectors whether industry or service highly value diversity
and its benefits. Take a look at a part of the statement by University of Oxford’s Equality and Diversity
Unit: “People at the University of Oxford come from around the world, with very varied backgrounds, beliefs,
and cultures. We expect all members of the University to treat their colleagues with dignity and respect. As
an individual you are entitled to hold your own beliefs, but in your work role you are expected to work with
people holding different beliefs”.39
Diversity by minorities, underrepresented groups, and disadvantaged groups.
Women, gays, ethnic minority groups, people with cognitive diversity, and refugees in western countries
also are basic elements of diversity in organizations around the world. The terms inequality, bias,
discrimination, abuse, and mobbing are mostly associated with these groups in the work place.
The effects have been positive as well as generating social and political discussions. The world has become
attuned to the US President Trump’s highly discussed travel and visa ban as well as restricted immigration
policies which have negatively affected the work efficieny in Silicon Valley companies. They hire employees from
Eastern countries. Most of them are in the technology field. Companies including Apple, Microsoft, Google, and
Tesla started a “tech opposition” against the ban and restrictions initiated by Trump.40
Women’s status in societies and in the work place
has been a significant topic for research and discussions
The business environment today is a
in international platforms detailed in the sub-section
reflection of a diversified global society
below. Work place diversity includes disadvantaged
which is a blend of nationalities, cultures,
people with disabilities either physical or mental.
ethnicity, religions, and languages.
Among these are cognitively different and neurodiverse
people with conditions such as autism and dyslexia.
These people, who are mostly isolated in the society and
work place, tend to be skilled in memory, pattern recognition, and mathematics which are critical to
companies diversified analytical capacity. An increasing number of companies such as Hewlet Packard,
Ford, IBM, and Deloitte recognize the contribution of these kinds of employees and adjust their HR processes
for recruiting and training them.41
The business environment today is a reflection of a diversified global society which is a blend of
nationalities, cultures, ethnicity, religions, and languages. Companies with international operations feel
the pressure of becoming more diversified under the developments and changes such as:
• The increasing mobility of the work force among the countries and regions of the world.
• The diversified nature of customers of economic sectors whether industrial or service providers.
• The increasing global competition pushing companies towards international strategies for gaining
different cultural perspectives and a variety of skills.
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Leadership, Diversity, and Motivation
Picture a work place with employees of different generations, different educational backgrounds, and
from different cultures. Managing generational diversity may result in a blend of managerial approaches
according to the expectations of different age groups in the work force.
Advantages of a diversified work environment
As a business expands by size and product line as well as growing beyond the home country’s borders,
it becomes not only spontenous but also a necessity to work with a diversified workforce. For example, the
unavoidable impact of globalization integrates employers and employees from all over the world which makes
the work environment virtually multicultural with gains towards the goal accomplisment. It is important to
note that, creating a diversified but harmonized work force is a challenge for managers that is explained
in the following part and must be managed through appropriate strategies.
International business operations require
diversified perpectives and skills.
A diversified work environment can support
creativity and innovation with effective
management.
Depending on the organizationals goals, if managed and coordinated successfully a diversified work
place, a group, or a work team has advantages such as:
•
An enriched work environment,
•
Promotion of equality,
•
Employees feeling more valued,
•
More effective customer relations – Avon products reach out to different market segments around the
world through its multinational sales force at the local level,
•
More efficient problem solving,42
•
More creative and innovative processes which require out of the box thinking, and
•
Reduced costs associated with high turnover and lawsuits.43
Challenges of a diversified work environment
The benefits of diversity apply only when it is considered and managed seriously. A diversified work
force requires consideration addressing differences in the most appropriate manner which otherwise can
cause extended issues for companies. One example is Walmart, the world’s largest retailer. In 2009, it settled
a lawsuit for discriminating against African-Americans seeking jobs as truck drivers.44
As well as the benefits, working with a diversified work force has some challenges for companies
such as:
198
•
Difficulty of managing differences – For example, cultural habits, religious practices, or speaking
different languages require consideration,
•
Conflict factor that may arise among the employees working closely or team members, and
•
Personal bias- Prejudice, streotyping, and discimination.
Business Management
Prejudice is uninformed and biased negative
perception of others who are different because of gender
Prejudice is uninformed and biased negative
identification, ethnicity, cultural background, or religion.
perception of others who are different based
Prejudice gives way to streotyping and discrimination.
on gender identification, ethnicity, cultural
Stereotyping is rigidly categorizing certain individuals,
background, or religion.
groups, or communities because of prejudicial tendency
Stereotyping is rigidly categorizing certain
towards their differences that are based on unreliable
individuals, groups, or communities because
sources of information such as media or public rumors.
of prejudicial tendency towards their
Discrimination happens as a result of sterotyping.45 It
differences.
is reflected in organizational policies and practices. We
can think of numerous examples of discrimination and
Discrimination happens as a result of
inequality as mentioned in various sections of this chapter.
prejudice and streotyping.
Putting members of certain religions or ethnic groups in the
same pot, or women not assigned for higher administrative
positions as well as being paid less for the same job are generic
examples of prejudicial and streotypical thinking.
One of the critical challenges of diversity mangement is efficiently harmonizing the differences of
all terms among the workforce. Managers should value the diversed variety of the individuals they are
responsible for and create an organizational culture of acceptance.
Managers should value the diversed nature of
the workforce.
Leading Across Cultures
“One believes things because one has been conditioned to believe them.”–– Aldous Huxley, Brave New
World
The charm of the global competition cause businesses
strive to go beyond their national borders and grow in
Culture encompasses values, beliefs, and
international markets. Going international is a milestone
norms that shape the way of living and
for a business to get involved in cultures different from
thinking in a society.
home. Culture encompasses values, beliefs, and norms
that shape the way of living and thinking in a society.
Multiculturalism refers to differences in
Culture strongly affects individuals and organizations
values, beliefs, attittudes, customs, and
within a society; thus we consider it the national culture
norms that are held by people from different
of a country. The cultural conditioning process happens
cultures.
under the influence of values shaped by authority
figures and environmental surroundings. The concept of
multiculturalism emphasizes diversity in terms of cultural
differences. Hence, multiculturalism refers to differences in values, beliefs, attittudes, customs, and norms
that are held by people from different cultures.46 Note that, different regions or different communities in a
country also may possess distinctive cultural characteristics as language, folklore, or traditions such as the Black
Sea region in Turkey, the Quebecois region of Canada, or the aboriginal people of Australia.
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Leadership, Diversity, and Motivation
Core values in a business environment are affected by
social values in a country.
values. Ethnocentrism is the belief that one’s own
culture is superior to others which creates barriers
between members of a group or a work team.
Ethnorelativism is the approach that
cultures are equal as well as being able to
think from the perspectives of others.
Ethnocentrism is the belief that one’s own
culture is superior to others.
Considering the description of culture
by Hofstede as “mental conditioning”47 for
individuals such conditioning recurs in different
settings throughout life: family culture; national
culture; professional culture; and organizational
culture. Organizational culture is shared values
that lead the way of operating towards the goal
accomplishment. Organizations are sub-cultures of
a national culture, embracing common values with
national cultures.
Organizational culture is shared values that
lead the way of operating towards the goal
accomplishment.
Cultural awareness and cultural sensitivity
support a harmonized multicultural
environment.
The fact that companies- namely international,
multinational, or global- operating in foreign
countries work with a diversified group of
people, makes cultural encounters critical.
Hence behaviors such as cultural awareness
and cultural sensitivity then become bridging
attitudes for employees of all levels from around
the world towards unified goals.
Managers in the global markets apply varying
techniques and tools for successfully leading a
diversified and multicultural workplace. On the
other hand, factors such as technology, education,
and industralization bring economies, cultures,
and organizations closer. Cultural convergence is
one of the results of such rapprochement. Cultural
convergence is a process that eliminates the
differences in values between nations, groups, or
organizations.
Cultural convergence is a process that
eliminates the differences in values between
nations, groups, or organizations.
Gender Differences
Managers in a multicultural work environment
should possess a behavioral pattern such
as ethnorelativism which is the opposite of
ethnocentrism. Ethnorelativism is the approach
that cultures are equal as well as being able to
think from the perspectives of others. This type
of thinking allows managers to create the best
harmony utilizing the richness of the work force
instead of unfairly judging others with different
200
The topic of gender inequality has been
subject of research and multi-dimensional
discussions. As it is the case around the world,
women in Turkey have had to struggle to
gain social and economic recognition. Under
Atatürk in the 1920s and 30s, women’s rights
were expanded, touching upon education,
employment, and holding elective office. The
reforms also included the abolition of polygamy.
In the 1980s and subsequently, administrations
Business Management
influenced by the United Nations, the quest for
accession by the European Union, the work of
civil society organizations, and the efforts of
women to organize for political action, have
resulted in their rights becoming part of the
national agenda and the legislation. Under
the present administration, they include laws
protecting women from harassment and spousal
sexual violence as well as additional legislation
regarding employment. The enforcement of
laws calls for a steady and uniform application
throughout the country. The rights of women in
the work place remains an important goal for the
Turkish business community.48 Unlike Europe,
Canada, or the United States, issues related to
LGBT have not yet become part of the national
dialogue in Turkey.
Parallel developments around the world
regarding strong support from civil society
organizations, governments, and research results
have had an empowering impact on women’s
standing in the society and consequently in the
work place. Moreover, increasing cases of lawsuits
by women against discrimination, mobbing, and
sexual harassment reflect the changing attitudes
about seeking redress of grievances. For example,
Microsoft is one of the large companies that had to
contend with such lawsuits based on a complaint that
female employees earned less than men other than
the bias for promoting men over equally qualified
women.49
Women’s employment rate in European countries
vary: In 2015 Sweden took the lead by 74%; Greece
the lowest by 42.5 % , wheeras the EU average of 28
countries was 60.4%.
Gender equality in the workplace includes maternity
conditions.
Women’s status in general, work life issues, and
inclusion in decision making process at various
levels have been topic to research studies around
the world. Common outcome of women’s studies
indicate a range of issues for women in society
and the work place including Turkey. World
Economic Forum (WEF) and Catalyst- a non-profit
organization with a mission of accelerating progress for
women through workplace inclusion50 are examples of
organizations for improving women’s employment
status.
Table 7.3 Examples of Global Gender Gap Ranking,
2016
Country
Ranking
Turkey
130
Japan
111
USA
45
China
99
Ethiopia
109
Italy
50
Iceland
1
Uganda
61
Netherlands
16
In the same token, women’s status around
the world is analyzed and measured by various
indexes and statistics. For example, Turkey ranks
130 among 144 other countries in the WEF
GlobalGender Gap Index for 2016 (Table 7.3).
Sub-index rankings for Turkey for 2016: economic
participation and opportunity 129; educational
attainment 109; health and survival 1; political
empowerment 113.51
Internet
http://www.nationalcentrefordiversity.com/
sector/businesses-and-equality-diversity-andinclusion-edi/
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Leadership, Diversity, and Motivation
Factors shaping women’s status in
the work place
Women’s social, economic, and political
standing is measured and analysed by various
instruments processed by states, corporations,
international organizations, and civil society
groups around the world. It is encouraging that
all relevant parties seem focused on progress being
made in this issue. Despite the strong consensus for
improving the still negative status of women not
only in developing nations but also in advanced
economic systems, the issue remains as noted in
studies by the OECD, WEF, and TUIK as well as
others.
Women’s status in the work place remains a
partially unresolved issue around the world.
The reasons that keep women taking part in
the work force in smaller numbers than men and
having less access to top administrative positions
may differ from one country to another.
However, the general conditions are common
which will be briefly described here. They apply
to not only women but to other minorities in
organizations.
Cultural orientation is a strong determinant of
women’s social and economic participation which
also affects their political power. Traditional and
conservative cultures tend to attach women’s roles
of wife and mother at home rather than as working
women. Educational attainment is an important
factor for women gaining economic independence
by seeking more participation in a country’s work
force and better jobs.
Educational attainment is an important
factor for women gaining economic
independence.
202
The glass ceiling is one of the most discussed
terms for organizational challenge regarding
women’s promotion to top administrative
positions. It indicates an invisible barrier for
upward mobility of women and other ethnic,
religious, or gender minorities in an organization.
For example, the specific term bamboo ceiling refers
to the promotional obstruction of Asian managers.
Opt-out-trend is about women leaving work before
they even experience the battle for promotion
or occupying higher positions in the work place.
Sources argue that the reasons for such choice
are mostly for fulfilling the requirements of other
personal roles or the belief that there will be no
chance of getting higher in the organizational
hierarchy. Queen bee syndrome is one of the
approaches causing this trend which points out
to female bosses not supporting female employees
for promoting to higher positions.52
Glass ceiling indicates an invisible barrier
for upward mobility of women and other
ethnic, religious, or gender minorities in an
organization.
6
Compare multi-culturalism and diversity in
organizations.
MOTIVATION IN THE WORK
PLACE
Picture yourself at your current work or a
work place you plan for yourself. Think about
why you work or what keeps you in your job. Are
there reasons for investing more time and labor in
the routine tasks or the ones you are temporarily
assigned for. How are your relationships with your
colleagues? Are you satisfied with your manager’s
or team leader’s approach to employees? Have you
Business Management
thought about what would make you more willing to contribute to your company’s goals? Would you be
willing to be more engaged in different processes? Simply the answers to these and similar questions define
the content of motivating employees.
Working long hours, being creative, being a frontline
person, completing a project prior to the due date; or the
opposite to all above. Examples point out motivated or
Motivation is a drive to be willing to perform
non-motivated employees. Motivation is a drive to be
a task, take an action, or achieve a goal
willing to perform a task, take an action, or achieve a goal
usually for a desired or expected outcome.
usually for a desired or expected outcome. Motivation has
been associated with high organizational performance.
Thus, it is one of the most attended topics by managers who acknowledge that satisfying employees leads
to satisfied customers and eventually to higher market share and profits.
Examples of motivational practices in Turkish companies are
a sailing club by Borusan; cooking sessions by Vestel; or a music
group by Mercedes Benz.53 Richard Branson, founder and
CEO of Virgin Group, emphasizes that a happy staff means a
Motivation is associated with high
more successful brand. He gives motivational tips as: flexibility;
organizational performance.
annual leaves; bonuses for high performance achievers; regular
training sessions for employees; and giving employees more
autonomy for important decisions.54
Motivation is attached to two descriptive factors:55 The influential factors and the level of individual
motivation is based on the interpretation of behaviors. Thus, directly measuring motivation is not
applicable.
Figure 7.5 Basic Process of Motivation
Needs
Money,
socialization,
accomplishment,
security...
Fullfillment
behaviors and actions
Work discipline by the
employee; engagement in
the work process...
Satisfaction and
rewards
Completing a
difficult task,
promotion, being
valued...
Figure 7.5 shows the basic process for motivating
employees in a work place. The process starts with the needs
that change by individuals and circumstances. Because all
The basic process for motivating employees
starts with needs; continues with actions for
individuals have needs of this or that kind, motivation is
the fulfilment of the needs; and results in
a basic tool for all managers to create a happy and efficient
satisfaction and rewards.
work place. The motivation process continues with actions
towards the fullfillment of the needs by the person, others,
and most importantly by managers. The result of these
actions are satisfactions and rewards either intrinsicly from within the person or extrinsicly from outside.
Satisfaction as well as relief by completing a mission or innovating a product is an intrinsic reward. Satisfaction
that is obtained from outside in the form of company shares, promotion, or being praised by the team leader is an
extrinsic reward. It is highly critical that managers maintain a balance for intrinsic and extrinsic rewards.
Employees who get work satisfaction only by internal or external rewards will in time seek other type of
rewards. See below: Maslow’s Hierarchy of Needs Theory.
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Leadership, Diversity, and Motivation
The different stages of a basic motivation process, for example the choice and extent of rewards, vary
by organizational circumstances. It must also be noted that results of an action in the work place has
two sides: rewards and penalties. The application of penalties changes based on the management style.
Therefore, employees are encouraged to achieve a task and contribute to organizational goals either for
rewards or for not being punished.
A carrot on a stick is a pervasively used metaphor for
rewards and penalties.
Motivation is a basic tool for managers for
creating a happy and an efficient work place.
Rewards for accomplishment
intrinsic or extrinsic.
can
be
PERSPECTIVES ON MOTIVATION
Motivation has been explained from different perspectives with a different focus. Thus, motivational
approaches and tools in the work place are grouped: by content and by process; by chronology as early
and contemporary approaches. In this chapter we will explain motivation from content and process
perspectives.
Content Perspectives on Motivation
Content perspectives focus on peoples’ needs that
result in certain behaviors and actions for fulfilling them.
Content theories focus on peoples’ needs
Content theories therefore discuss various needs that
that result in certain behaviors and actions
motivate people for contributing to organizational goals.
for fulfilling them.
A tip for managers concerning content perspectives on
motivation is that they should try to understand employees’
needs, how to structure managerial and organizational
tools to fulfil them, and what type of behaviors to expect as a result of meeting employees’ needs.
In regard to content perspectives on motivation, we will bring to your attention the hierarchy of needs,
ERG theory, two-factor approach, and acquired needs theory.
The hierarchy of needs theory
This theory, introduced by Maslow, is one of the early and most widely known approaches to motivation.
Early theories of motivation form the foundation of the present practices for motivating the work force
in organizations. Although changing philosophy in work life and globalization caused new perspectives to
motivation, early approaches are still in effect.
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Business Management
Figure 7.6 Maslow’s Hierarchy of Needs
Self-actualization needs
Esteem needs
Social needs
Safety needs
Physiological needs
Maslow’s hierarchy of needs theory proposes that
people are motivated by multible needs which are in a
hierarchical order. 56 In this regard, Maslow introduced
five types of needs: psychological needs; safety needs;
social needs; esteem needs; and self-actualization needs
(Figure 7.6).
Physiological needs are the most basic human needs
such as food and oxygen. These needs apply to every person
in an organizational setting.
The hierarchy of needs theory proposes
that people are motivated by multible needs
which are in a hierarchical order.
Maslow introduced five types of needs:
psychological needs; safety needs; social
needs; esteem needs; and self-actualization
needs.
Safety needs include protection from physical and
emotional as well as security against all environmental
threats. It is important for employees of a company to be
assured that their safety needs will be met at all times.57
Safety needs include protection from
Social needs are a person’s need for friendship,
physical and emotional as well as security
belongingness, acceptance, and love. Employees and group
against all environmental threats.
or team members of a company become satisfied by the
Social needs are a person’s need for friendship,
work environment beyond basic needs when they have
belongingness, acceptance, and love.
good relationships with their peers and managers.
Esteem needs can be internal such as self-respect
Esteem needs can be internal such as selfand self-image, and extrinsic such as recognition and
respect and self-image, and extrinsic such as
respect by others. Thus, managers can satisfy the extrinsic
recognition and respect by others.
needs through visible symbols such as titles and nice
Self-actualization needs reflect one’s desire
physical conditions; intrinsic esteem needs through
for self-development and growth.
assigning challenging tasks or providing opportunities for
accomplishment.
Self-actualization needs reflect one’s desire for self-development and growth. Managers can support
employees for satisfying these needs by providing an encouraging work atmosphere to be engaged in
various processes.
Maslow’s hierarchy of needs, as Figure 7.6 displays, has some characteristics:
• The needs are in sequence. As one level of needs are satisfied, they are no longer effective and the
next level of needs become activated.
Physiological needs are the most basic
human needs such as food, and oxygen.
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Leadership, Diversity, and Motivation
•
Maslow named the first two level needs as low level (extrinsic) needs and the upper level needs as
higher level (intrinsic) needs.
For utilizing Maslow’s model effectively, managers should know about employees’ characterisctics and
be aware of their needs, thus how to motivate them individually or as a group. Managers also should
recognize that not all employees can be motivated through same level of needs. For example, a new employee
is most likely to expect lower-level needs such as safety and social needs to be satisfied first. Employees with higher
merit on the other hand, will be satisfied through higher level
needs such as self-respect and self-development.
