KAUNAS UNIVERSITY OF TECHNOLOGY

DEPARTMENT OF MANAGEMENT










INTRODUCTION TO MANAGEMENT

Formered by Vilmant Kumpikait



Schoolbook





KAUNAS, 2009
Content

PREFACE.................................................................................................................................
CHAPTER 1. CONTEXT OF MANAGEMENT.....................................................................
3
4
1.1. The Definition of Management....
1.2. Four Management Functions ..
4
5
CHAPTER 2. MANAGEMENT THEORIES.. 8
2.1. The Importance of Management Theories...
2.2. Prehistory of Management...
2.3. Classical Management Theory.
2.4. Behavioral Management Theory
2.5. Quantitative Management Theory...
2.6. Systems Theory
2.7. Contingency Theory
2.8. Emerging Perspectives in Management...
2.9. Implications for Management..
8
9
12
18
24
24
27
30
32
CHAPTER 3. ORGANIZATION 34
3.1. Enterprise activity conditions and establishment stage...........................
3.2. Kinds of enterprises.
3.3. Motives for selection of enterprise kind......
3.4. The Environment and its Importance for an Organization..
3.5. Organization Charts.
34
36
37
38
40
CHAPTER 4. OPERATION MANAGEMENT.. 45
4.1. The operation system...
4.2. Operations in Production and Service Organizations..
4.3. Material Resource Regulation..
4.4. Planning and Control Procedures
45
46
47
49
CHAPTER 5. MARKETING . 51
5.1. Introduction to Marketing
5.2. Customers and Consumers...
5.3. Product Life Cycle...
5.4. Marketing strategies.
5.5. Marketing Mixes..
5.6. Marketing Segmentation..
51
51
52
53
54
58
CHAPTER 6. HUMAN RESOURCE MANAGEMENT 61
6.1. The Human Resource Management Process in Organizations
6.2. Human Resource Planning, Recruitment, Selection and Socialization...
6.3. Human Resource Training and Development.
6.4. Promotions and Demotions.
6.5. Components of a wage, salary or reward package
62
63
65
66
67
CHAPTER 7. FINANCIAL MANAGEMENT 69
7.1. Financial Statements
7.2. Depreciation.
7.3. Costs.
7.4. Balancing the Cash Book.
7.5. Break even analysis.
69
70
70
72
73
Bibliography. 75




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PREFACE

Management is a dynamic discipline and this schoolbook on the subject must constantly
undergo significant principals of Management to prepare students to be the managers of the future.
This schoolbook provides basic information about main management functions, management
prehistory and its theories, basic points of operation management, marketing, human resource and
financial management.
Introduction to Management is prepared for students of International Study Center, studying
Fundamentals of Management and for students studying Management in English of Faculty of
Economics and Management at Kaunas University of Technology. This schoolbook can be useful
for other students studying Management in English or Lithuanian.

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CHAPTER 1.
CONTEXT OF MANAGEMENT
1.1. The Definition of Management

Management is the process of
coordinating work activities so that they are
completed efficiently and effectively with and
through other people.
Management often is considered universal because it uses organizational resources to
accomplish goals and attain high performance in all types of profit and not-for-profit organizations.
Thus, our definition of management is as follows.
Management is the attainment of
organizational goals in an effective and efficient
manner through planning, organizing, leading,
and controlling organizational resources.
There are two important ideas in this definition:
1. the four functions of planning, organizing, leading, and controlling, and
2. the attainment of organizational goals in an effective and efficient manner.
We already know that the second part of the definition is what distinguishes a managerial
position from a non- managerial one. In addition, management involves the efficient and effective
completion of organizational work activities; or at least that is what managers aspire to do.
Efficiency is a vital part of management. Managers deal with the scare input resources
mainly people, money and equipment they are concerned with the efficient use of resources.
Management, therefore, is interested in minimizing resource costs. From this perspective, efficiency
is often referred to as doing thing right that is, not wasting resources.
Efficiency - getting the most output from
the least amount of inputs; referred to as doing
things right.
However, it is not enough simply to be efficient. Management is also concerned with
completing activities so that organizational goals are attained; that is, management is concerned
with effectiveness. When managers achieve their organizations goals, we say they are effective.
Effectiveness is often described as doing right things that is, those work activities that will help
the organization to reach its goals. Whereas efficiency is concerned with the means of getting things
done, effectiveness is concerned with the ends, or the attainment of organizational goals (see Figure
1.1.)
Effectiveness - completing activities so
that organizational goals are attained, referred
to as doing right things.