Another critical tip is for multinational company
Multinational company managers should
managers. These managers deal with employees from
possess cultural sensitivity for being able to
different cultures with different motivational values.
create a harmony of values in the work place.
For example, an employee from Thai culture might value
relationships whereas someone from an individualistic
culture such as the US may prioritize self actualization needs.
ERG theory
Maslow’s theory about the hierarchy of needs was
modifed by Clayton Alderfer.58 ERG theory represents
a simplified form of Maslow’s needs hierarchy with
reduced number of needs. Thus, it introduces the needs
hierarchy as:
ERG theory represents a simplified form of
Maslow’s hierarchy of needs theory.
ERG theory includes existence, relatedness,
and growth needs.
•
Existence needs about being in a healthy physical condition.
•
Relatedness needs indicating the needs for being in good relationships with others.
•
Growth needs about self-development and gaining competence.
Frustration regression principle argues
for the situation that a person may revert
to lower level needs aiming to get more
satisfaction from already fulfilled needs.
According to the ERG theory, when higher level
needs are not satisfied as expected frustration regression
principle may apply. That is, the person may revert to
lower level needs, this time aiming to get more satisfaction
from already fulfilled needs. An employee not being promoted
to more prestigious positions may seek making more money or
being a part of different social groups.
The two-factor theory
This perspective on motivation was introduced by Frederick Herzberg, also named as the motivationhygiene theory. Herzberg’s theory investigates employees’ relationship to the job. The theory content
is based on interviews he conducted to find out when employees were satisfied and when dissatisfied,
thus when they were motivated and unmotivated to work. The interview results proposed that the work
factors which caused employees’ satisfaction were siginificantly different from the factors which caused
dissatisfaction.59 The findings suggested that employees mentioned dissatisfaction based on extrinsic
factors such as work conditions, supervision, interpersonal relations, security, and pay. On the other hand,
work satisfaction is based on intrinsic factors such as achievement, responsibility, and success.
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Table 7.4 Herzberg’s Hygiene and Motivation Factors
Hygiene factors
Motivators
Work conditions
Supervision style
Company policy
Interpersonal relations
Security
Pay
Achievement
Responsibility
Empowerment
Work itself
Recognition
Self-development
These two sets of factors lead to the presence
of a two-tier process for gaining satisfaction,
therefore being motivated to work (Table 7.4).
The first group of factors, called hygiene factors,
are related to satisfaction or dissatisfaction.
When hygiene factors are not sufficient there is
dissatisfaction; when they are sufficient in the work
place dissatisfaction is removed but still there is
no high satisfaction and motivation. The second
group of factors, called motivators, determine the
satisfaction level and motivation. When motivators
are missing there is neither dissatisfaction nor the
opposite; however, when the motivators are present
employees are highly satisfied and motivated. The
message for managers by the two-factor theory
is job satisfaction and motivation is a two-stage
process. Managers must provide the employees with
a work atmosphere where the factors that cause
dissatisfaction are removed; then the motivators take
place for motivating employees. The team in Google
who came up with the non-driver car project makes
an example of work satisfaction being highly motivated
based on self-development and high achievement.60
According to Herzberg, motivation can be
obtained after dissatisfaction is removed.
Acquired needs perspective
This perspective, also called three-needs
theory and developed by David McClelland,
proposes that certain needs acquired throughout
one’s lifetime determine the motivation at
work. The most common needs are: need for
achievement(nAch); need for power(nPow); and
need for affiliation(nAff).61
•
•
•
Need for achievement is the motive for
reaching a high standard as well as complex
tasks and challenging others.
Need for power indicates the desire for
gaining authority over others as well as
controlling and leading them.
Need for affiliation is the desire for
establishing friendships and being a part of
a group.
Acquired needs perspective proposes
that certain needs acquired throughout
one’s lifetime determine the motivational
dimensions at work.
Acquired needs perspective emphasizes that,
based on their surroundings, people grow up
with certain priorities which turn into critical
needs in time. These needs impact work behaviors
and relationships which may be similar and/or
different from others. For example, someone who
seeks achievement may become an innovator and
an entrepreneur; another one with a strong need for
affiliation tends to develop social skills and become a
middle level manager such as the HR director who
interacts and serves as a moderator.
As mentioned previously, the content perspectives
explained above and others such as McGregor’s X-Y
theory (See Chapter 2) seek these types of needs as
well as their effect on motivating people.
Process Perspectives on Motivation
Process perspectives focus on peoples’
behaviors which may be affected by environmental
factors besides needs. The important point for
managers is how to cause employees to repeat or
not repeat those behaviors. Some known process
perspectives of motivation are equity theory,
expectancy theory, and goal setting. In this chapter
we will cover equity theory and expectancy theory.
Process perspectives focus on peoples’
behaviors which may be affected by
environmental factors besides needs.
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Leadership, Diversity, and Motivation
Equity theory
This theory is developed by Stacy Adams and is
based on individuals’ equity expectations. Equity
theory proposes that individuals seek equal and fair
treatment regarding equal contributions. Thus the
theory emphasizes justice, fairness, and equality.
Equity theory proposes that individuals
seek equal and fair treatment regarding equal
contributions.
Employees evaluate the ratio of inputs such
as time, effort, and ability to outcomes
such as pay, promotion, and recognition
compared to the similar ratios by others.
According to the equity perspective, employees
will be motivated when they observe that they get
the same amount of treatment compared to others.
That is, employees evaluate the ratio of inputs such
as time, effort, and ability to outcomes such as pay,
promotion, and recognition compared to the similar
ratios by others. If the ratio is equal to employees
under the same circumstances the individual
perceives the work place and the managers as being
fair and may be motivated for contributing even
more to the organizational goals. If the employee
feels that the s/he is being undervalued or being
treated unequally compared to the people with the
same amount or less contribution, then there is
perceived inequity.
Think about a situation that is likely to happen
in most work places: a team member who works
longer hours and adds more to the goals of the team
will observe the outcome for other team members,
especially a team member who puts less effort. If the
praisal and the pay is the same amount for all team
members, the overall result will be disappointment for
the hard working employee.
Employees seek equal treatment in terms
of pay, promotion, social benefits, and
recognition in the work place.
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Managers must be attentive about creating
an organizational atmosphere of equality. Today,
employees are more sensitive and informed about
the practice of transparency, fairnesses, and equality
in the work place. Depending on the organization
and culture in/equality between the attitudes of the
superiors towards the employees, pay, promotions,
and even office or parking spaces are in the concern
zone of employees. Employees who perceive being
treated inequally may react in certain ways which
changes from one individual to another. Think
about how you might be or already have reacted in
such a case. Some are:
• Keep silent: Some may prefer to accept the
situation which eventually might result in
the decline of work efficieny in any type
of organization. For instance a blue collar
worker may be unwillingly produce less
if s/he feels there is a pay gap with another
worker in the same company. An academic, no
matter how devoted, may lose motivation for
teaching if s/he observes inequal treatment for
promotion.
• Change effort and outcome:62 An
employee who perceives to be treated
unequally may seek to enhance her or his
performance in order to compete with
colleagues. For instance, the academic
person above will invest more time on
research for getting the promotion. On the
other hand, the perception of inequality
may cause an opposite reaction: less time
at work, slowing a work process, creating
rumors, and affecting other people against
managers.
• Revise perceptions: Another reaction
in the case of inequality is playing with
perceptions. The person might attempt
to either create a false self-perception
or damage the perception of those with
rewards.
• Leave team membership or job: If a
person feels being treated unequally s/he
might just leave rather than losing time
with other efforts. This best applies when
there are replacement alternatives for the
person’s current status or job.
Business Management
We should add that the term equity also described as:
distributive justice and procedural justice.
Distributive justice is whether the allocation of
resources is perceived as being fair. The equity theory
recently focused on procedural justice which is the
perceived fairness of the distribution of rewards.63
Distributive justice is whether the allocation
of resources is perceived as being fair.
Procedural justice is the perceived fairness
of the distribution of rewards.
Expectancy theory
This theory is based on three key factors: expectation,
Expectancy or effort-performance linkage
instrumentality, and valence. Expectancy or effortis the perceived probability of success by an
performance linkage is the perceived probability
individual about performing a task.
of success by an individual about performing a task.
Instrumentality or performance-reward (outcome)
Instrumentality or performance-reward
(outcome) linkage is the perceived degree of
linkage is the perceived degree of positive outcome.
positive outcome.
Valence is the attractiveness of the outcome for the
individual.
Expectancy theory therefore, as proposed by Victor
Vroom, links the performance of an individual in an
Valence is the attractiveness of the outcome
organization to the attractiveness or desirability of a
for the individual.
given outcome. The theory suggests that the individual’s
motivation depends on the expectation of her or his ability
Expectancy theory links the performance
to perform certain level and receive a reward linked to it.
of an individual in an organization to the
If the expectation for a good performance and the linkage
attractiveness or desirability of a given
to the desired outcome is high, then that individual will be
outcome for successfully performing the task.
highly motivated for performing a task. If the expectaction
for the desired outcome is low, then the motivation and
the effort for high performance will be relatively lower.
The key for managers here is to understand employees’ goals in terms of outcomes and what they
value. Employees may invest more effort for a better performance quality if they perceive that they will be
rewarded by a desired outcome.
Some employees value social relations while others link more pay to higher performance. According
to a research by Capital Magazine in large Turkish companies, employees value goals such as: equal pay; job
assurance and health insurance; respect and justice in the work place; career planning; and self-development
opportunities.64 Always note that employees’ orientation and what they value change from one to another
because of personality, culture, and organizational and individual circumstances.
7
Employees can be motivated more for the
outcome they highly value.
Discuss the main difference between the
content and process perspectives for motivating
employees.
In this chapter, we combined the contents of leadership, diversity, and motivation which are critical
for the globally integrated and multicultural work place. Each topic is a strategic process for a successful
management practice which are complementary as well. Because they apply to all types of organizations,
you can also observe and assess the implementation of these concepts in your work place.
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Leadership, Diversity, and Motivation
Further Reading
The Executive and the Elephant
“All of us experience the inner struggle between two seemingly different parts of ourselves that want to
do different things. The personal examples of inner-elephant and inner-executive behavior are supported by
diverse and systematic evidence from neurology, psychology, and Eastern philosophy.”
Daft, R. L. (2010). The Executive and the Elephant -A Leader’s Guide for Achieving Inner Excellence.
John Wiley & Sons, p.16.
Also suggested for reading:
Allen, L. Gen Y, (2011). Employers must unite, experts say. Central Penn Business Journal, 27 (34),
pp.17-19.
Baltaş, A. (2013). Managing in Turkish Culture. Remzi Publishing.
Maxwell, J. C. (2013). How Successful People Lead. Center Street.
Sturt, D. & Nordstrom, T. (May 12, 2017). 5 Business lessons you can learn from
Guardians Of The Galaxy Vol. 2. Forbes.com. Retrieved at http://web.b.ebscohost.com/ehost/detail/
detail?vid=7&sid=2038bac0-ed50-4b02-89fa-a77d0e00a5c0%40sessionmgr103&hid=124&bdata=J
mxhbmc9dHImc2l0ZT1laG9zdC1saXZl#AN=123072610&db=bth
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Business Management
In Practice
Mr. Debbate is the recently hired Asia Division manager of a large multinational electronics
company headquartered in United States for over 30 years. The company also acquired divisions in
Europe. As an experienced manager in various cultures, he strongly acknowledges that a diversified, in
this case multicultural, work environment requires special consideration of cultural issues. Mr. Debbate
also fosters the significance of recognizing the values and personality of employees that a manager works
with.
During one of the introductory meetings he decided to share the details of a report of the results
of a series of surveys he had conducted in cooperation with the HR department of the company. The
results were intended to get feedback about work satisfaction and the sense of belongingness among
culturally diversified employees working for the division. Without commenting he quoted statements
from the interviews:
“I have been with this company for a year. I am from Germany, this is my first overseas assignment.
What I do requires intense technical concentration. I want to focus on my job only, but I have not fully
adapted to this work environment.”
“I am Indian, I speak fluent English and I can understand all discussions during meetings….but I
have communication problems with my colleagues…”
“I wish the meetings would be in my language. I could participate more in the discussions during
my work team’s meetings. I don’t want my managers to think that I am incapable or incompetent.”
“I am a Muslim, I want to be off during my religious holidays. I observe an opposite treatment of
others. Recently I was not permitted to observe the most important holy day of my religion. I plan to
resign.”
“As a woman I should be treated equally with men. I feel that my section chief prefers to assign me
with easier tasks. I can handle tough ones too.”
“Our manager holds meetings to ask our opinions. He insists that before making a decision
he should discuss with us. I prefer to do my own job, nobody asked our opinions in the company
when I worked in my home country.”
Mr. Debbate made his point by saying: We are a multinational company with a multicultural
work atmosphere. We aim to obtain a satisfied and inspired work team for gaining organizational
performance at the highest level possible. But it seems like we have unhappy employees in our division.
These and others as well as survey results point out to the complexity and challenges of a multi-cultural
work environment.
Discuss:
1. To what extent should companies apply diversification policies? Can overly implemented
diversification affect the organizational goals in a negative way?
2. In this case, which employees do you believe are dissatified and why?
3. Search for and compare the general features of Indian and USA work cultures. Are they distinct? If
so in what terms? Which specific features should a work group leader consider while working with
members from these two cultures or any others?
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Leadership, Diversity, and Motivation
Summary
LO 1
Analyzing the nature of
leadership process
Leadership is the proces of influencing others – a group, employees, or followers depending on the
environment- in dynamic ways towards attaining goals. Leadership is a blend of factors shaped by
the environmental impact. Goals are guides for leaders and their followers which govern leadership
process. Personality and values shape a person’s leadership skills. The latter become most influential
when charismatic individuals emerge in times of crisis—whether generated from external threats—
such as economic crises, changes in the political environment, or internal threats such as upending
reorganizational change, succession, and new partnering caused by M&A (mergers and acquisitions),
etc. The acceptance of followers and/or encouragement is where leaders draw most of their power.
LO 2
Understanding the difference
between management and
leadership
We can distinguish leadership and management in various dimensions such as: Management is based
on position, leadership is about personal qualifications; managers are appointed, a leader is a role
model who earns the title and is embraced by the followers; management aims at formal goals whereas
leaders generate informal goals; management is attaining goals through others, leadership is pursuing
goals with others; management is based on rules, leadership is spontaneous and inspirational; managers
focus on completing tasks efficiently whereas leaders focus on goals for development, improvement,
and change; management authority is based on legal authority, leadership power comes from
followers; and finally management produces order and consistency but leadership produces change
and movement.
LO 3
Explaining the traditional
approaches to leadership
Traditional leadership studies point out to traits and behaviors of leaders. The traits approach focused
on identifying innate qualities and characteristics possessed by great social, political, and military leaders
in history. Recent research on leadership focus on more sophisticated traits and more importantly on
skills. Business leaders are seeked to possess skills such as social interaction, entrepreneurial traits,
cognitive abilities, flexibility, or cultural sensitivity and many others relevant with environmental,
global developments.
A focus solely on traits had not been sufficient for seperating leaders from others. This led to searching
for behavorial side of leaders’ characteristics. Some behaviorial approaches are: the Michigan studies,
the Ohio State studies, and the managerial grid. The Michigan studies identified two basic forms of
leadership behaviors: task/production oriented behaviors and people/employee oriented behaviors.
The researchers from Ohio State University introduced two basic leader behaviors or styles: initiating
structure behavior and consideration behavior. The managerial grid is a useful tool for managers to
observe which category in the grid their leadership style fits. It is also a model that can be used during
training programs for organizational development.
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Business Management
LO 4
Comprehending the contingency
approaches to leadership
LO 5
Summary
Contingency models of leadership focus on the match between environmental factors and leader’s
behaviors. Some of the factors examined are organizational goals, leader-employee relations, task
structure, and position power. Situational leadership and Fiedler’s contingency model are well known
contingency approaches. Situational leadership emphasizes that leaders match their approach
according to the degree that subordinates are ready for the task. Hence, the model introduces two
basic parts: leadership styles and development level of employees. The message for managers and
leaders here is that, it is critical to be informant and observant about subordinates’ connections to
their job.
Fiedler’s contingency model examines the match between the leadership style and the situation.
The difference from the situational model is that Fiedler’s model adds organizational aspects to the
situational variables. The focus of the Fiedler’s model is to detect the leadership style and the situation
correctly, so the most effective match can be decided.
Understanding the content of
contemporary leadership
The emerging dimensions of technology, communication, human relations, and social interaction
force new leader figures and new ways of leading people. Consequently, some leadership styles
that are recently introduced are charismatic/visionary leadership, leader-member exchange
theory, transformational and transactional leadership, servant leadership, team leadership, and
and authentic leadership. One of the contemporary approaches is the Leader-member exchange
theory (LMX). LMX suggests that leaders create in-groups and out-groups that they decide at the
beginning of their relationship with their subordinates or followers.
Charismatic leadership is inspiring and motivating people beyond what they would normally
do. Transformational leader articulates a vision, transforms the thinking of individuals,
brings out their creativity, engages in the organizational atmosphere, and empower followers
to accomplish goals, and moreoever reach their full potential. Transformational leadership is
explained in four I’s: charisma or idealized influence; inspirational motivation; intellectual
stimulation; and individualized consideration. Transcational leadership is employed where
accomplishment of organizational goals is the primary focus and the leader is fixed on the results.
Transformational and transactional leadership apart in the main motive behind approaching
the individuals or employees. For the transactional leader the motive is the achievement of the
organizational goals, where as for the transformational leader it is getting the individuals to
their fullest potential through inspiration and individual consideration.
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Leadership, Diversity, and Motivation
Summary
LO 6
Grasping the context of diversity
in organizations
Diversity simply indicates differences. Diversity is acknowledging and understanding of differences:
gender, age, background, cultural values, physical condition, nationality, religion, race, sexual
orientation, language, skills, and personality.
The pressure of increasing mobility of people of different skills and cultural orientations around the
world markets led business enterprizes, international organizations, governments, and non-profit
organizations to place more emphasis on inclusion and equality. For today’s managers, leading or
managing diversity successfully is a key component of competitive advantage as it is for effective
accomplishment of goals especially in international business settings.
A diversified work place is a blend of multi-characteristics possessed by the members of a business
organization. Hence, a diversified work place is: multi-generational; composed of a variety of
backgrounds, cultures, languages, and ideologies as well as religions; covers different ethnic groups;
minorities, under-represented and disadvantaged groups; and diversified gender groups.
LO 7
Defining motivation and explaining
its significance in the work place
Motivation is a drive to be willing to perform a task, take an action, or achieve a goal usually for a
desired or expected outcome. Motivation has been associated with high organizational performance.
Motivation is attached to two descriptive factors: the influential factors and the level of individual
motivation is based on the interpretation of behaviors; motivation is based on individuals. The
motivation process starts with the needs that change by individuals and circumstances. Because all
individuals have needs of this or that kind, motivation is a basic tool for all managers to create a happy
and efficient work place. The process continues with the actions towards the fullfillment of the needs
by the person, others, and most importantly by managers. The result of these actions are satisfactions
and rewards either intrinsicly from within the person or extrinsicly from outside.
LO 8
Comparing different perspectives
on motivation
Motivation has been explained from different perspectives with a different focus. Thus, motivational
approaches and tools in the work place are grouped: by content and by process; by chronology as early
and contemporary approaches. In this chapter we explained motivation from content and process
perspectives.
Content perspectives focus on peoples’ needs that result in certain behaviors and actions for fulfilling
them. A tip for managers by the content perspectives on motivation is that they should try to understand
employees’ needs, how to structure managerial and organizational tools to fulfil them, and what type
of behaviors to expect as a result of meeting employees’ needs. Some important content perspectives
on motivation Hierarchy of Needs, ERG theory, Two-Factor approach, and Acquired Needs theory.
Process perspectives focus on peoples’ behaviors which may be affected by environmental factors
besides needs. The important point for managers is how to cause employees to repeat or not repeat
those behaviors. Some known process perspectives to motivation are Equity theory, Expectancy theory,
and Goal setting.