Goal Attainment Resource usage

Low waste High attainment




Management strives for:
Low resource waste (high efficiency).
High goal attainment (high effectiveness)
Figure 1.1. Efficiency and effectiveness in management
4

Efficiency and effectiveness are related. It is easier to be effective if one ignores efficiency.
Some public service organizations are criticized regularly on the grounds that they are reasonably
effective but extremely inefficient; that is, they get their jobs done but at very high costs.
Management is therefore concerned not only with getting activities completed and meeting
organizational goals (effectiveness) but also with doing so as efficiently as possible.
The process represents the ongoing functions or primary activities engaged in by managers.
These functions are typically called planning, organizing, leading and controlling. It was spoken
about in the first part of managements definition. The management process of using resources to
attain goals is shown in Figure 1.2.















Figure 1.2. The Process of Management
Resources
Human
Financial
Raw material
Technological
Information
Performance
Goal attainment
Products
Services
Efficiency
Effectiveness
Controlling
Monitor activities and
make corrections
Resources
Human
Financial
Raw material
Technological
Information
Organizing
Assign responsibility
for task
accomplishment
Leading
Use influence to
motivate employees
Planning
Select goals and ways
to attain them

Management Functions

The next section begins with a brief overview of the four functions.
1.2. Four management Functions

In the early part of the twentieth century, a French industrialist by the name of Henri Fayol
proposed that all managers perform five management functions: planning, organizing,
commanding, coordinating, and controlling. Although some management theorists identify
additional management functions, such as staffing, communicating, or decision making, those
additional functions will be discusses as subsets of the four primary functions. Most management
textbooks still continue to be organized around the management functions, although they have been
condensed down to four basic and very important functions: planning, organizing, leading and
controlling (see Figure 1.3.).

Planning- Organizing Leading Controlling
Defining goals;
Establishing strategy;
Developing sub plans
to coordinate activities.

Determining what
needs to be done;
How it will be done
and
Who is to do it.
Directing and
motivating all
involved parties;
Resolving conflicts.

Monitoring
activities to
ensure that
they are
accomplished
as planned.

Lead to
Achieving
organizations
stated purpose
Figure 1.3. Management Functions


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Planning
Planning implies that managers think through their goals and actions in advance, that their actions
are based on some method, plan, or logic rather than on a hunch. Plans give the organization its
objectives and set up the best procedure for reaching them. In addition, plans are the guides by
which (1) the organization obtains and commits the resources required to reach its objectives; (2)
members of the organization carry on activities consistent with the chosen objectives and
procedures; and (3) progress toward the objectives is monitored and measured so that corrective
action can be taken if progress is unsatisfactory
The first step in planning is the selection of goals for the organization Then objectives are
established for the organization's subunitsits divisions, departments, and so on. Once objectives
are determined, programs are established for achieving them in a systematic manner Of course, in
selecting objectives and developing programs, the- manager considers their feasibility and whether
they will be acceptable to the organization's managers and employees.
Plans made by lop management fur the organization as a whole may cover periods as long as
five or ten years in a large organization, such as a multinational energy corporation, those plans
may involve commitments of billions of dollars Planning at the lower levels, by middle or first line
managers, covers much shorter periods. Such plans may be for the next day's work, for example, or
for a two-hour meeting to take place in a week.