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Business Management
6 Which leadership approach is Fiedler’s
theory included in?
a. Goals
b. Other leaders
c. Circumstances
d. Followers
e. Budget
a. Situational leadership
b. Behaviorial approach
c. Traits approach
d. Contemporary leadership
e. Early leadership theories
2
7
Which of the following is about leadership
when we compare leadership to management?
a. Formal goals
b. It is based on position
c. It is attaining goals through others
d. It is about personal qualifications
e. Focus on completing tasks efficiently
3 Which leadership approach is described
by “focus on identifying innate qualities and
characteristics possessed by great social, political,
and military leaders in history”?
According to the situational leadership
approach, if the situation is “Employee: Not
committed; incompetent”, which leadership style
is suitable?
a. Delegating
b. Supporting
c. Coaching
d. Directing
e. Competing
8 What kind of employee situation does the
delegating style match?
a. Behaviorial approach
b. Traits approach
c. Situational approach
d. Contingency approach
e. Transactional leadership
a. Committed; incompetent
b. Committed; competent
c. Not committed; incompetent
d. Competent; not committed
e. Lack of confidence
4 A focus solely on traits had not been sufficient
for separating leaders from others, neither was it for
analyzing the leadership process. As a result of this
development, which leadership approach emerged?
9 Which of the following is the case if the
situation is highly favorable?
a. Behaviorial approach
b. Traits approach
c. Transformational approach
d. Contingency approach
e. Great Man theory
5 Which of the following is not one of the
styles included in the Managerial Grid model?
a. Impoverished management
b. Country-club management
c. Authority compliance
d. Management by exception
e. Team management
Test yourself
1 Which of the following is a factor not directly
related to the leadership function?
a. Task is not clear
b. Roles are not defined
c. Not much authority
d. Leader has strong authority
e. Leader-member relations poor
10 Which one of the following is a factor that
shows the difference between trasformational and
transactional leadership?
a. Individualized consideration
b. Motivation
c. Communication
d. Goals
e. Employee support
215
1. b
If your answer is incorrect, review “The
Meaning and Nature of Leadership”.
6. a
If your answer is incorrect, review
“Contingency Approaches to Leadership”.
2. d
If your answer is incorrect,
“Leadership ad Management”.
review
7. c
If your answer is incorrect, review
“Contingency Approaches to Leadership”.
3. b
If your answer is incorrect, review “Traits
approach”.
8. b
If your answer is incorrect,
“Situational approach”.
review
4. a
If your answer is incorrect,
“Behaviorial approach”.
review
9. d
If your answer is incorrect,
“Situational approach”.
review
5. d
If your answer is incorrect,
“Behaviorial approach”.
review
10. a
If your answer is incorrect, review
“Contemporary Approaches to Leadership”.
Suggested answers for “Your turn”
Answers for “Test yourself”
Leadership, Diversity, and Motivation
Discuss the impact of leadership factors on the process
of influencing others.
your turn 1
Compare leadership and management for effectiveness
in accomplishing goals.
your turn 2
216
The leadership process occurs when certain factors - circumstances, goals,
charisma, and followers- are combined. When one of these factors is missing
then the leadership process is missing a dimension. Circumstances and goals
are the initiating factors for a need for leadership and to start the process.
Circumstances create the necessity for a leader and generate goals. Goals are also
the guides for the leader’s and the group’s decisions. Therefore, circumstances
and goals are vital to a leadership process. Charisma and a strong personality is
critical for creating a powerful image, so that the leader is accepted. And finally
the follower factor is the reason for calling someone a “leader”.
Leadership and management processes both aim to accomplish goals; basically
leadership deals more with informal and management with formal goals. As
we compare the two for effectiveness, none is superior to the other. Success
about accomplishing goals depends on organizational and environmental
factors. Although they are apart in various dimensions, both processes have
certain principles for success. Therefore, for a successful accomplishment of
goals requirements need to be fulfilled.
Business Management
List five habits for both what you think as successful
leadership and poor leadership.
Suggested answers for “Your turn”
your turn 3
Habits of successful leaders:
They are inclusive.
They are strategic thinkers.
They believe that diversity is richness.
They are good listeners and conversationalists.
They communicate to and from all levels of the hierarchy.
Habits of those who display poor leadership:
They are not democratic.
They discriminate.
They are not flexible.
They have a short term thinking.
They are not observant.
How would a leader behave if s/he is incompetent
her/himself?
your turn 4
Some leaders or managers are selected or appointed to certain managerial
positions disregarding that they don’t possess required skills. Thus they don’t
fit in the position. Every position requires cognitive, social, and analytical
skills as well as physical abilities depending on what the position is and how
the task is applied.
The disqualified person in the leadership position may or may not have selfawareness. If a person in a leadership position does not have the capacity
of any kind, s/he will primarily feel the pressure of being overloaded and
not able to complete tasks in her/his managerial territory. S/he might be
able to manage things for a while, because every new managerial person is
allowed some time to settle down. But eventually, her/his lack or the required
qualifications for the position and the tasks it covers, will be noticed. S/he
then might feel the stress more powerfully and try to make-up for the lack
of certain skills and abilities. Check “Peter’s Principle” which refers to those
behaviors in a humorous language.
217
Leadership, Diversity, and Motivation
Suggested answers for “Your turn”
Which brings more effective results during a period of
organizational change, transactional or transformational
leadership? Why?
your turn 5
The applicability and suitability of a leadership approach depends on the
circumstances including the leader’s choice and the goals. Transactional
leadership is an exchange relationship. The focus is on the task. Therefore this
leadership approach is more applicable when the effective completion of a task
is the primary concern. Transformational leadership is engaging, stimulating,
and inspiring for higher goals. The focus on people and the organizational
goals are aimed to be accomplished however. Thus, if the work environment
requires radical change and individuals’ engagement in the processes, then
transformational leadership is better fit.
Compare multi-culturalism and diversity in organizations.
your turn 6
Both multi-culturalism and diversity are about differences regarding people
and their orientations. Multi-culturalism is the diversity of cultures. In a
multi-culturual organization there are different cultures from any part of
the world; thus a variety of values, languages, religious traditions, attitudes,
relations, habits, and way of doing things. Diversity is much larger and
composes different cultures as well. Diversity covers different minorities,
gender groups, political ideologies, ethnic groups, education, perspectives,
generations, and any other type of diversity.
Discuss the main difference between the content and
process perspectives for motivating employees.
your turn 7
218
Content perspectives of motivation focus on peoples’ needs that result
in certain behaviors and actions for fulfilling them. Content theories
therefore discuss what type of needs motivate people for contributing to the
organizational goals. Therefore, it is necessary for managers to understand
which needs the employees prioritize. Process perspectives, on the other hand,
focus on peoples’ behaviors which may be affected by environmental factors
besides needs. Here, managers must try to understand the environmental
factors that affect employees’ behaviors.
Business Management
endnotes
1
2
Bass, B. M., Avolio, B. J., & Goodheim, L. (1987).
Biography and the assessment of transformational
leadership at the world – class level. Journal of
Management, 13, pp. 7-19.
Zeytinoglu, G. N., Koç, U., Gültekin, Z., & Yılmaz,
S. (2006). Atatürk as a transformational leader:
An empirical research on graduate students. 5th
Global Business and Economics Conference ( IJBE ABER). Cambridge, July 6-8.
23
Business Dictionary. Retrieved from http://www.
businessdictionary.com/definition/diversity.html
24
Ashkanay, N. M., Hartel, C. E. J., & Daus, C. S.
(October 31, 2001). Diversity and emotion: The
new frontiers in organizational behavior research.
Journal of Management. Retrieved from http://
citeseerx.ist.psu.edu/viewdoc/download?doi=10.1
.1.566.8783&rep=rep1&type=pdf
Shore, M. L., Randel, A. E., Chung, B. G., Dean,
M. A., & Singh, G. (July, 2011). Inclusion and
diversity in work groups: A review and model
for future research. Journal of Management, 37,
pp. 1262-1289.
25
3
Koçel, T. (2016). İşletme Yöneticiliği. Beta.
4
Northouse, P. G. (2013). Leadership (6th ed.). Sage
Publications, p. 12.
5
Ibid., p. 19.
6
Daft, R. L. (2016). Management (12
SouthWestern Cengage Learning, p. 521.
7
Ibid., p. 527.
8
Robbins, S. P. & Coulter, M. (2016). Management
(13th ed.). Pearson, p. 495.
28
9
Finkelstein, S. (December 17, 2014). The worst
CEOs of 2014. BBC Capital. Retrieved at http://
www.bbc.com/capital/story/20141216-theworst-ceos-of-2014
29
ed.).
Hersey, P. & Blanchard, K. H. (May, 1969).
Life-cycle theory of leadership. Training &
Development Journal, 23(5), pp. 26-34.
10
Northouse, op. cit., p. 99.
11
Ibid., p.100.
12
Northouse, op. cit., p. 124; Coulter, op. cit., p. 496.
13
Daft, op. cit., p. 526.
14
Robbins & Coulter, op. cit., p. 500.
15
Northouse, op. cit., pp. 8-9.
16
Maxwell, J.C. A Leader’s Inner Circle. Retrieved from
http://www.johnmaxwell.com/cms/images/uploads/
ads/A_Leaders_Inner_Circle.pdf
17
Zeytinoğlu et. al., op. cit.
18
Daft, op. cit., p. 530.
19
Zeytinoğlu, G. N. (2017). Management. In G. N.
Zeytinoğlu (Ed.), Introduction to Business, pp.
79-101 (96). Anadolu University Press.
20
Bass, B. M. (1985). Leadership and Performance
Beyond Expectations. Free Press.
21
Zeytinoğlu et. al., op. cit.
22
ILO Gender and Equality Branch. Retrieved from
http://www.ilo.org/gender/lang--en/index.htm
26
th
Herring, C. & Henderson, L. (2014). Diversity in
Organizations. Taylor and Francis, p. 37.
27
Retrieved from http://www8.hp.com/us/en/hpinformation/about-hp/diversity/culture.html
McGirt, E. (February 1, 2017). Fortune. Retrieved
from http://fortune.com/google-diversity/
Retrieved from https://www2.deloitte.com/global/
en/pages/about-deloitte/topics/global-diversitydeloitte-is-diversity.html
30
Daft, op. cit., p. 444.
31
Retrieved from https://www.google.com/diversity/
32
Retrieved
from
https://www.bloomberg.com/
diversity-inclusion/
33
United Nations, Department of Economic and
Social Affairs, Population Division (2015). World
Population Ageing 2015. Retrieved from http://
www.un.org/en/development/desa/population/
publications/pdf/ageing/WPA2015_Report.pdf
34
Australian Government Productivity Commission
(June 17, 2014). An Aging Australia: Preparing for
the Future (Commission research paper). Retrieved
from http://www.pc.gov.au/research/completed/
ageing-australia
35
Bureau of Labor Statistics. Retrieved from https://
www.bls.gov/cps/demographics.htm#age
36
Higginbottom, K. (March 17, 2016). The challenges
of managing a multi-generational workforce.
Forbes. Retrieved from https://www.forbes.
com/sites/karenhigginbottom/2016/03/17/thechallenges-of-managing-a-multi-generationalworkforce/#313a2a167d6a
37
219
Leadership, Diversity, and Motivation
Generation Y. BusinessDictionary.com. Retrieved
from
http://www.businessdictionary.com/
definition/Generation-Y.html
54
University of Oxford-Equality and Diversity.
Retrieved from https://www.admin.ox.ac.uk/eop/
inpractice/inclusive/
55
38
39
Streitfeld, D. (February 6, 2017). Tech opposition
to Trump propelled by employees, not executives.
New York Times. Retrieved from https://www.
nytimes.com/2017/02/06/business/trump-travelban-apple-google-facebook.html
The Five Secrets of Motivation from the Virgin Group.
Retrieved from http://the undercoverrecruiter.
com/virgin-branson-motivation/
Ulukan, C. (2016). Liderlik ve motivasyon
(Leadership and motivation). In G. Zeytinoğlu
(Ed.), Yönetim ve Organizasyon (Management
and Organization), pp. 144-169 (161). Anadolu
University Press.
40
Austin. R. (May-June, 2017). Neurodiversity as a
competitive advantage. Harvard Business Review,
pp. 98-103.
41
Griffin, R. W. (2016). Management. Houghton
Mifflin Company, p. 154.
42
Daft, op. cit., p.556.
56
Robbins & Coulter, op. cit., p. 462.
57
Alderfer, C. (1972). Existence, Relatedness, and
Growth. Free Press.
58
Robbins & Coulter, p. 464.
59
https://waymo.com/; Gibbs, S. (May 29, 2014).
Google’s self-driving car: How does it work and when
can we drive one? Retrieved from https://www.
theguardian.com/technology/2014/may/28/
google-self-driving-car-how-does-it-work
60
Daft, op.cit., p. 446.
43
Wal-Mart settles lawsuit on hiring. The New
York Times (February 20, 2009). Retrieved
from
http://www.nytimes.com/2009/02/21/
business/21walmart.html
61
Daft, op. cit., p. 450.
63
Griffin, op. cit., p. 146.
64
44
45
46
Hofstede, G. (1989). Organizing for cultural
diversity. European Management Journal, 7 (4),
pp. 390-399.
47
Zeytinoğlu, G. & Bonnabeau, R. (2015). From
Atatürk to Erdoğan: Women in modern Turkey.
In Safdar, S. & Kosakowska, N. (Eds.), Psychology
of Gender Through the Lens of Culture, pp. 93-112.
Springer Publications.
48
Rao, L. (September 16, 2015). Microsoft hit with
gender discrimination suit. Fortune. Retrieved
from http://fortune.com/2015/09/16/microsoftgender-discrimination-suit/
49
Catalyst. Retrieved from http://www.catalyst.org
50
World Economic Forum (2016). The Global
Gender Gap Report. Retrieved from http://
www3.weforum.org/docs/WEF_GenderGap_
Report_2013.pdf
51
Daft, op. cit., pp. 452-454.
52
Şirketlerden örnek motivasyon uygulamaları
(Reference motivational practices of companies).
İK Magazine. Retrieved from http://www.
ikmagazin.com/n
53
220
Robbins & Coulter, p. 465.
Daft, op. cit., p. 565.
62
Robbins & Coulter, p. 472.
What Does an Employee Want? Capital (October
22,
2014).
https://www.capital.com.tr/
yonetim/insan-kaynaklari/calisan-neister?sayfa=3
Chapter 8
Managerial Control
Learning Outcomes
After completing this chapter, you will be able to:
1
3
5
Define control and relevant terms.
Describe different types of control.
Distinguish the level of control systems.
Chapter Outline
Management and Control
The Control Process
Types of Managerial Control
Scope of Control
The Level and Focus of Control Systems
Most Common Tools and Techniques for
Controlling
222
2
4
6
Explain the control process.
Understand the scope of control.
Explain the most common control tools and
techniques in organizations.
Key Terms
Managerial control
Control process
Feedforward controls
Concurrent controls
Strategic control
Operational control
Financial controls
Activity-based costing (ABC)
Business Management
“Our anxiety does not come from thinking about
the future, but from wanting to control it.”
- Kahlil Gibran
Control is a broad concept that means
different things to different people. The word
“control” usually has a negative connotation for
people. Actually, control is a critical management
function in organizations. Managers face many
control issues, including controlling work
processes, regulating employee behavior, setting
up basic systems for allocating financial resources,
developing human resources, analyzing financial
performance, and evaluating overall profitability.1
Managers have to control people and other
organizational resources in order to survive. But
control should be the right amount and type. Lack
of control can lead to financial losses, reputation
damages, market share losses, even bankruptcy.
On the other hand, too much control can cause
unsatisfaction and reduced motivation among
employees.
Overdone control has a negative connotation in
people.
There are similar terms for control such
as audit and some people can use them
interchangeably. Actually they have different
meanings. Control is a management function
but audit is the examination of the financial
report of an organization by an independent
organization. This chapter introduces basic
mechanisms of controlling for organizations.
We begin by explaining the definition and
importance of control in management. The four
steps of control process and types of controls
will be described. Then we will discuss the scope
and levels of controlling and finally we will
explain some common tools and methods for
controlling.
MANAGEMENT AND CONTROL
What does controlling cover and what is its
purpose? In order to appreciate this question, we
have to talk about the meaning of control and also
the “controlling function of management”.
The Meaning of Control
The word control reminds us “to check, test,
constrain or verify by evidence or experiment”.
To control means to adjust or to bring conformity
to specifications or objectives that have been set.2
Control is the opposite of chance. It is related to
the notions of command and regulation.3
Controlling is one of the vital functions of
management. When we look at the controlling
function of management, it involves regulating
activities and behaviors within an organization,
measuring performance and then taking
corrective action/s if goals are not being
achieved. Controlling is the systematic process
of regulating organizational activities to make
them consistent with expectations established
in plans, targets, and standards of performance.4
So, controlling is the process of ensuring that
all activities in the organization go according
to planned activities. Controlling is related to
implementing plans and evaluating the results
of business operations by comparing the actual
results to planned goals or standards. As you can
see, controlling is one of the main responsibilities
of management.
Controlling is the systematic process
of regulating organizational activities to
make them consistent with expectations
established in plans, targets, and standards of
performance.
Simpy stated, controlling is the process of
ensuring that actual activities conform to
planned activities.
223
Managerial Control
To control an organization effectively, managers
need information about performance standards
and also actual performance. To do so effectively,
managers must determine what information is
essential, how they will obtain that information,
and how they can respond to it. As you can imagine,
getting correct, accurate, and timely data is essential.
Managers
decide
which
standards,
measurements, and metrics are needed to effectively
monitor and control the organization. The progress
towards organizational goals will be monitored,
measured, assessed, and if necessary modified
through the controlling function. Organizational
performance and managerial activities must be
measured by standards, plans, and expectations
which are achieved through the control process.
Controlling can also be viewed as detecting
and correcting significant differences between
the results obtained and planned activities.
Internal Control
As we emphasized, one of the key responsibilities
of a business manager is to control the company’s
operations. In the private sector, company directors
are responsible for determining policy, monitoring
performance, and taking corrective action if either
policy or its implementation is wrong. Internal
control is a process, effected by an entity’s board
of directors, management, and other personnel,
designed to provide reasonable assurance regarding
the achievement of objectives relating to operations,
reporting, and compliance.5 Companies face a wide
range of uncertain internal and external factors
that may affect achievement of their strategic,
operational, or financial objectives. The effect of
this uncertainty on objectives can be opportunities
or threats. Internal control helps counter threats
and take advantage of opportunities.
Internal control is a process, effected by
an entity’s board of directors, management,
and other personnel, designed to provide
reasonable
assurance
regarding
the
achievement of objectives relating to
operations, reporting, and compliance.6
224
Indeed, the concept of internal control has
evolved along with accounting and independent
auditing. Internal control is a managerial task and
responsibility to ensure that all of the activities of
a company are under management control. In this
respect, all the managers should understand the
necessities of an effective internal control system.
Internal control is therefore an important aspect
of an organization’s governance, management,
and operations. Internal control is defined by the
Committee of Sponsoring Organizations of the
Treadway Commission (COSO) as follows:
The internationally accepted COSO model
requires internal controls to be built on basic
components for the purposes of efficient and effective
organizational operations and reliable financial
reporting as well as compliance with legislation.
Internal control is an integral part of any organization’s
financial and business policies and procedures.
Internal control consists of a set of rules, procedures
and organizational structures which aim to:
• Protect the company’s assets against waste,
fraud, and inefficiency.
• Ensure the reliability and integrity of
accounting and operating data.
• Promote operational efficiency.
• Ensure that operations comply with all
existing rules and regulations.