Organizing
Organizing typically follows planning and reflects how the organization tries to accomplish the
plan. Organizing is the process of arranging and allocating work, authority, and resources among
an organization's members so they can achieve an organizations goals efficiently, different goals,
of course, require different structures. For example, an organization that aims to develop computer
software needs a different structure manufacturer of blue jeans. Producing a standardized product
like blue jeans requires efficient assembly-line techniques, whereas producing software requires
organizing teams of professionalssystems analysts, programmers, and so on. Although these
professionals must interact effectively, they cannot be organized like assembly line workers. Thus,
managers must match an organization's structure to its goals and resources, a process called
organizational design.

Leading
The third management function is to provide leadership for employees. Leading involves directing,
influencing, and motivating employees to perform essential tasks. While planning and organizing
deal with the more abstract aspects of the management process, the activity of leading is very
concrete. It involves working with people. Leading means communicating goals to employees
throughout the organization and infusing them with the desire to perform at high level. Leading
involves motivating entire department and divisions as well as individuals. By establishing the
proper atmosphere, managers help their employees do their best.
Summarizing, we can say that leading
is managements function that involves motivating subordinates;
influencing individuals or teams as they work;
selecting the most effective communication channels;
dealing with employee behavior issues.


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Controlling
Controlling is the fourth function on the management process. Finally, the manager must be sure the
actions of the organization s members do in fact move the organization toward its stated goals. This
is the controlling function of management, and it involves three main elements: (1) Establishing
standards of performance: (2) Measuring current performance; (3) Comparing this performance to
the established standards; and (4) If deviations are detected, taking corrective action. Through the
controlling function, the manager keeps the organization on its chosen track.




REVIEW QUESTIONS


?
1. Define the term management and explain why it is important.
2. Define efficiency and effectiveness and explain why they are important to
management.
3. Can organizations be efficient and yet not effective?
4. Explain how efficiency and effectiveness are related.
5. Describe the basic activities in the management process and give examples of how
they are interrelated.
6. Enumerate the main management functions.
7. Define the term planning.
8. Define the term organizing.
9. Define the term leading.
10.Define the term controlling and explain its main elements.





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CHAPTER 2.
MANAGEMENT THEORIES
2.1. The Importance of Management Theories

The question we hear very often is: Why study management theory? The answer is, because
management is an applied discipline concerned with practical results; you may be impatient with
the idea of studying theories from the past. But this study is important for at least four reasons.
Theory is coherent group of
assumptions put forth explain the
relationship between two or more
observable facts and to provide a sound
basis for predicting future events.
Theories guide management decisions. Studying theories helps us to understand underlying
processes, and on that basis, choose an effective course of action. In essence, a theory is a
coherent group of assumptions put forth to explain the relationship between two or more
observable facts. Valid theories, then, let us predict what will happen under certain
situations. With this knowledge, we can apply different management theories to different
situations.
Theories shape our view of organizations. Studying management theories also shows us
where we get some of our ideas about organizations and the people in them. Take Henry
Fords assembly line, for instance. This is one very practical application of scientific
management theory, the idea that managers can scientifically determine the best way to
perform any task. This theory is based on the assumption that people dont like work;
instead they need close supervision and the incentive of money rewards. As a result, Ford
adopted a new set of assumptions about employees that they care about their work and
want a say in how it is organized and performed ideas that underlie the neoclassical
approach.
Theories make us aware of the business environment. As you study the various theories,
you will come to see that each product its environment the social, economic, political,
and technological forces present in a given time and locale. This knowledge will help to
you understand why certain theories are appropriate to different circumstances. At the
beginning of the twentieth century, for example, skilled labor was in short supply, leading
managers to concentrate on ways to make every worker more efficient. In this context,
Henry Fords approach makes sense. Today, though, when general level of education is
higher and we have an ample labor supply, different theories are more effective.
Theories are a source of new ideas. As you can see, theories give us a chance to take a
different view of everyday situations. Even though you may feel more comfortable with
one theory than another, it is important to realize that no general theory unifies or
dominates the field. Instead, the eclectic approach the practice of borrowing principles
from different theories as required by circumstances the state of the art in management
theory and practice. Thus, you need to keep an open mind and become familiar with each
of the major theories that currently coexist.
We will focus on three well established schools of management thought: the classical school
(which has two branches scientific management and classical organization theory), the behavioral
school, and the management science school. Although these schools developed in historical
sequence, later ideas have not replaced earlier ones. At the same time, each school has continued to
develop and even merge with others. Thus, we will also discuss three recent integrative approaches:
the systems approach, the contingency approach, and the neohuman relations movement. Figure
2.1. gives you an approximate idea of when each of these theoretical perspective emerged.
8

















The Neo Human Relations
Movement
1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
1
5
9
13

The Contingency Approach

The Systems Approach

The Quantitative School

The Behavioral School

Classical Management
Theories

Figure 2.1. Key Management Theories: An Overview.

2.2. Prehistory of Management

Studying history does not mean merely arranging events in chronological order; it means
developing an understanding of the impact of societal forces on organizations. Studying history a
way to achieve strategic thinking, see the big picture, and improve conceptual skills.


Egyptian Pyramids

Organized endeavors directed by people responsible for planning, organizing, leading and
controlling activities have existed for thousands of years. The Egyptian pyramids (see Figure 2.1
and 2.2 ) and the Great Wall of China (see Pictures) are evidence that projects, employing tens of
thousands of people were undertaken well before modern times. People, who planned what was to
be done, organized people and materials to do it, performed managers functions.


Sphinx and Egyptian Pyramid The Great Wall of China

These examples from the past demonstrate that organizations have been around for thousands of
years and that management has been practiced for an equivalent period. However, two pre-twentieth
century events played particularly significant roles in promoting study of management.

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The Industrial Revolution
The significance of the Industrial Revolution is that it led to radical changes in the way
people work, socialize, engage in politics, and carry out their daily lives. Prior to the Industrial
Revolution in Europe and the United States, most human labor was performed in relation to the soil.
Serfs and peasants alike extracted their livelihood from planting and harvesting crops on their land
or land owned by the aristocracy. However, not all labor was agrarian. Artisans comprised a small
segment of labor which was mostly confined to the cities and concentrated in the production of
goods such as cloth, shoes, tools, and weapons. However, it was the advancement of technology in
several key spheres that culminated in the rapid emergence and growth of industrial manufacturing.
Foremost among the technological advancements was the
discovery of how to derive energy from steam. The steam
engine, as perfected by J ames Watt, provided a mechanism
for obtaining cheap and efficient energy. Moreover, steam
power allowed for the concentration and development of
machinery that could lower production costs, produce larger
volumes of goods, and ultimately provide for a swifter
transportation of those goods to markets. However, this
could not be achieved without a readily available labor
force. As factories began to emerge based on the use of this
new technology, the need for greater numbers of laborers
generated political tension in many European societies. With
most of the labor (much of which was under servitude or
slavery) dispersed on farmlands, attempts to reform society
began to occur. Indeed, much of the political unrest in
Europe during the nineteenth century was due to political power struggles between the aristocratic
classes and a new emerging class of factory owners struggling to redefine the role that labor would
play in the Industrial Revolution.