In an “effective” internal control system, the
following five components work to support the
achievement of an entity’s mission, strategies, and
related business objectives:
1. Control Environment
2. Risk Assessment
3. Control Activities
4. Information and Communication
5. Monitoring
These components work to establish the
foundation for a sound internal control within
the company through directed leadership, shared
values, and a culture that emphasizes accountability
for control. Although COSO’s guidance is nonmandatory, it has been influential because it provides
frameworks against which risk management
and internal control systems can be assessed and
improved. Selection of control system to effect
relevant principles and associated components is a
function of management judgment based on factors
Business Management
ce
ian
pl
Entity
Division
Operating Unit
Function
Co
m
rti
po
Re
Op
er
at
io
ng
ns
unique to the organization. The COSO framework provides
additional guidance to enhance the control environment for
In an “effective” internal control system,
controlling function of management.
five components work to support the
Implementing and maintaining an appropriate and
achievement of an entity’s mission, strategies,
effective internal control system is critical and taking the
and related business objectives which are:
right steps should be a priority of management and the bocontrol environment; risk assessment; control
ard of directors. Management is responsible for establishing
activities; information and communication;
and maintaining internal control to achieve the objectives
and monitoring.
of effective and efficient operations, reliable financial reporting, and compliance with applicable laws and regulations.
With the corruption scandals of Enron and WorldCom,
internal control became more and more important. US
corporate failures resulted in the report of the Treadway
Commission and in the formation of the Committee of Directed leadership, shared values, and a
Sponsoring Organizations of the Treadway Commission culture that emphasizes accountability for
(COSO). An effective internal control system is a requirement control are key elements for establishing a
of the Sarbanes-Oxley Act of 2002. It regulates reporting and strong control system.
testing of internal controls of financial reporting for public
companies in the USA.7 Regulators in Turkey and many other nations require and encourage entities to take
action in internal controls, internal auditing, and risk management.
In Turkey, the Public Financial Management and
COSO Cube (2013 Edition)
Control Law No. 5018 (published December 24th, 2003)
regulates the public institutions under the central government,
social security institutions and local administrations under
general administration for financial management and
control. Internal auditing was introduced to the Turkish
system with this law. With Law No. 5018, contemporary
financial management and control practices have been
Control Environment
included in our system such as the following:
•
Strategic planning,
Risk Assessment
•
Performance based budgeting,
Control Activities
•
Internal control, and
•
Internal auditing.
İnformation & Communication
The rules concerning internal auditing issued by the
Banking Regulation and Supervision Agency, the Capital
Markets Board of Turkey, and others have contributed
Monitoring Activities
to the development of internal auditing in Turkey.
Banking Law No: 5411 and the Banking Regulation
Source: https://www.coso.org/Pages/ic.aspx
and Supervision Agency (“BDDK”) of Turkey includes
regulation of internal systems of banks.
Internal auditing is an essential part of internal control.
The internal control system designed by companies for
the purpose of efficient and effective business processes,
reliable financial reporting, and compliance with rules
Internet
and regulations are assessed through internal audit Visit the wep page of COSO for detailed
activities. The internal audit examines the adequacy guidance and to examine the “COSO Cube”
and effectiveness of internal controls and makes https://www.coso.org/Pages/ic.aspx
recommendations where control improvements are
225
Managerial Control
needed. Internal auditors are company employees who
continuously evaluate the effectiveness of a company’s
internal control systems. Internal auditors play a
significant role in the verification that management has
met its responsibility.8 Internal audits are internal but
independent assurance functions.
An audit committee must be formed to supervise
a corporation’s accounting system, the making of
required public disclosures, the appointment of
independent auditors, and overviewing the operation
and efficiency of the internal control and internal audit
system. The Capital Markets Board of Turkey published
“Corporate Governance Communiqué (II-17.1) came
into effect on January 3rd, 2014”. It stated that “The
Audit Committee shall be in charge of the supervision of
the corporation’s accounting system, public disclosure of
the financial information, independent auditing and the
operation and efficiency of internal control and internal
audit system.”.
Internal audit is a function but internal
control is a system.
The internal control system designed by
companies for the purpose of efficient and
effective business processes, reliable financial
reporting, and compliance with rules and
regulations are assessed through internal
audit activities.
The internal audit examines the adequacy
and effectiveness of internal controls and
makes recommendations where control
improvements are needed.
Internet
You can examine the internal control
practices of Şekerbank http://www.sekerbank.
com.tr/docs/default-source/english_doc/
sekerbank-corporate-governance-compliancereport-2016.pdf?Status=Master&sfvrsn=6
You can examine the internal control practices
of Huawei http://www.huawei.com/en/abouthuawei/corporate-governance/internal-control
Controlling and the Other Management Functions
In the previous chapters you became familiar with the planning, organizing, and leading functions
of business management. Management is defined as a process which applies to any formal and
informal management environment with a variety of goals: “Management is the achievement of goals
by others through Planning, Organizing, Leading, and Controlling activities (P-O-L-C framework)”.
Each function contributes to the management process from a different perspective, but they are
interconnected and complement each other. Managers are responsible for ensuring the achievement
of goals; therefore, planning, organizing, leading, and controlling the company’s operations are key
responsibilities for managers.
1
Compare the internal control and internal
audit.
226
Controlling is a primary function for all
managements levels.
Business Management
Goals must be described.
When you review the P-O-L-C framework
“controlling” might be seen as the last function of
business management. But the controlling function
is actually a highly integrated function in the
management process. It is a primary function of
all management levels. Controlling helps managers
monitor how well planning, organizing, and leading
have been performed. Therefore, you should have
a sound understanding of controlling function to
complete your grasp of P-O-L-C framework.
Planning and controlling functions are
closely linked.
Controlling is most closely associated with planning,
because goals and the methods for achieving them will
be decided during the planning process. As you know,
Controlling determines what is being
planning comprises all the activities associated with
accomplished
and taking corrective changes
the formulation of a company’s strategy, including
so that performance will conform to what is
the identification of short- and long-term goals and
required.
objectives, then deciding which tasks will be performed
and the resources that will be utilized to achieve them.
Managers check to see that organizational activities and processes are being carried out as planned.
As you realize by this definition, planning and controlling are closely linked to each other. Managers
must always seek feedback on how the system is performing and managers want to know whether
organizational goals are achieved and if not, the reasons. This feedback process helps the formulation
of future plans in the light of the problems that were identified and, thus, helps better planning for the
future. Controlling is a function that brings the management cycle back to the planning process.
The organizing function follows planning.
Figure 8.1 Planning-Controlling Link
It determines tasks appropriate to goals;
grouping tasks by departments; assigning
Planning
the work force for specific tasks; deciding
Goals
Objectives
the authority relationships, and preparing
Strategies
the work environment which includes
Plans
allocating the resources. The organizational
structure that tasks and authority relations
are established should enable the controlling
Controlling
Organizing
fınction be applied effectively.
Standards
Structure
Measurements
Leading is about guiding the organization
Human Resource Management
Comparison
towards the organizational goals and objectives.
Actions
Organizing and leading are related. Through
these two functions choices are made about the
way people work together and are motivated
Leading
to achieve individual and group goals and
Motivation
objectives. As a final step in the management
Leadership
process, controlling provides the critical link
Communication
Individual and Group Behavior
back to planning (Figure 8.1). Controlling is
the monitoring function of the management
th
Source: Robbins, S. P. & Coulter, M. (2012). Management (13 ed.).
process and is critical for the success of other
Pearson Education, Inc., p.487.
management functions.
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Managerial Control
preceding functions work well, control will work
well. When they don’t work well, control can
become a major issue for a manager.9 As a result,
controlling is the monitoring function of the
management process and is critical for the success
of other management functions.
Controlling is the monitoring function
of the management process and is critical
for the success of other management
functions.
THE CONTROL PROCESS
Management control is a continuous process;
as a last function in the management process
it provides a critical backward link to
planning process.
Controlling helps managers to measure the
effectiveness of their planning, organizing and
leadership activities. If those prior functions are
carried out well, generating positive responses
to controls can be much easier. Conversely, if
major problems exist in planning, organizing,
and leading, controlling function will probably
not work very well. In this sense, effective control
is a managerial instrument that depends on the
other functions that come before it. When these
Steps in the basic control process follow the
logic of planning: (1) establish standards and
methods to measure performance, (2) measure
performance, (3) compare the actual performance
with the established standards, whether
performance matches the standard and then (4)
taking corrective action as needed. Figure 8.2
presents an overview of basic steps in the control
process.
The basic control process typically involves
four steps: establish standards and methods to
measure performance; measure performance;
compare performance to standards; and take
corrective action as needed.
Figure 8.2 Basic Steps in the Control Process
Establish standards
and methods to
measure performance
Compare what is
expected to what is
realized
Measure
performance
Take corrective
action as needed
Feedback
Send signals for more effective processes
Establish Standards and Methods to Measure Performance
Knowing the expectations set by management is very critical at each step of the control process. Managers
should carefully decide what they will measure and how they will define it. This starts at the top of the
organization and should eventually involve every level of employees.10 As explained in Chapter 5, first a vision
must be decided at the highest levels and include well formulated strategic goals for the organization. Without
a strategic vision and goals for the overall organization, managers in various divisions of the organization will
have difficulty to develop meaningful and agreed-upon performance measures.11
During the planning process goals and objectives will be determined and they will eventually become
the foundations for different control processes. Goals and objectives will become performance standards.
When the plans and goals are developed, controls must be established to monitor the progress toward
these goals.
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Business Management
A standard is a unit of measurement used to evaluate
results and the criteria of performance. A standard
can be the price, cost, or quantity which is expected
A standard is a predetermined price, cost,
under regular conditions. Standards can be set in both
or quantity which is expected under regular
quantitative and qualitative terms. For instance, standards
conditions.
set in terms of cost to be incurred, revenue to be earned,
product units to be produced and sold, and time to be spent
in performing a task are examples of quantitative standards. Improving the reputation of a company
and the motivation of employees or a viewer’s perception of the visual appeal of an advertisement are
examples of qualitative standards.12
Performance standards are the specific goals created during the planning process. Performance
standards should be realistic and acceptable to the people involved, otherwise controlling might
become difficult and subjective. Standards should be defined clearly and precisely, so employees
know what they need to do, and determine whether
their activities are on target.13 To effectively evaluate
and reward employee achievement, managers need
Performance standards are the specific goals
clear standards that reflect activities that contribute to
created
during the planning process.
the organization’s overall strategy in a significant way.
Managers and employees know that their eventual
performance will be compared to established standards.
Standards and controls usually deal with time, cost, quality, productivity, or behavior. Once set,
standards must be continually reevaluated to ensure that they are still necessary and valid.
The feedback in the control process is intended to provide management with information on the
progress of various levels of plans, sub-plans, goals, objectives, strategy, tactics, or individual performances.
In this way, managers can receive useful and timely feedback.
Managers determine all important areas of organizational performance and establish corresponding
standards in each area. Managers can establish different kinds of standards related to operative goals. Some
examples include the following:
• Profitability standards
• Market position standards
2
• Productivity standards
Which types of performance standards can be
• Product leadership standards
used for controlling purposes?
• Employee development standards
• Social responsibility standards
Measuring Actual Performance
The second step in the basic control process is the measurement of performance. Managers must
measure actual performance to determine any deviations from the standards. Approaches used by managers
to measure and report actual performance are: personal observations; statistical reports; oral reports; and
written reports.14 Managers might use a combination of these approaches.
Performance measurement against standards should be done correctly but it may not be very easy.
Performance should be measured in an objective and reliable manner. Standards must be defined clearly
and also performance measurements must be made
appropriately. If specific and concrete standards have
been set and appropriate measurements are available,
Performance should be measured in an
measurement of performance can be made easily and there
objective and reliable manner.
will be agreement on how performance is to be measured.
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Managerial Control
Organizations prepare different types of formal
reports of quantitative performance measurements,
such as sales volume, profit, and cost of goods
sold. For instance, if export growth is a target, the
organization should have a means of gathering and
reporting sales data according to the geographic
area. Another example is to establish labor-hour
standards for the production of a mass-produced
item. This might be very easy and it might also be
easy to measure performance against these standards.
If the organization has identified appropriate
measurements, regular review of these reports helps
managers know whether the organization is doing
what it should.15 But there are many activities for
which it is difficult to develop accurate standards
and there are many activities that are hard to
measure. If managers want to increase employee
participation in the decision making process, what
should be the standards and measurements of
employee participation? In that situation managers
should use subjective measures. Although such
measures may have limitations, they are better
than having no standards at all and doing no
controlling.16
Organizations prepare formal reports of
quantitative performance measurements
such as sales amounts. Managers will review
those reports daily, weekly, or monthly. These
performance measurements should be related
to the standards set in the first step of the
control process.
Comparing Actual Performance to
Standards
The third step in the control process is
comparing actual performance to performance
standards. There will be a comparison between
the “what is” and the “what should be.” Measured
results are compared with the standards which
are already set. Comparing actual performance to
standards includes measuring the deviation. The
difference between “what is” and “what should
be” is known as the deviation. Although some
deviation in performance can be expected in all
activities, it’s critical to determine an acceptable
230
range of deviation and how much deviation from
the standard is a basis for corrective action. Because
some amount of deviation in performance can be
expected and tolerated in all activities, quantitative
measures are used. Comparison becomes easier and
statistical analysis can determine how much of a
deviation is significant.17
Actual performance is measured to
determine any variations from the standard.
Deviation is the difference between “what
is” and “what should be”.
The standards will strongly influence the
performance measurement, so comparisons
will be affected by the kinds of measurements
available. If key measurements have not been
built already into the system, it is usually not
possible to go back and reconstruct them for
purposes of comparison. Sometimes managers
realize too late that appropriate comparisons
cannot be made.18
If performance matches the standard, managers
may assume that “everything is under control!”.
In such a case no action needs to be taken. When
performance deviates from a standard, managers
must interpret the deviation. Managers are expected
to find the reason of the problem and the results
of the comparison between actual performance
and standards must be communicated or reported
to the right people. These people might be the
employees themselves and their managers or top
managers.
When several dimensions of performance have
been measured, this step in the process can involve
multiple comparisons. So managers need to know
how to interpret the patterns of comparisons and
to draw appropriate conclusions.
Taking Corrective Action as Needed
The fourth and final step in the controlling
process is evaluating results and taking action.
Managers can choose among three possible courses
of action: do nothing; solve the problem (correct
the actual situation); or revise the standards.
Business Management
This step becomes essential especially if actual performance is different than standards and the analysis
indicates that corrective action is required. Figure 8.3 summarizes the decisions a manager makes in
controlling process.
Figure 8.3 Managerial Decisions in the Control Process
Compare
actual
performance
with standard
Objectives
Standard
Measure
actual
performance
Is
standard
being
attained?
Yes
Do nothing
No
Is
variance
acceptable?
Yes
Do nothing
No
Is
standard
acceptable?
No
Revise
standard
Yes
Identify
cause of
variation
Correct
performance
Source: Robbins, S. P. & Coulter, M. (2012). Management (13th ed.). Pearson Education, Inc., p. 491.
Do nothing
The purpose of the control system is to determine
whether plans are working. No corrective action is required
if the evaluation reveals that events are proceeding according
to plan or when the deviations are within acceptable
limits. Doing nothing, however, does not mean giving
up responsibility. A manager can find an opportunity to
compliment employees for having achieved their objectives
(thus employee motivation will increase) but do nothing
about their approach to reaching objectives because
performance measurements show it to be effective.19
Immediate corrective action corrects
problems at once to get performance back
on track.
Basic corrective action looks at how and
why performance deviated before correcting
the source of deviation.
Solve the problem
Managers could take different corrective actions depending on the problem types. If deviation is
significant, managers must start to solve the problem. The corrective action could involve a change in one
or more activities of the organization’s operations. For example, when the production target cannot be met and
if the problem is related to workers’ incompetency, corrective action might be employee training. If the problem is a
defective material, the manager can take corrective actions in determining the quality of the materials used.
The correction of problems in critical areas will have
priority over non-critical areas. One decision that a manager
must make is whether to take immediate corrective action,
which corrects problems at once to get performance back If performance falls short of standards
on track, or to use basic corrective action, which looks at corrective action becomes essential.
how and why performance deviated before correcting the
source of deviation.20
231
Managerial Control
Revise the standards
Deviations from standards are sometimes attributable to errors in planning rather than to performance
problems. Deviations can also arise due to unrealistic standards. Standards may sometimes be too high or
too low. In that case, the corrective action could involve
a change in the original standards rather than a change
in performance. Standards often must be revised because
Corrective actions include changes in the
original performance standards if they are
of the changes in the external environment. For example,
evaluated to be too high or too low.
it may not have been possible to achieve the target of 10%
growth because of an unexpected economic crisis. In this case,
it may be necessary to change the target of 10% growth due
to the economic crisis.
It should be noted that managers should monitor the performance rather than just exercising control.
Managers should try to find constructive ways to bring performance up to standards instead of only
identifying past failures and problems.
TYPES OF MANAGERIAL
CONTROL
It is important to understand that, within
strategic and operational levels, there are several
types of control. Managers can implement
controls before an activity begins, during the
time the activity is carried on, and after the
activity has been completed. The first type
is called “feedforward control,” the second,
“concurrent control,” and the last, “feedback
control” (Figure 8.4).
Figure 8.4 Types of Control
Input
Processes
Output
Feedforward
Control
Concurrent
Control
Feedback
Control
Anticipates
problems
Corrects
problems as
they happen
Corrects
problems after
they occur
Source: Robbins, S. P. And Coulter M. (2012).
Management (13th ed.). Pearson Education, Inc., p.494.
Feedforward Controls
Feedforward controls or pre controls are future directed. Feedforward controls are designed to
detect and anticipate deviations from standards at various points before relevant work is performed.
Feedforward controls prevent problems before the operation takes place. This form of operational
control focuses on the quality, quantity, and characteristics of the inputs into the production process.
If there is more rigorous control over the quality of inputs, control needs will be less at later stages.
For instance, when McDonald’s opened its first restaurant
in Moscow, it sent company quality control experts to help
Russian farmers learn how to grow high-quality potatoes and
Feedforward controls or pre controls are
to teach bakers to make high-quality rolls for hamburgers
designed to detect and anticipate deviations
and other items.21 Why? Because McDonald’s requires the
from standards at various points before
same product quality in all its restaurants, no matter the
relevant work is performed.
location. They want a cheeseburger in Moscow to taste like
one in Detroit.
The key to feedforward controls is taking managerial action before a problem occurs. Thus, problems
can be prevented rather than having to correct them after any damage (low quality products, lost customers, lost revenue, etc.) has taken place.22
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Business Management
Concurrent Controls
Concurrent controls apply to business
operations as they happen. Concurrent
controlling is the process of monitoring and
adjusting ongoing activities and processes. It
involves real-time assessment of the quality of
the transformation process, that is, evaluation
of the conversion of inputs to outputs while it
is happening.23 Such controls are not necessarily
proactive, but they can prevent problems from
becoming worse, and therefore are designed to
provide immediate feedback so that operations
can be changed rapidly to decrease errors or
increase quality.
Concurrent controls apply to business
operations as they happen.
Vehicle Tracking Systems (VTS) can be given
as a concurrent control example. You could track
your vehicles over maps from anywhere. You can
follow the speed of the vehicle and its location. So
VTS will improve control on vehicles and drivers
concurrently.
Feedback Controls
Feedback controls are the most popular and
most used type of controls. Feedback controls
are post-performance controls because the control
takes place after the activity have been completed.
By the time a manager has the information, the
problems have already occurred and they might be
leading to waste or damage.24
Feedback controls are post-performance
controls as the control takes place after the
activity have been completed.
The feedback controls will focus on gathering
information about a completed activity,
evaluating that information, and taking steps
to improve the similar activities in the future.
They include controls that aim to ensure that
specific outcomes will be achieved and involve
monitoring, measuring, and taking corrective
action. This is the least proactive of controls
and is generally a basis taking corrective action.
But in many work areas feedback control is the
only viable type of control. Feedback controls
permit managers to use information based on
past organizational performance. These include
output or results controls and are often financially
oriented. Controls that focus on feedforward
control include administrative controls (standard
operating procedures and rules), personnel
controls (human resource management policies)
and behavior controls (the ongoing monitoring of
activities and decisions).25
Feedback controls are generally the basis for
taking corrective actions.
Feedback controls have two advantages: First,
feedback gives managers meaningful information
on the effectiveness of their planning efforts.