Fords Assembly Line
Ultimately, labor in Europe and the United States was freed from servitude with many of the
peasants moving to the city to obtain work in the developing factories. As a result, human labor and
energy were transferred to machines and industrial development spread throughout Western
civilization. However, an additional technological advancement was necessary in order for factories
and industries to grow. While goods could be produced in greater quantities, at cheaper costs, and
in faster time, customers had to be available. Again, steam power and its application to
transportation, such as railroads and ships provided access to previously unavailable markets.
Where a single city may have constituted a market for the goods produced in a factory, railroads
and ships could now efficiently transport the goods to be sold to new customers. Hence, it was both
the invention of new forms of energy for the production
and transportation of goods and radical political
changes in societies that promoted the Industrial
Revolution.
The rapid growth of factories posed different
management problems than those encountered in
previous organizational forms. Governments could
operate without competition or having to show a profit;
the Church could organize and manage its activities
because of the devotion of the faithful; and militaries
could control large numbers of troops through a rigid
hierarchy of discipline and authority. Managers of
factories, however, could not resort to any of these
techniques and thus had to rely on a different set of principles and rules in order to be effective.

Child Labour in Textile Factory
As the factories grew in employee size, it became more difficult for one person to oversee
the coordination and control of work. The solution to this problem was the hiring and training of
managers to oversee segments of the production process. That is, managers were needed to plan the
10
work to be performed, to assign tasks and responsibilities, to direct workers, and to respond to
problems encountered in the work process. Yet this was not possible in most cases. Trained
managers were in short supply. Most managers employed had to learn their position based on ad
hoc problem solving which oftentimes had as much failure as it did success. To complicate the task
of managing in a factory, many laborers did not have access to education; thus, literacy was low as
was the ability to perform basic mathematical calculations. Great amounts of managerial time were
therefore spent in providing oral instructions and demonstrations of tasks to be performed. The
focus of managers, therefore, was more on directing subordinates than on coordinating and
controlling the work force. The effect of this situation was a loss of production efficiency.
During this time, several individuals began to address issues of management both in
practice and in writings. Two of the most recognized are Robert Owen and Charles Babbage.
Robert Owen. Robert Owen (1771-1858) was an owner of a mill in New
Lanark, Scotland. He came to recognize that human resources were as valuable
to the production of goods as were financial and material resources. Owen
believed that factory workers would be more productive if they were motivated
through rewards rather than punishments. He experimented with several
motivating techniques and became a strong advocate for improving working
conditions through increasing the minimum working age of children to 10 years,
providing regular meal breaks for workers, and reducing the work day to 10i
hours with no night work for children. While these ideas are widely accepted now, they were con-
sidered "too radical" by other manufacturers and politicians of that time. Owen's frustration
culminated when he left England for the United States and founded a communal township at New
Harmony, Indiana, in 1824 which incorporated much of his philosophy. Many of Owen's ideas
about the management of human resources were assimilated into a school of thought, referred to as
behavioral theory that emerged in the 1900s.
Charles Babbage. Charles Babbage (1792-1871) is considered a genius for his
contribution to the development of the modern school of English mathematics, his
application of mathematic principles to management, and his development of an
"analytic engine" whose ideas are represented in the modern computer in the form
of program control, microprogramming, multiprocessing, and array processing.
Babbage's major contribution to management is his book On the Economy of
Machinery and Manufactures in which he described in great detail how
mathematics could be applied to problems of inefficient use of materials and facilities. Many of his
ideas would be expressed both in classical management theory and in quantitative management
theory that were espoused in the 1900s. Babbage also had a strong understanding of the importance
of human resources as related to efficiency. He advocated profit-sharing plans and bonus systems
as ways to achieve better relations between management and labour. Despite the significance of his
contributions, Charles Babbage was considered by his contemporaries to be eccentric, if not on the
verge of lunacy. Upset over the number of English street organ-grinders outside of his home, he
would counter with the blowing of bugles in front of his house much to the dismay of his
neighbors. One friend noted that "He spoke as if he hated mankind in general, Englishmen in
particular, and the English government and organ-grinders most of all."
Despite the suggestions by Owen and Babbage, it was not until the late 1800s that owners
and managers began to raise concerns about the problem of material and human inefficiency. This
was due largely to markets becoming saturated, demands for greater profits, and competition that
was becoming keener. This emphasis on cutting costs and increasing efficiency led to the
emergence of the classical school of management theory.

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2.3. Classical Management Theory

It is important to recognize that while the Industrial Revolution was having similar impacts
on Europe and America, some important distinctions can be made. Unlike Europe, America was a
country undergoing rapid growth and expansion. Midwestern and western lands were sparsely
inhabited and contained large quantities of untapped minerals, forest reserves, and fertile farmland.
As the population moved westward, new markets were opened for enterprises and the need for
power, transportation, and communication became critical. With the implementation of these
technologies through applications of steam and coal power, development of rail systems, and the
establishment of telegraph lines, entrepreneurial activity was abundant and highly competitive. The
need to develop management techniques that would integrate technology, materials, and worker
activities in a productive and efficient manner was a central concern during this time period.
Because of these events in the United States and the impact of the Industrial Revolution in Europe,
classical management theory evolved in an effort to uncover those techniques that would solve
problems of organizational efficiency in the production of goods and services.
Classical management theory can be divided into two perspectives distinguished by the
issues and problems that they address. One perspective, administrative theory, evolved from both
European and American academicians and managers concerned with the nature and management of
the total organization. Issues and problems that they sought to address concerned the technical
efficiency of the organization. A second perspective, scientific management, emerged from
predominately American scholars and managers and focused on issues concerning the management
of work and workers.
Scientific Management
Scientific management theory arose in part from the need to increase productivity. In the
United States especially, skilled labor was In short supply at the beginning of the twentieth century.
The only way to expand productivity was to raise the efficiency of workers Thus, Frederick W
Taylor, Henry L Gantt, and the Gilbreths Frank and Lilliandevised the body of principle
known as scientific management theory.
Frederick W. Taylor. Before the 1880s, there were almost no systematic
efforts to find ways to properly manage workers. While the writings of Fayol,
Weber, and Barnard provided a blueprint for structuring organizations and
organizing managerial activities, the practice of management was based
primarily on experience, intuition, and common sense. Frederick W. Taylor
(1856-1915), a self-taught engineer who worked his way up from common
laborer to chief engineer at the Midvale Steel Company by the age of 28, tried
to change that view. Taylor espoused a view that managers should study work
scientifically in order to identify the "one best way" to perform a task. His engineering background
provided a model for establishing principles of management that would guide scientific analysis of
work so as to improve task efficiency. Taylor's principles can be summarized as follows:
Determining the one best way. Taylor believed that managers should observe and analyze
work in order to uncover the one best way to perform the job and then put that way into
operation. To enable managers to study work scientifically, Taylor promoted the use of
time and motion studies. Time and motion studies measure all task movements made by a
worker and try to eliminate those that do not lead to increased productivity.
Scientific selection of personnel. Taylor did not believe that any individual with proper
training would necessarily be the most competent to perform a certain task. Taylor was a
strong advocate of matching physical traits to the dimensions of the task to be performed.
While recognizing that the application of scientific principles would increase efficiency in
task production, Taylor felt that some individuals would be more suited to a task than
others and that managers should seek out those with proper traits. For Taylor, the most
important physical traits of a worker were production capability, muscle durability, and
resistance to fatigue. Selection of workers based on personality or emotions was to be
12
avoided.
A Financial incentives. While matching the correct worker with the task was essential to
increasing worker efficiency, Taylor recognized that another element must be added to the
equation. Workers had to be motivated. At the time, the most common form of wages was
the hourly rate. Taylor felt that motivation would be enhanced by the piece-rate system of
financial incentives, where workers would be paid according to what they produced rather
than the number of hours they worked.
Functional foremanship. Finally, Taylor advocated that responsibility should be divided
between managers and workers. This principle specified that separate managers would
plan, direct, and evaluate the work process while the worker was responsible for
performing the actual task. Thus, a worker would take orders from the functional foreman
depending on the stage in which the work process existed.
Under the Taylor system, the first three principles formed the core of the scientific