Feedback that shows little variance between
standard and actual performance indicates that
the planning was generally on target. If the
deviation is significant, a manager can use that
information to formulate new plans. Second,
feedback can enhance motivation. People want to
know how well they are doing and feedback gives
this information.26
3
Explain the relationship between feedback
controls and financial statements.
233
Managerial Control
SCOPE OF CONTROL
The basic of the control process are similar
wherever they occur in organizations, but the
scope of what is being controlled can vary
widely. Managers should control both the overall
organization as well as departments, teams, and
individuals. Some control strategies apply to the
whole organization or major divisions. Control
is also an issue at the lower and operational level,
where department managers and supervisors
focus on the performance of teams and individual
employees.27
Three major categories of scope of control are:
strategic, operational, and tactical (Figure 8.5).
In terms of their scope, we will look at the issues
involved in each of these three control categories.
Actually, it is believed that it is becoming more
common for lower-level employees to be actively
involved, not only in the day-to-day processes
that were once the domain of middle and senior
managers, but in activities that are of strategic
significance. Thus, the artificial boundaries between
operational, managerial, and strategic control may
no longer hold.28 The differences between strategic
and tactical control issues often are blurred. It is
not always clear whether a control issue should be
considered tactical or operational. Nevertheless,
the three categories help remind managers where
they should focus their attention.29
Information that is appropriate for making
management control decisions generally has a
variety of characteristics. They range somewhere
between the extreme of appropriate operational
control information and appropriate strategic
control information.
Three major categories of scope of control
are strategic, operational, and tactical.
Strategic Control
As discussed in earlier chapters, the term strategic
generally indicates long-term goals and strategies
which refer to the direction for the organization as a
whole. It is linked to the mission of the organization
and to the basic plans for achieving that mission.
Strategic decision makers need information that
focuses on the relationship of the organization to
its external environment.30 Thus, strategic control
focused on how the organization as a whole fits in
its external environment and meets its long-run
objectives and goals.31
The strategic control process is closely
related to strategic planning process.
Strategic control is a specialized form of
management control. Strategic control systems
are designed to determine how well those types
of objectives and goals are being met. Strategic
control is concerned with tracking the strategy as
it is being implemented, detecting any problems or
potential problem areas, and making any necessary
adjustments.
Figure 8.5 Scope of Control
STRATEGIC CONTROLS
TACTICAL CONTROLS
OPERATIONAL CONTROLS
(Narrow)
SCOPE
Source: Hitt, M. A., Black J. S., & Porter L. W. (2012).
Management (3th ed.). Pearson Education, Inc., p.395.
234
(Broad)
Strategic control is a specialized
form of management control. It is
the assessment and regulation of
how the organization as a whole
fits its external environment and
meets its long-term objectives
and goals
Business Management
Tactical Control
Strategy involves the future vision of the business
whereas tactics involve the actual steps needed to
achieve that vision. Tactical control focuses on
implementing a strategy. Thus, this level of control
forms the heart of an organization’s total set of
controls. Tactical control involves the fundamental
control arrangements of the organization, those
with which its members have to live day to day.
Figure 8.6 summarizes characteristics of strategic
and tactical controls.
Most common types of tactical control systems
are financial controls, budgets, the supervisory
structure, and human resource policies and
procedures. Financial and budgetary control
contains elements of both strategic and tactical
control systems. To the extent they focus on the
entire organization, they tend to be more toward
the strategic end of the continuum. The more
they focus on specific units within an overall
organization, they tend to be toward the tactical
end. We choose to discuss them in this section
since they focus on organizational units, but note
that they can also be used for some strategic control
considerations.32
Tactical control is the assessment and
regulation of the day-to-day functions of the
organization and its major units during the
implementation of its strategies.
Figure 8.6 Characteristics of Strategic and Tactical Controls
Tactical Controls
Limited
Controls relate to
specific, functional
areas
Comparisons
made within
organization
Time Frame
Strategic Controls
Long, unspecific
Objective
Types of Comparisons
Focus
Implementation
of strategy
Controls relate to
organization as
a whole
Comparisons
made to other
organizations
Determination of
overall organizational
strategy
Source: Hitt, M. A., Black J. S., & Porter L. W. (2012). Management (3rd ed.). Pearson
Education, Inc., p.397.
Operational Control
As its name implies, operational control
regulates the activities or methods an organization
uses to produce the goods and services it supplies to
its customers. Operational control regulates the dayto-day output relative to schedules, specifications,
and costs because the term operational generally
indicates short-term goals. Information appropriate
for making operational control decisions has
dramatically different characteristics from
information appropriate for making strategic
controlling decisions.
Operational control regulates the activities
or methods an organization uses to produce
the goods and services it supplies to its
customers.
Operational control decision makers need
information that focuses on the internal
organizational environment, emphasizes the
performance history of the organization, and is welldefined, narrow in scope, and detailed. In addition,
appropriate information for this type of decision
is both highly updated and highly accurate.33 It is
235
Managerial Control
a type of control applied to the transformation of
inputs into outputs, such as the actions that produce
a car, administer therapy to an ill patient, cook and
serve a restaurant meal, send a satellite into the sky, or
write computer software.34 The overall management
of operations involves a number of critical and
often technical issues. Operational control, in
contrast to strategic control is concerned with
executing strategy. Where operational controls
are imposed, they function within the framework
established by strategy. The major components
of operations control are just-in-time inventory
control, maintenance control, cost control,
budgetary control, ratio analysis, and materials
control.35
Operational control focuses on executing the
strategy.
Operational control can be analyzed by relating
it to the three basic elements involved in producing
any type of service or goods: inputs, process, and
outputs. These three elements can be related to
the location of control in the production process
which are discussed previously (See Figure 8.4):
before transformation occurs that is feedforward
control; during transformation that is concurrent
control; and after transformation takes place that
is feedback control.36
4
Which control tool can be used for operational
control purpose?
THE LEVEL AND FOCUS OF
CONTROL SYSTEMS
The decision about where to focus control in an
organization involves critical choices based on which
actions and outcomes should receive the greatest
attention. In other words, the focus of control refers
not only to what is to be controlled but also to where
control should be located in the organizational
236
structure. This means paying careful attention to
which people or positions in the structure have
responsibility for different types and areas of
control and how broad or narrow is their scope of
responsibility.37 The guiding principle of the focus of
control is that it should be closely linked to strategic
goals and the planning process of the organization.
When we explain the scope of control we
mentioned that managers will consider both
control of the overall organization and control of
departments, teams, and individuals. Therefore,
some control strategies apply to the top levels of
an organization or major divisions or teams and
individual employees. Managers apply different
management control systems and tools consistent
with the scope of control. Some are discussed
below based on organizational and departmental
levels of control.
Focus of control should be linked to strategic
goals and the planning process of the
organization.
Organization Level: The Balanced
Scorecard
For successful results, managers establish
organizational goals and strategies with a focus
on strategic issues. As you know, organizations
capture resources from the environment and those
resources are transformed into outputs delivered
back into the environment. Therefore, traditional
approaches to measuring effectiveness observe
different parts of the organization and measure
indicators connected to outputs, inputs, or internal
activities.38 Traditional approaches based on goals,
resources, and internal process indicators all
have something to offer, but each based on only a
part of the organization.
Managers continue to look for ways to
overcome the limited view of performance. One
comprehensive approach has become popular in
recent years by combining several indicators of
effectiveness into a single framework and this new
approach balances various parts of the organization
rather than focusing on one aspect.
Business Management
Organizations use the Balanced Scorecard as
a management control system to integrate
different performance measures.
The most popular type of strategic performance
measurement systems is the balanced scorecard.
Robert S. Kaplan and David P. Norton defined
The Balanced Scorecard which is a management
control system that enables organizations to clarify
their vision and strategy and translate them into
action.39 The balanced scorecard was originally
introduced to integrate financial and non-financial
controls in order to provide a balanced view of a
firm’s performance. For controlling purposes, the
balanced scorecard is defined as a comprehensive
management control system that balances
traditional financial measures with operational
measures relating to a company’s critical success
factors.40
The Balanced Scorecard is a management
control system that enables organizations to
clarify their vision and strategy and translate
them into action.
Managers using the balanced scorecard do not
rely only on the short-term financial measures;
the balanced scorecard helps an organization
set goals and measure performance from four
perspectives that are vital to all businesses.
Figure 8.7 illustrates the four perspective of
the balanced scorecard: financial performance;
customer service; internal business processes;
and the organization’s capacity for learning and
growth.
The financial perspective reflects a concern
that the organization’s activities contribute
to improving short and long-term financial
performance. It includes traditional measures
such as net income, gross profit margin, and
return on investment. The customer perspective
helps managers evaluate the question, “How
do customers see us?” Customer satisfaction
is critical to achieving the company’s financial
goals outlined in the financial perspective of the
balanced scorecard.41 Customer service indicators
measure such things as how customers view the
organization, as well as customer retention and
satisfaction. The internal business processes
perspective helps managers address the question,
“At what business processes must we excel to
satisfy customer and financial objectives?”
The answer to this question incorporates three
factors: innovation, operation, and post-sales
service. All three factors critically affect customer
satisfaction, which will affect the company’s
financial success.42 Business process indicators
focus on production and operating statistics.
The final component looks at the organization’s
potential for learning and growth. This
perspective helps managers assess the question,
“How can we continue to improve and create
value?” The learning and growth perspective
focuses on three factors: “employee capabilities”,
“information system capabilities”, and “the
company’s climate for action.”43 Measurements
include such things as employee satisfaction
and retention, the amount of training people
receive, business process improvements, and the
introduction of new products.
The Balanced Scorecard balances traditional
financial measures with operational measures.
The components of the scorecard are designed
in an integrative manner so that they reinforce one
another and link short-term actions with longterm strategic goals, as illustrated in Figure 8.7.
237
Managerial Control
Figure 8.7 Balanced Scorecard Effectiveness Criteria
Financial
Do actions
Targets
contribute to
better financial
performance? Corrective
Actions
Examples of
measures: profit,
Outcomes
return on
investment
Metrics
Internal Business
Processes
Customers
How well do we
serve our
customers?
Do work processes
Targets
add value for
customers and
shareholders? Corrective
Actions
Examples of
measures: order rate
Outcomes
fulfillment,
cost-per-order
Targets
Corrective
Examples of
Actions
measures:
customer
satisfaction
Outcomes
customer loyalty
Metrics
Overall
Mission
Strategy
Goals
Are we learning,
Targets
changing, and
improving?
Corrective
Examples of
Actions
measures:
continuous
process improve-ment,
Outcomes
employee retention
Metrics
Metrics
Learning and Growth
Source: Daft, R. L. (2010). Organization Theory and Design (10th ed.). South-Western Cengage Learning
Publications, p.307.
The balanced scorecard will help managers
assess the organization from many perspectives
so they have a better understanding of total
effectiveness. Successful managers keep the
organization focused on data in all four
components rather than relying on just one
which tells only part of the story. Overall
effectiveness is the result of how well these
interdependent elements are aligned, so that
individuals, teams, departments, and so forth
are working in concert to attain specific goals
238
that ultimately help the organization achieve
high performance and fulfill its mission. Thus
the scorecard has become the core management
control system for many organizations. Check
the following example.
The balanced scorecard is used primarily by
top and upper-level managers.
Business Management
Palladium Group Announces 2013 Winners of The Palladium Balanced Scorecard Hall Of Fame for Executing Strategy:
Palladium -founded by Robert S. Kaplan and David P. Norton- is the global leader in helping organizations solve pressing
strategy execution challenges. They said that the remarkable execution premiums these winners have achieved attest to the
power of disciplined strategy management when it is successfully linked to operations. The Hall of Fame award honors
organizations that have achieved excellence in strategy execution through the use of the Balanced Scorecard. The Hall of
Fame Report features 15 organizations that were inducted into the Palladium Balanced Scorecard Hall of Fame for Executing
Strategy® in 2013. The organizations entering the Hall of Fame represent a diverse set of industries and geographies. Turkcell
Superonline was one of the 15 winners. Istanbul-based Turkcell Superonline (TSOL) is an innovative telecom service provider
founded in 2004. The company was aware that seizing first mover advantage would require mastering execution in planning
and rolling out the fiber network and chose the Balanced Scorecard to assist in the process. The senior team believed the BSC
would provide a valuable strategy management framework for growing the business in line with its 2008 crafted vision, “to
become an innovative telecom operator with its own infrastructure,” and to ensure alignment both within the company and
with its shareholder, Turkcell Group…..
Source: Strategy Execution Champions, The Palladium Balanced Scorecard Hall of Fame Report 2014. Retrieved from http://www.
id.gov.ae/userfiles/assets/RosaZDrAmUi.pdf
Department Level: Behavior Versus Outcome Control
There are two different approaches to evaluating and controlling a team or individual performance and
allocating rewards. One approach focuses primarily on how people do their jobs, whereas the other focuses
primarily on the outcomes that people produce.44 Behavioral controls involve the direct evaluation of
managerial and employee decision making, not the results of managerial decisions. Behavior control is based
on manager observation of employee actions to see whether the individual follows desired procedures and
performs tasks as structured. Do people get to work on time? Do they stay focused on their tasks or spend a lot of
time socializing with colleagues? Do they dress appropriately for the job? Do they perform their jobs according
to established methods or supervisor instructions? With behavior control, managers provide heavy supervision
and monitoring, pay attention to the methods people use to accomplish their jobs, and evaluate and reward
people based on specific criteria, which might include areas such as appearance, punctuality, skills, activities, and
so forth.45 Information technology has increased the potential for managers to use behavior control. Managers
in many companies monitor employees’ e-mail and other online activities.
A second approach to control is to pay less attention to what people do than to what they accomplish.
Outcome control is based on monitoring and rewarding results, and managers might pay little attention to how
results are obtained. With outcome control, managers don’t supervise employees in the traditional sense. People
have a great deal of autonomy in terms of how they do their jobs as long as they produce desired outcomes.
Rather than monitoring how many hours an employee works, for example, managers focus on how much work
the employee accomplishes.46 Outcome controls are effective when there’s little external interference between
managerial decision making on the one hand and business performance on the other.
In some cases behavior control is more appropriate
and effective, but in general, managers in successful
organizations are moving away from closely monitoring
5
and controlling behavior toward allowing employees
more discretion and autonomy in how they do their What is the importance of balanced scorecard
jobs. In most organizations, managers use both behavior in the control process?
and outcome control.
MOST COMMON TOOLS AND TECHNIQUES FOR CONTROLLING
Managers use a large number of tools and techniques for effective controlling. Therefore, we need to
discuss specific techniques for managing the control process. First we will discuss budgetary control and
then we will discuss financial controls and other control tools and techniques such as break-even analysis,
activity-based costing, just-in-time inventory control, and total quality management.
239
Managerial Control
Budgetary Controls
Budgets are natural part of the most control
systems. Planned situations will be compared with
actual situations, and corrective action will be
taken if the deviation is significant. Budgets will
guide or influence the decisions of both managers
and employees. A budgetary control is the process
of setting targets for an organization’s expenditures,
monitoring results and comparing them to the
budget, and making changes as needed. Budgetary
controls are commonly used controlling techniques.
Budgets help to evaluate strategic risks and
opportunities.
Budgets
Budgets are used in almost every organization.
A budget is the quantitative expression of a
proposed plan of action by management for a
specified period and an aid to coordinate what
needs to be done to implement that plan.47 A
budget is usually quantitative in nature although
there are qualitative aspects. Monetary amounts,
work hours, or materials quantity can be used in
budgets.
The purpose of budgeting in organizations can
be classified under two titles:
• Budgets are usually planning tools.
• Budgets are controlling tools.
A budget is a detailed plan that covers a
specified length of time to allocate resources.
Planning involves establsihing goals and
preparing various budgets to support the
achievement of goals. With respect to planning,
a budget is a plan outlining how resources in
a given period will be allocated. So the idea of
budgets is understanding where resources are
needed inside the organization. With respect
to controlling, budgets are the foundation of
most control systems. Planned situations are
compared to actual situations and corrective
action is taken if the deviation is significant.
Budgets will guide or influence the decisions of
managers and employees regarding the financial
situation of the company. Figure 8.8 shows
that strategic plans are expressed through longrun budgets and operating plans are expressed
through short-run budgets.
Budgets are a natural part of controlling.
Remember the definition of controlling.
Budgetary control is one of the most commonly
used methods of managerial control.
Figure 8.8 Strategies, Planning and Budgets
Strategy
Long-Run Planning
(Strategic Plans)
Short-Run Planning
(Operating Plans)
Long-Run Budgets
Short-Run Budgets
Source: Horngren, C. T., Datar S. M., & Rajan M. V. (2012). Cost Accounting:
A Managerial Emphasis (14th ed.). Pearson Education, Inc., p.184.
After budgets, the next step is executing plans
followed by the comparison of actual results to
budgeted amounts. The results can be utilized to
make control decisions.48 Thus, budgets can help
managers determine what, if any, corrective action
240
to take by providing with feedback about the likely
effects of their strategies and plans. Budgets also
help to evaluate strategic risks and opportunities.
Because of feedback signals, managers might need
to revise their plans and possibly their strategies.49
Business Management
Types of budgets
There are different purposes for budgeting; therefore, there can be different types of budgets. Budgets
can be classified as strategic and operational budgets under a time basis. While strategic budgets are
long-term financial plans to coordinate the activities needed to achieve long-term goals of a company,
operational budgets are short-term financial plans to coordinate activities needed to achieve the shortterm goals of a company.
Budgets can also be classified as static and flexible
Strategic budgets are long-term financial
budgets. When static budgets are prepared for only one
plans to coordinate the activities needed to
level of sales volume; flexible budgets are prepared for
achieve long-term goals of a company.
various levels of sales volume. The master budget is a set of
budgeted financial statements and supporting schedules
Operational budgets are short-term
for an entire organization.50 The master budget includes
financial plans to coordinate activities
three separate but interdependent budgets that formally
needed to achieve the short-term goals of a
present the company’s sales, production, and financial
company.
goals: the operating budget; the capital expenditures
budget; and the financial budget.
The master budget includes three separate
but interdependent budgets: the operating
budget; the capital expenditures budget; and
the financial budget.
Static budgets are prepared for only one
level of sales volume; flexible budgets are
prepared for various levels of sales volume.
The operating budget is a set of budgets that
forecast revenues and expenses such as sales revenue,
cost of goods sold, and operating expenses. The
first and perhaps most crucial component of an
6
operating budget is the sales budget, because sales
affect most other components of a master budget.
Compare the operating budget with operatiAfter projecting sales revenue, the following must be
onal budget.
prepared: a projected cost of goods sold budget, an
inventory and purchasing budget, and a budget for
operating expenses must be prepared.
The second type of budget that takes place in the master budget is the capital expenditures budget.
This budget presents a company’s plan for projects and long-term assets such as purchases of property,
plant equipment, and other long-term assets.
The third type is the financial budget. The financial budget lays out how an organization will acquire
its cash and how it intends to use the cash. The financial budget includes the cash budget which helps a
company in planning and controlling regarding its cash inflows and outflows and the budgeted financial
statements which help to see the company’s overall financial position. The budgeted financial statements
look exactly like ordinary statements. The only difference is that they list budgeted (projected) rather than
actual amounts.51
241
Managerial Control
Budgets are effective planning and controlling tools.
When the managers prepare a master budget,
they must think carefully about pricing, product
lines, job assignments, needs for additional
equipment, and negotiations with financial
institutions.52
Essentially, budgets identify acceptable levels of
performance. When managers gather information
on actual outcomes within an operating period,
they can reveal significant deviations from
budgeted amounts. If so, they should develop and
implement a control strategy to bring the actual
performance in line with planned performance.53
As a control device, budgets report actual as well
as planned expenditures for cash, assets, raw
materials, salaries, and other resources so that
managers can take action to correct variances.
Budgetary control is the process of setting
targets for an organization’s expenditures,
monitoring results and comparing them to
the budget, and making changes as needed.
control system is called a responsibility
center. A responsibility center is defined as any
organizational department or unit under the
supervision of a manager who has decision-making
authority and accountability for the results of
those decisions. Each manager has responsiblity
for planning and controlling some part of
company’s activities. Higher-level managers have
broader responsibilities; they use budgets for
the company as a whole. Lower-level managers
are responsible for budgeting and controlling
costs of a single value chain function such as the
distribution of the product to customers. Lowerlevel managers focus on the budget performance
of their department or division and they will
report to higher-level managers. A budgetary
control is a significant form of tactical control
because it focuses on how well strategies are being
implemented.54
Financial Controls
In every organization, managers need to
watch how well the organization is performing
financially. So financial controls are a key element
of organizational success and survival. Financial
controls tell whether the organization is successful
financially and they can be also useful indicators
of other kinds of performance problems. For
example, if company’s sales are declining, the
reason might be related to product quality,
customer service performance, or sales force
effectiveness.
The fundamental unit of analysis for a budget
control system is the responsibility center.
A budget is created for every division or
department within an organization and the
manager of each unit has budget responsibility.
The fundamental unit of analysis for a budget
242
Business Management
Financial controls are related to financial analysis.
Financial statements
As you have learned previously, financial
statements provide basic information used for the
financial control of an organization. Managers
rely on a variety of financial and non-financial
reports. Financial statements provide management
with information to monitor financial resources
and activities. The balance sheet and the income
statement are basic financial statements. They can
be used as starting points for financial control. Each
financial statement gives the manager a different
perspective or insight about how well the business
is operating toward reaching its goals.
The balance sheet shows a firm’s financial
position with respect to assets and liabilities at a
specific point in time. It provides three types of
information: assets, liabilities, and owners’ equity.
Assets are what the company owns and they include
current assets (those that can be converted into cash
and will be used in a short time period such as cash,
accounts receivable, or inventory) and non-current
assets (such as buildings and equipment that are
long term in nature). Liabilities are the existing
debts of a company including both current liabilities
(obligations that will be paid by the company in
one year such as accounts payable, salaries payable)
and long-term liabilities (obligations payable over
a long period such as bonds payables). Owners’
equity is the difference between total assets and
liabilities and it is the company’s net worth.
The income statement, sometimes called a profit
and loss statement (P&L), summarizes the company’s
financial performance for a specific time period, such
as a one-quarter or one-year period. The statement
shows the results of the organization’s operations,
such as revenues, expenses, and profit or loss.
The balance sheet shows a firm’s financial
position with respect to assets and liabilities
at a specific point in time.
Assets are what the company owns and they
include current assets and non-current assets.
Liabilities are the existing debts of a
company including both current liabilities
and long-term liabilities.
Owners’ equity is the difference between
total assets and liabilities and it is the
company’s net worth.
The income statement, sometimes called a
profit and loss statement (P&L), summarizes
the company’s financial performance for a
specific time period, such as a one-quarter or
one-year period.
While actual financial performance is always
historical, managers can use pro forma financials
which are projections for the future years.
243
Managerial Control
Financial analysis: Interpreting the numbers and ratios
A manager needs to be able to evaluate financial reports that compare the organization’s performance
with earlier data or industry norms. These comparisons enable a manager to see whether the organization
is improving and whether it is competitive with others in the industry.
The most common financial analysis focuses on ratios. Ratio analysis expresses the relationship among
selected items of financial statement data by calculating the ratios. The relationship is expressed in terms
of either a percentage, a rate, or a simple proportion.
The important point regarding financial ratios is not the detailed steps that need to be taken to calculate
them. Rather, the ratios can be used to compare one organization to another. The comparative nature of
the ratios provides information to the managers who will need to take action during the control process.
Managers should use ratio analysis in three ways to control an organization:55
• Managers should evaluate all ratios simultaneously: This strategy ensures that they will develop
and implement a control strategy appropriate for the organization as a whole rather than one that
suits only one phase or segment of the organization.
• Managers should compare computed values for ratios in a specific organization with the
values of industry averages for those ratios: Managers increase the probability of formulating
and implementing appropriate control strategies when they compare their financial situation to
that of competitors in this way.
• Managers’ use of ratios should incorporate
trend analysis: Managers must remember that any
Internet
set of ratio values is actually only a determination
The values of industry averages for the ratios can
of relationships that existed in a specified time
be obtained from Turkish Central Bank. http://
period. Once the trends are revealed, managers can
www3.tcmb.gov.tr/sektor/2014/menu.php
formulate and implement appropriate strategies
for dealing with them.
The ratios available to managers for controlling
organizations can be divided into four categories:
1. Liquidity ratios
2. Activity ratios
3. Profitability ratios
4. Leverage ratios (Solvency ratios)
Table 8.1 shows examples of these four types of ratios.
Table 8.1 Four Categories of Ratios
244
Liquidity Ratios
Current ratio
Current assets/Current liabilities
Activity Ratios
Inventory turnover
Conversion ratio
Total sales/Average inventory
Purchase orders/ Customer inquiries
Profitability Ratios
Profit margin on sales
Gross margin
Return on assets (ROA)
Net income/Sales
Gross income/Sales
Net income/Total assets
Leverage Ratios
Debt ratio
Total debt/Total assets
Business Management
1. Liquidity ratios: These ratios measure an organization’s ability to meet its current debt obligations.
For example, the current ratio (current assets divided by current liabilities) tells whether a company
has sufficient current assets to convert into cash to pay off its debts.
2. Activity ratios: Activity ratios measure internal performance with respect to key activities defined by
management. Activity ratios use turnover measures to show how efficiently a company operates and
uses its assets. For example, inventory turnover is calculated by dividing total sales by average inventory.
This ratio tells how many times the inventory is used up to meet the total sales amount. A high rate of
turnover indicates ease in selling inventory; a low rate indicates difficulty.
Another type of activity ratio, the conversion ratio, is purchase orders divided by customer
inquiries. This ratio is an indicator of a company’s effectiveness in converting inquiries into sales.
3. Profitability ratios: Profitability ratios measure the income or operating success of a company for a given period of time. One important profitability ratio is gross profit margin, expressed as the difference
between sales and the cost of goods sold, divided by sales
Gross profit margin =
Sales-Cost of goods sold
Sales
This ratio measures the total money available to cover operating expenses and to make a profit. If
performance deviates significantly from a predetermined performance standard, corrective action must be
taken. Gross profit margins are highly regarded by many managers.
Profit margin: The gross profit margin presents
an overly optimistic picture of how well the business
is performing. In addition to the gross profit margin
7
another profitability ratio, the profit margin, should be
used. Profit margin measures profits earned per dollar of A company’s Gross Profit Margin dropped
sales as well as the efficiency of the operation. The profit from 45% to 35%. As a manager which
margin is calculated as net income divided by sales.
control tools would you use to determine why
the gross profit margin is declining?
Profit margin = Net income
Sales
Another profitability measure is return on total assets (ROA), which is a percentage representing what
a company earned from its assets, computed as net income divided by total assets.
Return on total assets (ROA) = Net income
Total Assets
ROA is a valuable measure for comparing a company’s ability to generate earnings with other investment
opportunities. In basic terms, a company should be able to earn more by using its assets to operate the
business than it could by investing the same amount in the bank.
4. Leverage (solvency) Ratios: Leverage refers to funding activities with borrowed money. A company can
use leverage to make its assets produce more than they could on their own. However, too much borrowing can increase the risk such that it will be unable to keep up with repayment of its debt. Managers
therefore track their debt ratio to make sure it does not exceed a level they consider acceptable.
Cost-Volume-Profit (CVP) Analysis
Cost-Volume-Profit (CVP) analysis is a planning
tool that shows the relationship between costs, volume
and profits. Companies use CVP analysis to estimate
how changes in sales prices, variable costs, fixed costs and
volume will affect profits and losses.
Cost-Volume-Profit (CVP) analysis is a
planning tool for the management so it can
be used for control purposes in business
organizations.
245
Managerial Control
CVP analysis will assist in estimating the
amount of sales needed to achieve a target profit.
The breakeven point (BEP) can be used to
determine a target profit. The breakeven point
(BEP) determines probable profit and losses at
different levels of activity. The breakeven point
(BEP) is that quantity of output sold at which total
revenues equal to total costs.56
It is important to know the relationship
among cost-profit and volume.
The breakeven point (BEP) is the sales level
at which the company does not earn a profit
or a loss. Total cost will be equal to the total
revenues at the BEP.
If there are some changes in sales price, cost or volume, managers want to know how those changes
will affect their profits. Managers can use CVP relationship to make predictions and to see the effects
on profitability. Because CVP analysis is used for sensitivity analysis. Sensitivity analysis is a “what if ”
technique that estimates profit or loss results if the sales price, cost or volume change.57 A CVP analysis
summarizes various levels of profit or loss associated with various levels of production and sales volume.
Managers see how various business strategies will affect a company’s profit by using sensitivity analysis.
For instance, if managers decide to reduce the variable costs, the profit per unit will be higher and,
therefore, to reach the target profit amount fewer units
need to be sold. The CVP and Break-even analysis provide
a way for managers to evaluate whether new products or
services have a potential to earn a profit. For this reason,
The breakeven point (BEP) is a financial
managers can exercise control before new ventures are
measure which is used for controlling
accepted.58 Table 8.2 shows the basic ingredients of CVP
purposes.
and break-even analysis.
Table 8.2 Basic Ingredients of CVP and Break-even Analysis
Basic Ingredients of Cost-Volume-Profit and Break-Even Analysis
Fixed costs
Variable costs
Total cost
246
A fixed cost is a cost that does not change with an increase or decrease in the amount of
goods or services produced. Some examples are insurance, interest expense, property
taxes, utilities expenses, and depreciation of assets.
An expense that fluctuates with the number of products produced is a variable cost.
Variable costs will vary depending on a company’s production volume and they rise as
production increases and fall as production decreases. Examples are costs of packaging
a product and costs of materials needed to make the product.
The total cost is simply the sum of fixed and variable costs associated with production
at a certain level of output.
Business Management
Activity-Based Costing (ABC)
Primary activities of company must be identified.
The cost of produced goods and services must be
measured so managers can be sure they are selling
those products for more than the cost to produce
them. Companies with various products, can get
better costing information by using Activity Based
Costing (ABC) and Activity Based Management
(ABM). ABM focuses on the primary activities of
a company, determines the cost of activities, and
then uses the cost information to make decisions
that will lead to improved customer satisfaction
and the greater profitability.59 Activity-based
costing focuses on activities as the fundamental cost objects. The total production process will be divided
into activities and cost of the activities will be determined. Then costs will be assigned to products based on
how much the production uses those activities to make the product.60 The costs of those activities become
building blocks for allocating the indirect costs of products, services, and customers.
Just-in-Time Inventory Control
A Just-in-Time (JIT) system is an inventory management and control system that ensures timely
delivery of a product or service and related inputs. The objective is to produce a product or service only
as needed with only the necessary materials, equipment, and employee time that will add value to the
product or service.61 JIT emphasizes maintaining organizational operations by using only the resources
that are absolutely necessary to meet customer demand.
Just-in-Time (JIT) is an inventory
management and control system that
ensures timely delivery of a product
or service and related inputs.
JIT works best in companies that manufacture relatively
standardized products that experience consistent demand.
Such companies can comfortably order materials from
suppliers and assemble products in small, continuous
batches.62 However, JIT is not always the best choice for every
organization.
Total Quality Management
Another popular approach based on a decentralized control philosophy is Total Quality Management
(TQM). TQM is an organization-wide effort to integrate quality into every activity in a company through
continuous improvement of products and processes. TQM emphasizes the importance of each person in
the company and requires a commitment from employees
at all levels. In traditional quality control, a separate team
of experts inspect products or services for defects or errors
Total Quality Management (TQM)is an
after completion. But TQM emphasizes “quality at the
organization-wide effort to integrate quality
source,” that is, quality inspection in all processes and
into every activity in a company through
at all stages of production or service output. Therefore,
continuous improvement of products and
some quantitative techniques, such as statistical process
processes.
control, and nonquantitative techniques, such as employee
empowerment should be used.
247
Managerial Control
The implementation of total quality
management involves the use of many techniques
such as quality circles, benchmarking, Six Sigma
principles, reduced cycle time, and continuous
improvement.
Balance quality and quantity.
Many countries have adopted a universal
benchmark for quality management practices. The
ISO 9000 standards addresses various aspects
of quality management and provides guidance
and tools for companies and organizations
who want to ensure that their products and
services consistently meet customer requirements, and that quality is consistently improved. A lot of
organizations have been certifed for ISO 9000 standards to demonstrate their commitment to quality.
The International Organization for Standardization (ISO) certification has become the recognized
standard for evaluating and comparing companies on a global basis, and more Turkish companies are
feeling the pressure to participate to remain competitive in international markets.
ISO members are the primary standard organizations in their countries and there is only one
member for each country. Each member represents ISO in its country. Individuals or companies
cannot become ISO members. See ISO website: https://www.iso.org/members.html
Internet
Turkish Standards Institution (TSE) https://
www.tse.org.tr/en/Default.aspx
The International Organization for
Standardization (ISO) certification has
become the recognized standard for evaluating
and comparing companies on a global basis.
The Turkish Standards Institution (TSE) is the
Quality control is an evidence for product quality.
sole authorized body for standardization in Turkey.
It is a public institution established by law. TSE
operates in diverse fields of the quality infrastructure
that includes certification, testing, training as well
as surveillance and inspection activities. TSE is
an active member of the world standardization
community and as such has full membership in
the ISO and the International Electrotechnical
Commission. In addition, many countries and
companies require ISO certifcation before they
will do business with an organization. Check 3M website for different types of standards that the 3M
Company uses for different aspects of performance, policies, and position.
https://www.3m.com/3M/en_US/sustainability-us/policies-reports/#PoliciesPositionsStandards
248
Business Management
Implementing quality processes efficiently
in business and all types of organizations is a
matter of establishing a well structured quality
culture. Turkish companies has been applying
quality standards successfully at national and
international level. Arçelik A.Ş. started quality
efforts through implementation of Quality Circles in
the early 1980s. These efforts then incorporated and
developed under Total Quality in the early 1990s.
Arçelik A.Ş. adopted the Total Quality Management
approach for all processes until the final product and
was granted the European Foundation for Quality
Management (EFQM) Quality Achievement and
TUSIAD - KalDer (Turkish Society for Quality)
Quality Grand Awards. For details see http://
www.arcelikas.com/UserFiles/file/ANNUAL%20
REPORT_2016_15_05_17.pdf
Another example of quality efforts in Turkey
is by Vestel. In 1993, the Turkish Standard
Institute granted Vestel Ticaret A.Ş. a certificate
for the ISO 9001 quality standard which brings
a significant competitive advantage to industrial
establishments having export operations. By
applying a management system based on ISO
9001 that disciplines all processes related to
customer demand analysis, market investigation,
design, production, after-sale services and their
sub-processes, Vestel aims at maximizing customer
satisfaction. See: http://vestelinternational.com/en/
corporate/quality-certificates/
Further Reading
Today’s Understanding of Internal Control and its Reflection on Turkey
…..
The Turkish public administration has adopted globally accepted internal control standards:
In Turkey, the internal control system of Turkish public administration is governed by the
Public Financial Management and Control Law
No. 5018. The Law entrusts the duty of central
harmonization in the internal control system in
public financial management to the Ministry of
Finance. The Ministry of Finance is authorized
to take necessary measures concerning internal
control throughout the country.….According
to the internationally accepted understanding of
internal control, the internal control framework
should cover all activities of the organization –
operational, technical, commercial, financial and
administrative. Internal controls should not be
limited to accounting controls or controls concerning financial reporting (ECIIA, 2005: 22).
Source: Akyel, R. (December, 2010). Today’s Understanding of Internal Control and its Reflection
on Turkey. TODAIE’s Review of Public Administration, 4 (4), pp.185-213. Retrieved from http://www.
todaie.gov.tr/resimler/ekler/862ff394edf5554_
ek.pdf?dergi=Review%20of%20Public%20Administration
249
Managerial Control
Inside Practice
Establishing the right operating model for
risk, control, and compliance capabilities starts
with defining a) the activities underpinning
these capabilities, b)where within an organization should they reside.
See the link below.
Insights on Governance, Risk and Compliance — Centralized Operations
EY, February 2014. Retrieved from http://
www.ey.com/Publication/vwLUAssets/EY_-_
250
Centralized_operations:_future_of_Risk,_
Control_and_Compliance/$FILE/EY-Insightson-GRC-Centralized-operations.pdf
Discuss:
1. Compare the management control and
accounting control?
2. What would your initial approach be if
you were assigned for a company as an
internal auditor?
Business Management
LO 1
Defining control and relevant
terms
LO 2
Summary
Controlling is one of the important functions of management. Controlling is the process of ensuring that
all activities in the organization go according to planned activities. Controlling is related to implementing
plans and evaluating the results of business operations by comparing actual results to planned goals or
standards; so it is the responsibility of management. To effectively control an organization, managers
need to decide what information is essential, how they will obtain that information, and how they can
respond to it. Management is responsible to establish the internal control system in their organizations.
Management is a process through which required resources are utilized by a sequence of functions
starting with Planning, followed by Organizing, Leading, and Controlling for achieving organizational
goals. Each function contributes to the management process from a different perspective, but they are
interconnected and complement each other.
Explaining the control process
The steps in the basic control process follow the logic of planning: (1) establish standards and methods
to measure performance, (2) measure performance, (3) compare the actual performance with the
established standards, to determine if performance matches the standard and then (4) take corrective
action as needed.
Managers should carefully decide what they will measure and how they will define it. The second
step in the basic control process is the measurement of performance. Managers must measure actual
performance to determine any variations from the standard. The third step in the control process is
comparing actual performance to performance standards. There will be a comparison between the “what
is” and the “what should be.” The fourth and final step in the controlling process is evaluating results
and taking action. Managers can choose among three possible courses of action: “do nothing”, “solve
the problem (correct the actual situation)”, or “revise the standards”
LO 3
Describing different types of
control
Managers can implement controls before an activity begins, during the time the activity is going on,
and after the activity has been completed. The first type is called “feedforward control”; the second,
“concurrent control”; and the last, “feedback control”.
Feedforward controls or pre controls are future directed. Feedforward controls are designed to detect
and anticipate deviations from standards at various points before work is performed. Feedforward
controls prevent problems before an operation takes place. Concurrent controls apply to processes as
they happen and it is the process of monitoring and adjusting ongoing activities and processes. Feedback
controls are the most popular and most used type of controls. Feedback controls are post-performance
controls because the control takes place after the activity is done.
251
Managerial Control
Summary
LO 4
Understanding the scope of
control
Managers should control both the overall organization and departments, teams, and individuals. Three
major categories of control scope are strategic, operational, and tactical.
Strategic control focuses on how an organization as a whole fits its external environment and meets its
long-run objectives and goals. Tactical control focuses on implementing strategy. Tactical control involves
the fundamental control arrangements of an organization, those with which its members have to live
day to day. Operational control regulates the activities or methods an organization uses to produce the
goods and services it supplies to customers. Operational control regulates the day-to-day output relative
to schedules, specifications, and costs because the term operational generally indicates short-term goals.
LO 5
Distinguishing the level of
control systems
The decision about where to focus control in an organization involves critical choices based on which
actions and outcomes should receive the greatest attention. In other words, the focus of control refers not
only to what is to be controlled but also to where control should be located in the organizational structure.
Balanced Scorecard is a comprehensive approach that has become popular in recent years by combining
several indicators of effectiveness into a single framework and this new approach balances various parts
of the organization rather than focusing on one aspect. Managers using the balanced scorecard do not
rely only on short-term financial measures. The balanced scorecard helps an organization set goals
and measure performance from four perspectives: financial performance, customer service, internal
business processes, and the organization’s capacity for learning and growth. The balanced scorecard
will help managers assess the organization from many perspectives so they have a better understanding
of total effectiveness.
There are two different approaches to evaluating and controlling team or individual performance and
allocating rewards: Behavioral controls involve the direct evaluation of managerial and employee
decision making, not the results of managerial decisions. Outcome control is based on monitoring and
rewarding results, and managers might pay little attention to how those results are obtained.