management approach. The final principle was considered innovative in terms of the philosophy of
management in that it introduced the notion of relieving workers from the responsibility to plan,
initiate, and evaluate their work and instead they could focus more directly on the actual production
process.
In practice, Taylor's ideas led to huge success in the increase of production and higher wages
as evidenced by its application in the steel industry. However, many of Taylor's methods were met
with resistance as workers and unions feared that greater physical demands and increased layoffs
would result from the implementation of the techniques. In addition, many owners and managers
used the methods to increase their own profits and earnings, thus depriving workers of sharing in
the benefits of increased and more efficient production. Indeed, these were the outcomes when
Taylor's methods were implemented in the Simonds Rolling Machine Company, a firm that
manufactured ball bearings. By 1912, with strikes occurring at the Watertown Arsenal in
Massachusetts and opposition from labor unions solidified, Congressional hearings were held on
Taylor's methods concerning their ethics and possible worker exploitation. Taylor believed and
expressed his philosophy before Congress by arguing that his methods would work only if labor and
management would share equally in the rewards of increased productivity.
Taylor's ideas for improving productivity and efficiency in the workplace had a long-lasting
impact on American industry. Manufacturers turned increasingly to mass-production methods to
which Taylor's methods were highly suited. Though strong evidence exists that Taylor may have
falsified some of his findings that supported the merits of his methods, the methods did lead to
increased productivity and efficiency in many plants.
While many of Taylor's techniques, such as time and motion studies and piece-rate work, are
commonly used in industry today, the philosophy of scientific management was not accepted m its
entirety in the United States. Of interest is the fact that many European societies found Taylor's
philosophy more suitable to their culture and incorporated many of Taylor's ideas in industry. Even
Lenin, at the time he was Premier of the Soviet Union, advocated the adoption of scientific
management principles to Soviet industry.
Henry L. Gantt. There were many other early contributors to scientific
management. One was Henry L. Gantt (1861-1919), who had worked with
Taylor in implementing his methods at Midvale, Simonds, and Bethlehem
Steel. Gantt, believing that the piece-rate system developed by Taylor was not
having the desired level of impact, focused his attention on techniques that
would further motivate workers. One of his innovations, a modification of the
piece-rate system, was a task-and-bonus wage system whereby production
goals were established for the worker. If the worker achieved the goal, a bonus
in addition to the day wage was provided. If a worker fell short of the goal, he or she would still
receive the day wage, hi addition, if the worker achieved the goal, the foreman or immediate
supervisor would also receive a bonus. This was implemented under the assumption that if the
foreman was also rewarded, more emphasis on training the worker to do the job efficiently would
occur.
13
Another of Gantt's contributions was his development of the Gantt chart, a technique to
show on a graph the scheduling of work to be done and itemization of the work that has been
completed. For example, a chart might show which machines will be used, or have been used, for
various tasks over time. Although it is a simple idea, the Gantt chart was a major development in
methods for controlling production. The chart is used extensively today in many manufacturing
firms.
As with Taylor, Gantt believed that production efficiency was the most important
consideration of a manager. However, Gantt had greater concern for the psychological welfare of
the worker in regard to the production process. Gantt's development of the task-and-bonus system
was spawned by his belief that a generous bonus system would lead to more satisfied employees
and therefore better output.
The Gilbreths. Lillian Gilbreth (1878-1972) and Frank
Gilbreth (1868-1924), a wife and husband team, were early
backers of Taylor's scientific management philosophy. With
Lillian's knowledge of management and psychology, resulting
from her work on a doctoral thesis, and Frank's understanding
of the intricacies of work resulting from his experiences in
construction, a unique and effective team was formed. Whereas
Taylor often tried to find ways to have a task done faster by speeding up the worker, the Gilbreths
tried to increase speed by eliminating movements that were discovered to be unnecessary. For
instance, Frank's early work experience as an apprentice bricklayer focused his attention on the
process of laying brick. Working together and using photo stills taken from the filming of
bricklayers, they discovered that one could reduce the number of motions that a bricklayer
performed in the task from 182 to 4. This led to an increase in bricks laid per day from 1,000 to
2,700 without speeding up the worker. Their success in this area led them to focus on tasks
performed by workers in the manufacturing industries.