LO 6
Explaining the most common
control tools and techniques in
organizations
Managers use a large number of tools and techniques for effective controlling. Managers can use budgets
to accomplish their major responsibilities. A budget is the quantitative expression of a proposed plan
of action by management for a specified period and an aid to coordinate what needs to be done to
implement that plan.
In every organization managers need to watch how well the organization is performing financially.
Financial controls tell whether the organization is successful financially, and they can also be useful
indicators of other kinds of performance problems.
A cost-volume-profit (CVP) analysis is a planning tool that shows the relationship between costs,
volume and profits. Companies with various products, can get better costing information by using
acivity based costing (ABC).
A just-in-time (JIT) system is an inventory management and control system that ensures the timely
delivery of a product or service and related inputs.
Another popular approach based on a decentralized control philosophy is total quality management
(TQM). TQM an organization-wide effort to integrate quality into every activity in a company through
continuous improvement of products and processes.
252
Business Management
1 Which of the following must be compared in
a control process?
2
Which one defines “controlling” in the
proper context?
a. Assigning the work force for specific tasks.
b. Preparing the work environment which
includes allocating the resources
c. Implementing of plans and evaluating the
results of business operations by comparing the
actual results to the planned goals or standards.
d. Guiding the organization towards the
organizational goals and objectives
e. Deciding the authority relationships
3 Who is responsible in the private sector for
determining policy, monitoring performance,
and taking corrective action if either policy or its
implementation is wrong?
a. Internal auditors
b. Company directors
c. External auditors
d. Independent audtitors
e. Capital markets board
4 Which of the following is not a step in the
control process?
a. Establishing standards and methods to measure
performance
b. Measuring performance
c. Setting the vision
d. Comparing performance to standards
e. Taking corrective action
5 When deviation is the result of an unrealistic
standard which type of corrective action should be
taken by management?
a. Take immediate corrective action.
b. Use basic corrective action.
c. Do nothing.
d. Revise the standard.
e. Change the performance.
Which types of control take place while an
activity is in progress?
a. Feedforward controls
b. Pre-controls
c. Concurrent controls
d. Feedback controls
e. Strategic controls
7 Which of the following controls focused on
how the organization as a whole fits its external
environment and meets its long-run objectives
and goals?
Test yourself
a. Responsibility of management with efficiency
standards
b. The actual results with the planned goals or
standards
c. Operating results with nonoperating results
d. Organizational goals with departmental goals
e. Uncertainties with planned goals or standards
6
a. Concurrent controls
b. Operational control
c. Financial controls
d. Tactical control
e. Strategic control
8
How should we classify the budgets under
the time basis?
a. Strategic and operational budgets
b. Static and flexible budgets
c. Financial and nonfinancial budgets
d. Planning budgets and controlling budgets
e. Capital expenditures budget and cash budgets
9 Which of the following statements can be
used to project future performance?
a. Budgets
b. Pro forma financial statements
c. Industry averages
d. Activity based management
e. Total quality management
10 Which one below emphasizes “quality at the
source” that is, quality inspection at all stages of
production or service output?
a. The breakeven point
b. Activity based management
c. Activity based costing
d. Just-in-time
e. Total quality management
253
1. b
If your answer is incorrect, review “The
Meaning of Control”.
6. c
If your answer is incorrect,
“Concurrent Controls”.
2. c
If your answer is incorrect, review “The
Meaning of Control”.
7. e
If your answer is incorrect, review “Strategic
Control”.
3. b
If your answer is incorrect, review
“Controlling and the Other Management
Functions”.
8. a
If your answer is incorrect, review “Types of
budgets”.
4. c
If your answer is incorrect, review “The
Control Process”.
9. b
If your answer is incorrect, review “Financial
statements”.
5. d
If your answer is incorrect, review “Revise
the Standard”.
10. e
If your answer is incorrect, review “Total
Quality Management”.
Suggested answers for “Your turn”
Answer for “Test yourself”
Managerial Control
Compare the internal control and internal audit.
your turn 1
An internal audit is an essential part of internal control. It is a function but
the internal control is a system. The internal control system is designed by
companies for the purpose of efficient and effective business processes, reliable
financial reporting, and compliance with rules and regulations are assessed
through internal audit activities. The internal audit will examine the adequacy
and effectiveness of the internal controls and make recommendations where
control improvements are needed.
Which types of performance standards can be used for
controlling purposes?
your turn 2
254
review
Performance standards usually deal with time, cost, quality, productivity,
or behavior. Managers will determine all important areas of organizational
performance and establish corresponding standards in each area. The
standards should be written in terms of specific measures that will be used to
appraise performance. Performance standards should be attainable, specific,
observable, meaningful, measurable, and stated in terms of quality, quantity,
timeliness or cost. For example, in a restaurant you can set a performance
standard such as “All the orders must be taken in two minutes and must be
settled in five minutes by waiters.” All the waiters will know this standard and
if they were late, the reasons must be investigated.
Business Management
Explain the relationship between feedback controls and
financial statements.
Which control tool can be used for operational control
purpose?
your turn 4
Operational control regulates the activities or methods an organization uses to
produce the goods and services it supplies to customers. Operational control
decision makers need information that focuses on the internal organizational
environment, emphasizes the performance history of the organization, and
is well-defined, narrow in scope, and detailed. Operational control can be
analyzed by relating it to the three basic elements involved in any type of
service or goods production: inputs, process, and outputs. The focus of operational control is on individual tasks or operations. Just-in-time inventory
control, maintenance control, cost control, budgetary control, ratio analysis,
and materials control are major components of operational controls. Decision
tree analysis, Value analysis, Computer-aided design (CAD), Computer-aided
manufacturing (CAM) are some of the best-known and most commonly used
operations control tools.
Suggested answers for “Your turn”
your turn 3
Feedback controls are post-performance controls because the control takes
place after the activity is done. They include controls that aim to ensure that
specific outcomes will be achieved and involve monitoring, measuring, and
taking corrective actions. Feedback controls permit managers to use information on past organizational performance. These include output or results
controls and are often financially oriented. Financial statements provide management with information to monitor financial resources and activities. The
balance sheet shows a firm’s financial position with respect to assets and liabilities at a specific point in time. The income statement summarizes the
company’s financial performance for a specific time period. This statement
shows the results of the organization’s operations, such as revenues, expenses,
and profit or loss. Financial statements are always historical; therefore, they
will be used for feedback controls.
What is the importance of balanced scorecard in
the control process?
your turn 5
The most popular type of strategic performance measurement systems is the
balanced scorecard. For controlling purposes, the balanced scorecard is defined
as a comprehensive management control system that balances traditional
financial measures with operational measures relating to a company’s critical
success factors. Managers using the balanced scorecard do not rely only on the
short-term financial measures; the balanced scorecard helps an organization
set goals and measure performance from four perspectives that are vital to
all businesses. Balanced scorecard is a control system that translates an
organization’s vision, mission, and strategy into specific, quantifiable goals,
monitors the organization’s performance in terms of achieving these goals.
255
Managerial Control
Suggested answers for “Your turn”
Compare the operating budget with operational budget
your turn 6
The operational budget is a short-term budget based on estimates of income
and expenses associated with the organization’s operations. As you know, the
term operational indicates the short-term goals of a company. An operational
budget is a general term related to the time length of a budget (generally one
year or less) whereas the operating budget is a specific part of a master budget.
The operating budget is a set of budgets that forecast revenues and expenses
such as sales revenue, cost of goods sold, and operating expenses.
Company’s gross profit margin dropped from 45% to
35%. As a manager, which control tools would you use to
determine why gross profit margin is declining?
your turn 7
You should basically use financial controls. The income statement summarizes
the firm’s financial performance for a given period. The income statement
shows revenues coming into the organization from all sources and subtracts
all expenses, including cost of goods sold. As you know, a gross profit margin
is expressed as the difference between sales and the cost of goods sold, divided
by sales. If a gross profit margin is decreasing, the manager must control the
sales revenue and cost of goods sold. If sales revenue is declining, what are the
reasons? Decreases in sales volume or sales price could be the reason. Increases
in the cost of goods sold can be faster than increases in sales revenue. It can be
another reason for the declining gross profit. In that situation, the manager
will focus on cost related activities such as production costs. The manager
must evaluate the company activities to increase the sales revenue and cut
costs.
endnotes
1
Daft, R. L. (2010). Management (9th ed.). SouthWestern Cengage Learning Publications, p. 537.
2
Hitt, M. A., Black, J. S. & Porter, L. W. (2012).
Management (3th ed.). Pearson Education, Inc., p.
388.
3
Giraud, F., Zarlowski, P., Saulpic, O., Lorain, M-A,
Fourcade, F., & Morales, J. (2011). Fundamentals
of Management Control: Techniques and Principles.
Pearson Education, Inc., p. 542.
4
Daft, op. cit., p. 538.
5
https://www.coso.org/Documents/990025PExecutive-Summary-final-may20.pdf
Reding, K. F, Sobel, P. J., Anderson, U.L., Head,
M.J., Ramamoorti S., Salamasick, M. Riddle, C.
(2013). Internal Auditing: Assurance & Advisory
Services, (3th ed.). Institute of Internal Auditors
Research Foundation Institute (IIARF), p. 6-28.
8
Hitt, et al., op. cit., p. 388.
9
Ibid., p. 390.
10
Ibid., p. 390.
11
DuBrin, A. J. (2012). Essentials of Management
(9th ed.). South-Western Cengage Learning
Publications, p. 544.
12
Daft, op. cit., p. 542.
13
6
https://www.coso.org/Documents/990025PExecutive-Summary-final-may20.pdf
14
7
http://www.carrtegra.com/2016/06/importanceinternal-controls-accounting/
15
256
Robbins, S. P. & Coulter, M. (2012). Management
(13th ed.). Pearson Education, Inc., p. 488.
Daft, op. cit., p. 542.
Business Management
Robbins & Coulter, op.cit., p. 488.
44
DuBrin, op. cit., p. 546.
45
Hitt et al., op. cit., p. 392.
46
DuBrin, op. cit., p. 547.
47
16
17
18
19
Robbins & Coulter, op. cit., p. 490.
20
Ibid., p. 494.
21
Ibid., p. 494.
22
Hitt et al., op. cit., p. 402.
23
Robbins & Coulter, op. cit., p. 495.
24
Langfield-Smith, K. (1997). Management control
systems and strategy: A critical review. Accounting,
Organizations, and Society, 22(2), pp. 207-229.
25
Daft, op. cit., p. 308.
Ibid., p. 308.
Ibid., p. 310.
Horngren, C. T., Datar, S. M., & Rajan, M. V.
(2012). Cost Accounting: A Managerial Emphasis
(14th ed.). Pearson Education, Inc., p.184.
Miller-Nobles, T. L., Mattison, B. L., &
Matsumura, E. M. (2016). Horngrens Accounting:
The Managerial Chapters (Global ed., 11th ed.).
Pearson, p. 257.
48
Horngren et al., op. cit., p. 184.
49
Miller-Nobles et al., op. cit., p. 262.
50
Horngren et al., op. cit., p. 1052.
51
Robbins & Coulter, op.cit., p. 495.
52
Daft, op. cit., p. 306.
53
Langfield-Smith, op. cit., p. 208.
54
Hitt et al., op. cit., p. 395.
55
Certo, S. C & Certo, S. T. (2012) Modern
Management: Concepts and Skills (12th ed.). Pearson
Education, Inc., p. 511.
56
26
27
28
29
30
Hitt et al., op. cit., p. 395.
31
Ibid., p. 396.
32
Certo & Certo, op. cit., p. 511.
33
Hitt et al., p. 402.
34
Certo & Certo, op. cit., p. 538.
35
Miller-Nobles et al., op. cit., p. 263.
Certo & Certo, op. cit., p. 541.
Hitt et al., op. cit., p. 398.
Certo & Certo, op. cit., p. 542.
Horngren et al., op. cit., p. 68.
Miller-Nobles et al., op. cit., p. 203.
57
Hitt et al., op. cit., p. 398.
58
Miller-Nobles et al., op. cit., p. 405.
59
Horngren et al., op. cit., p. 883.
60
Hitt et al., op. cit., p. 371.
61
Certo & Certo, op. cit., p. 539.
62
Hitt et al., op. cit., p. 402.
36
Ibid., p. 405.
37
Daft, op. cit., p. 75.
38
DuBrin, op. cit., p. 565.
39
Daft, op. cit., p. 540.
40
Horngren, C. T., Walter, T. & Oliver, M. S. (2012).
Accounting (9th ed.). Pearson Education, Inc., p.1157.
41
Ibid., p. 1158.
42
Ibid., p. 1158.
43
257
Business Management
Glossary
5W 1H A technique for refining the problem statement.
5 Whys A technique to determine the root cause of the problem.
A
Accounting profitability A company’s efficiency in utilizing production factors to generate earnings as a
common practice to evaluate company performance and competitive advantage.
Acquired needs perspective A theory by David McClelland that proposes certain needs acquired throughout
one’s lifetime determine the motivational dimensions at work. See also three needs theory.
Acquisition A strategic action in the form of buying another company.
Action plan A statement of tasks that are needed to be undertaken for accomplishing goals that are put put in
a chronological order.
Activity-based budgeting A forecast of costs that are expected to be incurred around the planned activities of
a process, service, product or department.
Activity-based costing (ABC) A control system that focuses on activities as the fundamental cost objects.
Activity ratio A ratio that measures internal performance with respect to key activities defined by management.
Altruism A leadership perspective which has a focus on benefiting others at the highest level.
Approved budget The budget that shows the total amount of money a manager is authorized to spend that also
involves the amount of money to be spent on each budget item.
Assumptions Cultural elements that are accepted as they are without questioning; they reflect the beliefs
concerning human nature.
Authority Formal right possessed by a manager based on a legitimate ability to issue orders and deploy resources
towards the attainment of organizational goals.
B
Balance sheet A firm’s financial position with respect to assets and liabilities at a specific point in time.
Balanced scorecard A management control system that enables organizations to clarify their vision and strategy
and translate them into action.
BCG matrix An approach developed by Boston Consulting Group that provides an instrument for helping
corporations allocate their resources based on the growth rate of each strategic business unit (SBU) as well
as the relative market share of each SBU.
Bounded rationality model A model of decision making where the decision maker is claimed to settle for the
first satisfactory alternative rather than finding the best/optimal one because of human limitations in the
ability to process information.
Breakeven point (BEP) Sales level at which the company does not earn a profit or a loss.
Budget A plan that commits resources to projects or activities for a specific time frame.
Business process Sequential set of activities to accomplish a specific organizational goal.
Business-level strategy The determination of the long-term goals and objectives, the allocation of resources,
and the adoption of courses of action in seeking competitive advantage when competing in a single product
market.
259
Glossary
C
Capability Resources which enable a company to fully take advantage of the other resources it controls to
formulate and implement strategies.
Centralization The location of decision making made by managers at the top of the hierarchy.
Chain of command The hierarchy of authority and the reporting relationships from one management level to
the next.
Charismatic leader A leader who inspires and motivates people beyond what they would normally do.
Chief ethics officer A person whose function is to ensure the integration of organizational ethics and values
into daily decisions in business organizations.
Code of ethics A document that declares the values, ethics, objectives and responsibilities of companies.
Coercive power Power based on the belief that a person can punish others for noncompliance.
Competitor Other organizations in the same industry or type of businesses that provide goods and services to
the same set of customers.
Complement Products which add value to the existing products in an industry to better satisfy customer
demands through combined and enhnaced products.
Complementary products and services Products and services that can be sold separately but that are used
together, each creating a demand for the other.
Conceptual skills A manager’s ability to see the organization as a whole for integrating resources to attain the
organizational goals.
Concurrent control Managerial control type that applies to business operations as they happen.
Conflict The friction or opposition resulting from actual or perceived differences or incompatibilities.
Contingency model A leadership approach with a focus on the match between environmental factors and a
leader’s behaviors based on “There is no-one-fits all explanation”.
Consideration behavior A form of people orientation that indicates the extent of concern for the relationships
with subordinates and their feelings.
Contingent reward The basics of the exchange between a transactional leader and the followers such as a
promotion, a appraisal, salary raise, or a good grade are reward examples.
Controlling The systematic process of regulating organizational activities to make them consistent with
expectations established in plans, targets, and standards of performance.
Core competency Unique strengths that are deeply embedded within a company which are key for sustainable
competitive advantage.
Corporate-level strategy Determination of the long-term goals and objectives, the allocation of resources,
and the adoption of courses of action for seeking competitive advantage while competing in more than one
industry and market simultaneously.
Corporate social performance The extent to which a firm answers to the demands of its stakeholders to behave
in a socially responsible way.
Corporate social responsibility The idea that firms have obligations to society beyond their economic
obligations to owners or stockholders and beyond those prescribed by law or contract.
Cost-benefit analysis An analysis where the expected cost of a planned activity is compared to that activity’s
expected benefits.
Cost-leadership strategy Offering the same or similar value for customers by delivering products or services
at a lower cost than competitors, enabling the company to charge average or lower prices to the customers.
Cost-volume-profit (CVP) analysis A planning tool for the management so it can be used for control purposes
in business organizations.
Cross-functional team A team that is composed of employees from different departments or functions.
Customer departmentalization Grouping of work activities that targets specific customer classifications in
order to serve the needs of identifiable customer groups.
260
Business Management
D
Decentralization The decision authority is pushed down to lower levels of the hierarchy.
Decision making The process of identifying problems to be solved and opportunities to be utilized, then
making a choice from available options or developing a solution.
Decisional roles Manager’s requirement for making decisions that affect an organization partially or as a whole.
Delegation A manager divides work among subordinates and gives them the responsibility and authority to
accomplish tasks.
Departmentalization The basis for grouping of jobs into logical units.
Deviation The difference between “what is” and “what should be”.
Differentiation strategy Offering higher value through delivering products with unique characteristics while keeping
costs at the same or similar levels of competitors and charging higher prices for customers.
Directive behaviors Leadership behaviors include one-way communication, clearly defined goals, tasks, and
roles as well how to achieve them.
Discrimination Judging people based on their personal characteristics that happens as a result of prejudice and
stereotyping.
Diversification A corporate-level strategy which is the degree of doing business in different industries to offer
new products and services.
Diversity Acknowledging and understanding of differences: gender, age, background, cultural values, physical
condition, nationality, religion, race, sexual orientation, language, skills, and personality.
Division of labor The degree to which work activities are divided into separate jobs.
Divisional structure An organizational structure that is made up of separate divisions according to similarities
or demands of product, customers or geography.
Downsizing Slimming down of operations to focus resources and boost profits or decrease expenses.
E
Economic forces The factors that determine the nature of the economic conditions in which businesses operate.
Economies of scale Decrease in average costs per unit of production as output increases.
Economies of scope Decreasing the cost of combined production of multiple products more than the cost of
separate production through sharing departmental activities and manufacturing facilities.
Effectiveness Making the right decisions and it also involves successful execution of these decisions.
Efficiency Refers to not wasting resources when achieving organizational goals.
Empowerment The ability to make decisions by individuals or teams.
Entrepreneurial role A manager’s task to initiate a change process, finding solutions for possible problems,
generating new ideas, building an organizational culture that encourages employees to come up with new
ideas, and evaluating and implementing innovative ideas.
Entropy The system’s tendency to go into a decline and die.
Environmental uncertainty A situation where the management of a firm has little information about its
external environment which makes it largely unpredictable.
Equity theory A motivation theory by Stacy Adams proposing that individuals seek equal and fair treatment
regarding equal contributions and emphasizing justice, fairness, and equality.
Ethical egoism Highlights an egocentric (selfish) approach for making decisions.
Ethics The study of moral obligation, or separating right from wrong.
Ethnocentrism The belief that one’s own culture is superior to others which creates barriers between members
of a group or a work team.
Ethnorelativism The approach supporting that cultures are equal as well as being able to think from the
perspectives of others which allows managers to create productive relationships utilizing the richness of the
work force instead of unfairly judging others with different values.
261
Glossary
Exit barriers Economic, strategic, and emotional factors which block companies from leaving an industry.
Expectancy or effort-performance linkage The perceived probability of success by an individual about
performing a task.
Expectancy theory Suggests that the individual’s motivation depends on the expectation of her or his ability to
perform at a certain level and receive a reward linked to it.
Expert power Power based on a person’s skills and knowledge.
External analysis Analyses of the market and the industry structure that a company operates in.
External environment The environment that comprises of factors affecting organizations indirectly and limits
managers’ ability to control them is very limited.
External stakeholder Individuals and groups outside a company such as customers, suppliers, and governments
that influence the company.
Extrinsic reward Satisfaction that is obtained from outside in the form of company shares, promotion, or being
praised by the team leader.
F
Feedback control Post-performance control as the control takes place after the activity has been completed.
Feedforward control Also named as pre-control which is designed to detect and anticipate deviations from
standards at various points before relevant work is performed.
Five forces model A framework developed by Michael E. Porter for identifying opportunities and threats facing
a specific company in the industrial context.
Flat organization structure A management structure that has relatively few layers of management.
Flexible budget Budget type that is prepared for various levels of sales volume.
Formalization The use of written or computerized documents to describe and guide behavior and activities of
employees.
Frustration regression principle The situation, according to the existence, relatedness, and growth (ERG)
theory, that a person may revert to lower-level needs aimed at having more satisfaction from already fulfilled
needs.
Functional departmentalization Grouping of work activities by the functions employees perform.
Functional-level strategy The determination of the long-term goals and objectives, the allocation of resources, and
the adoption of the courses of action in seeking competitive advantage at the functional or departmental level.
Functional structure An organizational structure where activities are grouped according to their similar or
related skills, expertise and use of the same resources.
G
General environment The environment that includes those factors that might not have a direct impact on the
daily operations of a firm but will indirectly influence it.
Geographic departmentalization Grouping of work activities based on the geographic markets or the locations
where work is done.
Glass ceiling Indicates an invisible barrier for upward mobility of women and other ethnic, religious, or gender
minorities in a organization.
Globalization The reduction of most barriers between nations – physical and non-physical.
Global integration-local responsiveness framework Indicates that cost pressure often requires global
integration and forces local companies to adapt accordingly.
Global mindset A critical perspective for success in international settings which include awareness and respect
of other beliefs and cultures in conducting business, and adapting quickly to local conditions.
Global-standardization strategy Achieving significant economies of scale and low cost inputs by pursuing a
global division of labor based on wherever best-of-class capabilities reside at the lowest cost.
262
Business Management
Global strategy The determination of the long-term goals and objectives; the allocation of the resources; and
the adoption of courses of action in seeking competitive advantage when competing around the world.
Global team A team made up of people from different nationalities operating in multiple countries, recently
operating virtually.
Goal A general qualitative statement of a desired result which has a particular time frame and toward which
effort is exerted.
H
Hierarchy See chain of command.
Hierarchy of needs theory The theory by Maslow proposing that people are motivated by multiple needs
which are in a hierarchical order.
Home replication strategy Selling the same products in both domestic and foreign markets through exploiting
home-based core competencies.
Horizontal team See cross-functional team.
Human skills A manager’s ability to communicate and establish constructive relationships with other members of a group.
Hybrid structure An organizational structure that makes use of different forms of structures in order to
accommodate an organization’s specific needs.
Hygiene factors Factors that determine the presence or removal of dissatisfaction in the work place such as
work conditions, supervision style, company policy, interpersonal relations, and security.
I
Inclusion The degree to which each member of an organization feels that her or his presence is appreciated.
Income statement Also called a profit and loss statement (P&L), summarizes the company’s financial
performance for a specific timeframe, such as a one-quarter or one-year period.
Incremental budgeting Using the previous period’s budget or actual performance as a starting point, then
making some additions or adjustments for the new, upcoming budget.
Incremental innovation Exploiting the existing knowledge base and small improvements of existing products.
Informational power Power based on a person’s ability to control the information that others need to
accomplish something.
Informational roles Include gathering information and conveying relevant information to internal and external
stakeholders.
Initiating structure A managerial approach parallel to the task-oriented behavior which shows the emphasis on
formal processes such as designing roles and responsibilities.
Innovation Implementation of a new or significantly improved product (good or service), or process, a new marketing
method, or a new organizational method in business practices, workplace organization or external relations.
Instrumentality or performance-reward linkage The perceived degree of positive outcome.
Integration strategy Offering customers more value for the same price by satisfying their desires and reducing
costs compared to competitors with similar caliber products.
Internal analysis The examination of resources, capabilities, core competencies, and value chain activities
Internal audit examines the adequacy and effectiveness of internal controls and makes recommendations where
control improvements are needed.
Internal control A process affected by an entity’s board of directors, management, and other personnel
which is designed to provide reasonable assurance regarding the achievement of objectives relating to
operations, reporting, and compliance.
Internal environment The environment that includes leadership and management styles, organizational
culture, human resources, organizational structures, business assets, financial strength, operational, and
managerial processes.
263
Glossary
Internal stakeholder Stockholders, board of directors, executive officers, other managers, and employees of a
company.
International Organization for Standardization (ISO) A certification that has become the recognized
standard for evaluating and comparing companies on a global basis.
Interpersonal roles Interpersonal relations and behaviors necessary for effectively managing the organization.
Intrinsic reward Satisfaction in the achievement of completing a mission or innovating a product.
Intuition Knowing or understanding something instinctively or subconsciously without reasoning or proof.
Intuitive decision making A model of decision making where decisions are taken based on someone’s knowing
or understanding of certain things instinctively or subconsciously without reasoning or proof.
J
Joint venture Creating a new company by two or more companies which continue to operate.
Just-in-time (JIT) An inventory management and control system that ensures timely delivery of a product or
service and related inputs.
L
Large group intervention (LGI) approach A planned meeting of organization members and outside
stakeholders to address organizational problems and opportunities.
Leader A role model who earns the title and is embraced by the followers.
Leader-member exchange theory (LMX) A contemporary leadership approach that suggests leaders create
in-groups and out-groups which they decide at the beginning of their relationship with their subordinates
or followers.
Leadership The proces of influencing others – a group, employees, or followers depending on the environmentin dynamic ways towards attaining goals.
Leadership grid The behavioral leadership model that consists of five managerial or leadership styles reflected
in two dimensions which are concern for people and concern for production.
Least prefered co-worker (LPC) A scale for measuring leader styles indicating that leaders with high LPC
scores are people oriented; leaders with low LPC scores are task oriented.
Legitimate power Power based on a person’s right in the formal hierarchy to make demands.
Line authority The employer-employee relationship that moves from top to bottom according to the chain of
command.
Liquidity ratio Type of a ratio which measures an organization’s ability to meet its current debt obligations.
Localization strategy A strategic approach that requires maximizing local responsiveness so that local consumers
will perceive the products as local ones.
Long-term objectives The things that are intended to be achieved which are expected to take more than three
years.
Long-term planning Type of planning for determining what to accomplish that will take more than three
years.
M
Management The act of getting people to work together in achieving organizational goals through effective and
efficient use of resources.
Management by exception (MBE) Intervention of managers in the performance of employees which happens
in an active or passive form.
Management by objectives (MBO) A process by which managers and employees at all levels set mutually
agreed-upon goals.
Managerial effectiveness Manager’s ability to achieve desired results.
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Managerial efficiency Manager’s ability to manage a business with optimal utilization of organizational
resources.
Managerial planning A process by which managers set the organizational goals and determine action plans to
meet those goals.
Managing diversity Coordinating differences in a work environment in the most effective way.
Margin The difference between value and total costs.
Mass customization Tailoring products to meet the needs of a large number of individual customers.
Mass production A system of production of a large number of standard products such as using assembly lines.
Master budget A budget that includes three separate but interdependent budgets: the operating budget, the
capital expenditures budget, and the financial budget.
Matrix structure An organizational structure that combines people and resources by function and by product
or project group.
Mechanistic structure A rigid bureaucratic structure that is controlled by rules and procedures in a clear
hierarchy of authority or chain of command.
Medium-term planning Determining what to accomplish within a timeframe of more than a year, less than
three years.
Merger The integration of two independent companies that become one company.
Mission A statement about the reason for the existence of a company that describes what a company actually does.
Monopolistic competition An environment that has many producers which sell a differentiated product with
some pricing power in a consolidated or fragmented market.
Monopoly An environment in which a single producer sells an undifferentiated product with a large degree of
pricing power in a consolidated market.
Motivation A drive to be willing to perform a task, take an action, or achieve a goal usually for a desired or
expected outcome which is also associated with high organizational performance.
Motivators Factors that determine the satisfaction level and motivation such as achievement, responsibility,
empowerment, recognition, and self-development.
Multiculturalism Differences in values, beliefs, attittudes, customs, and norms that are held by people from
different cultures.
N
Negative entropy All attempts and efforts to slow entropy down. See entropy.
Nonmonetary budget A budget expressed in nonfinancial terms that allocates resources such as units of output,
hours of direct labor, machine hours, or square-meter allocations.
O
Objective A specific description of what one intends to achieve within a timeframe and available resources.
Oligopoly Environment that has few producers—more than one but not a large number—selling products
which may be either undifferentiated or differentiated with some pricing power in a consolidated market.
Operational budgets Short-term financial plans to coordinate activities needed to achieve the short-term goals
of a company.
Operational control Type of managerial control which regulates the activities or methods an organization uses
to produce the goods and services it supplies to its customers.
Operational plan A plan that translates the tactical plan into specific goals and actions for small units of the
organization which usually focuses on the next twelve months or less.
Organic structure A more adaptive and flexible structure with a looser chain of command.
Organizational change The process by which organizations adopt new ideas or behaviors to increase
organizational effectiveness.
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Glossary
Organization chart A visual representation of an organization structure.
Organizational culture Shared values, principles, traditions, and ways of doing things that influence the way
organizational members act and how one organization differs from another.
Organizational development A field of research, theory and practice techniques to expand the knowledge and
effectiveness of people to accomplish successful organizational change and performance.
Organizational structure A system that consists of rules and policies to outline work roles, responsibility,
reporting relationships, and how they fit within the overall system.
Organizing Management function related to establishing and maintaining organizational structures and
systems.
Organizing function The management function concerned with arranging and assigning tasks, allocating
resources, and structuring work in order to reach organizational objectives.
Outsourcing Contracting out the activities that otherwise would be conducted within a company
P
People change A change that pertains to changes in attitudes, expectations, perceptions, and behaviors of
employees in an organization.
People-oriented behavior A supportive managerial approach to subordinates in relation to a concern about
high performance goals and human needs.
Perfect competition An environment that has many producers who sell an undifferentiated product with little
or no pricing power in a fragmented market.
Planning A process by which goals or objectives are set, how to achieve them are determined, and the action
plans are implemented, then monitored for results.
Policy A standing plan that conveys basic principles and broad guidelines for directing and limiting actions
and decisions.
Political forces The effects of political and legal institutions on organizations and individuals.
Position power The amount of power that a leader has over her/his subordinates in terms of hiring, firing,
promotion, and work orders.
Power An ability possessed by leaders based on personal characteristics to influence followers towards the
achievement of group goals.
Problem-solving team A team that is involved in efforts to improve work or to solve specific problems.
Procedure A step-by-step sequence of activities that should be followed in order to perform a task.
Process departmentalization Grouping of work activities according to production processes of goods or
services.
Process innovation A new method or technology to produce an existing product usually aimed at lowering
costs.
Process production A system of production of continuous process that is almost completely mechanized and
automated.
Product departmentalization Grouping of work activities according to specific products or services offered by
an organization.
Profitability ratio A type of ratio that measures the income or operating success of a company for a given
period of time.
Proposed budget A budget that provides a plan of the amount of resources needed by a particular team,
organizational unit and/or for a particular project that is submitted to a superior or budget review committee
for approval.
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Q
Queen bee syndrome A phrase defining those female supervisors or managers who do not support female
employees seeking advancement to higher positions.
R
Radical innovation A radical departure in the development of new and different products which anticpate
their immedite implementation.
Rational model of decision-making A step-by-step process for making logically sound decisions which is
based on the assumption that the decision maker has full and perfect information.
Referent power Power based on a person’s perceived attractiveness, worthiness, and a right to others’ respect.
Resources Tangible and intangible assets which the company can exploit when formulating and implementing
strategies.
Responsibility The obligation or expectation that all employees have to perform the duties associated with
their jobs.
Reward power Power based on a person’s ability to compensate another for compliance.
Routine technology The nature of technology that is characterized by work tasks that are repetitive regarding
work procedures.
S
Scientific management approach Developed by the founding scholars of management who applied scientific
methodology that focused on the methods to use a workforce more efficiently and finding the best way to
solve organizational problems.
Self-directed team See self-managed team.
Self-managed team A small self-organized group of employees whose members determine, plan and manage
their day-to-day activities under reduced or no supervision.
Sensitivity training A technique where employees interact, get better acquainted, and form relationships in
order to develop positive working relationships.
Short-term objectives The things that are intended to be achieved within a year.
Short-term planning Determining what to accomplish within a period of at most one year.
Single-use plan A one-time plan that is designed to achieve a specific goal within a particular budget and time
period that is unlikely to be repeated in the future.
Situational model A leadership approach emphasizing that leaders adjust their style according to the degree
that subordinates are ready for change in task-based assignments on the premise that “Different situations
demand different types of leadership”.
Social forces. Social forces refer to macro factors within social, cultural, and historical contexts.
Social responsibility The approach about businesses having a responsibility to conduct their affairs ethically to
benefit both employees and the larger society.
Span of control The number of employees directly supervised by a manager.
Span of management See span of control.
Staff authority A form of authority created to assist, support, and advise the work of line managers.
Stakeholders The actors inside and outside of a company who can affect or can be affected by the achievement
of the company’s objectives.
Stakeholder approach An appoach asserts that treating stakeholders well and managing their interests helps a
company achieve a higher performance.
Standing plan An ongoing plan that provides guidance for activities performed repeatedly, such a policy and
procedure.
Static budget A budget type which is prepared for only one level of sales volume.
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Glossary
Stockholder viewpoint The traditional perspective that claims business firms are responsible only to their
stockholders
Strategic alliance The cooperation of companies regarding different processes for realizing their strategic
objectives.
Strategic budget Long-term financial plan to coordinate the activities needed to achieve long-term goals of a
company.
Strategic business unit (SBU) An independent division of a larger corporation with its own mission, vision,
market features, customers, and profit-and-loss responsibilities.
Strategic control The assessment and regulation of how the organization as a whole fits its external environment
and meets its long-term objectives and goals.
Strategic management Integration of analysis of the firm’s external and internal environments; formulation of
corporate, business, and functional strategies; and implementation of strategies in the quest for competitive
advantage.
Strategic plan A broadly defined plan that identifies the long-term direction the organization will take as a
whole with a time horizon of three to five years.
Strategy Long-term goal of an enterprise, the adoption of courses of action and the allocation of resources
necessary for carrying out these goals to achieve sustainable competitive advantage.
Strategy formulation The strategic management stage for choosing the strategy in terms of where and how to
compete at corporate-level, business-level, and functional or operational level.
Strategy implementation The strategic management stage that directs the organizational resources towards the
execution of strategic goals.
Stereotyping Rigidly categorizing certain individuals, groups, or communities because of prejudicial tendency
towards their differences.
Strong culture Organizational culture where employees subconsciously know the shared assumptions,
consciously know the values and beliefs, and behave as expected.
Structure change A change that pertains to the organization’s structural variables such as procedures and
policies, job tasks, the degree of centralization or decentralization, and authority relationships.
Substitute product Goods and services that a consumer sees as the same or similar to any other product or
services.
Supplier Individuals or organizations providing businesses with inputs such as raw materials, semi-finished
materials, and energy.
Supportive behavior Leadership behaviors that are participative, friendly, include two-way communication,
praising, listening, and rewarding.
Sustainable competitive advantage Market positioning as being ahead of competitors or achieving higher
performance than the industrial average for a long time.
SWOT analysis An audit which analyzes the strengths, weaknesses, opportunities, and threats of a company in
a market environment for determining the organizational performance.
Synergy The thinking that the whole is greater than the sum of its parts.
System A structure of interrelated parts which transform inputs into outputs to achieve specific goals.
Systematic management approach The management approach which is an attempt to build specific
procedures and processes to systematize organizational activities and ensure coordination.
T
Tactical control The assessment and regulation of the day-to-day functions of the organization and its major
units during the implementation of its strategies.
Tactical plan A short-range plan, often focused on one to two years in the future, that translates the strategic
plan into specific goals for various parts of the organization such as production, marketing and human
resources.
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Tall organization structure A management structure that has multiple layers of management.
Task environment The set of forces and conditions that originate with suppliers, distributors, customers, and
competitors; these forces and conditions affect an organization’s ability to obtain inputs and its outputs.
Task-oriented behaviors A managerial focus on production and technical aspects of a job as a result of a
concern about issues such as keeping low costs and scheduling meetings.
Task structure Indicates to what extent the job requirements as well as the goals are clearly defined, formalized
and standardized.
Team A group of people who interact and coordinate their work together to achieve shared goals.
Team building Activities that are designed to improve the capacity of the members to work as a team together
in a productive environment.
Team cohesiveness The extent to which team members remain united and committed to a team’s goals.
Team leader Person who is mainly responsible for coordinating the work of a small group of people while
acting as a catalyst or facilitator.
Team norms A set of guidelines or expectations shared by team members.
Team role The tendency for team members to behave, contribute and relate with others in a particular way.
Team structure An organizational structure that emphasizes work groups or project type teams with little or no
functional hierarchy and with team authority as its building block.
Technical complexity A classification of manufacturing processes according to the level of mechanization.
Technical skills A manager’s ability to use necessary knowledge, methods, techniques, and equipment to
perform certain tasks.
Technological forces Innovations and changes in technology that can potentially affect the business processes.
Technology The study and knowledge of the practical, especially industrial, use of scientific discoveries.
Technology change A change that deals with how the work is done such as the use of new equipment, tools,
machines, work methods, and work processes.
Three-needs theory Also named acquired needs theory, proposes that the most common needs are need for
achievement(nAch), need for power(nPow), and need for affiliation(nAff).
Total quality management (TQM) An organization-wide effort to integrate quality into every activity in a
company through continuous improvement of products and processes.
Trait approach An early approach, also referred to as Great Man theory, to understand leadership with a
focus on identifying the qualities such as intelligence, honesty, integrity, self-confidence, and appearance
possessed by successful social, political, and military figures.
Transactional leader A leader who aims to accomplish organizational goals in an efficient way through
clarifying tasks and rewarding employees.
Transformational leader A leader who articulates a vision, transforms the thinking of individuals, brings out
their creativity, engages in the organizational atmosphere, and empowers followers to accomplish goals, and
to reach their full potential.
Transnational strategy An international strategic approach which integrates the benefits of a localization
strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position
attainable).
U
Unit production A system of production where items are produced in units or small batches often for
customized work that rely heavily on inputs.
Utilitarianism An ethical philosophy in which the happiness of the greatest number of people in the society is
considered the greatest good.
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Glossary
V
Valence The attractiveness of the outcome for the individual.
Value A belief or an idea which states what is desirable, proper, and appropriate in the organizational context.
Value chain Diverse but integrated activities that a company performs internally.
Vertical integration The degree of the direct participation of a company to the different stages of industrial
value chain.
Virtual network structure An organizational structure where most major functions or business processes are
subcontracted to other firms.
Virtual team A team that is composed of members who are geographically dispersed, often interacting by
electronic means and engaged in interdependent tasks.
Vision A statement about where a company wants to be in the future which communicates management’s
aspirations to stakeholders about “where we are going” and helps channel the energies of company personnel
in a common direction.
W
Weak culture Organizations with many employees who do not behave as expected are called weak cultures.
Whistle-blower An employee who discloses organizational wrongdoing to parties who can take action.
Work specialization See division of labor.
Z
Zero-based budgeting Budgeting that requires all proposals to be justified on a cost/benefit basis at the
beginning of each budgeting period.
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