The Gilbreths did not limit their research to the discovery of the one best way of performing a
task. They believed that motion and fatigue were interrelated and that if one could reduce the
number of motions a worker made in performing a task, worker fatigue would also be reduced. To
this end, the Gilbreths focused their attention on the psychology of management, which was the
topic of Lillian's doctoral thesis. As a result, the Gilbreths devised methods for training and
developing workers to rotate through tasks under the assumption that diversity in the workplace
would boost morale.


The Kitchen Practical by Gilbreths, 1929

The Gilbreths did not confine their ideas solely to the workplace. As documented in a book
written by 2 of their 12 children titled Cheaper by the Dozen (later a popular movie), Frank and
Lillian applied many of their ideas to their family. The children note that their father buttoned his
vest from the bottom to the top, instead of top to bottom, because he could save four seconds. By
using two razors to shave with, he could reduce shaving time by 44 seconds, but he abandoned this
14
technique because it took two minutes per bandage to treat the cuts. The children insist that it was
the two minutes lost "and not the cuts that bothered him the most.
Administrative Theory.
Administrative theory focuses on the total organization and attempts to develop rules and principles
that will direct managers to more efficient activities. Prominent writers in this perspective are Henri
Fayol, Max Weber, and Chester Barnard.
Henri Fayol. Henry Fayol (1841-1925) was a French management theorist. He
was a French mining engineer who spent many of his latter years as an executive
for a French coal and iron combine where he worked for 30 years. In 1916, as
director of the company, Fayol penned the book General and Industrial
Management which first became a classic in Europe and later, upon translation into
English, a classic for American management. In his book, Fayol classified the
study of management into several functional areas which are still commonly used
for providing executive training and guiding corporate development programs.
Fayol was one of the most influential contributors to modern concepts of
management, having proposed that there are five primary functions of management: (1) planning,
(2) organizing, (3) commanding, (4) coordinating, and (5) controlling (Fayol, 1949, 1987). Many of
todays management texts have reduced the five functions to four: (1) planning, (2) organizing, (3)
leading, and (4) controlling.
He proceeded to state 14 principles of management fundamental rules of management that
could be taught in schools and applied in all organizational situations:
1. Specialization of labor. Specializing encourages continuous improvement in skills and the
development of improvements in methods.
2. Authority. The right to give orders and the power to exact obedience.
3. Discipline. No slacking, bending of rules. The workers should be obedient and respectful of
the organization.
4. Unity of command. Each employee has one and only one boss.
5. Unity of direction. A single mind generates a single plan and all play their part in that plan.
6. Subordination of Individual Interests. When at work, only work things should be pursued or
thought about.
7. Remuneration. Employees receive fair payment for services, not what the company can get
away with.
8. Centralization. Consolidation of management functions. Decisions are made from the top.
9. Chain of Superiors (line of authority). Formal chain of command running from top to
bottom of the organization, like military
10. Order. All materials and personnel have a prescribed place, and they must remain there.
11. Equity. Equality of treatment (but not necessarily identical treatment)
12. Personnel Tenure. Limited turnover of personnel. Lifetime employment for good workers.
13. Initiative. Thinking out a plan and do what it takes to make it happen.
14. Esprit de corps. Harmony, cohesion among personnel. It's a great source of strength in the
organization. Fayol stated that for promoting esprit de corps, the principle of unity of
command should be observed and the dangers of divide and rule and the abuse of written
communication should be avoided.
Fayol's principles were not meant to be exhaustive. Rather the attempt was to provide
managers with the necessary building blocks to serve as guidelines for managerial activities. In
sum, the principles emphasize efficiency, order, stability, and fairness. While they are now over 80
years old, they are very similar to the principles which are still being applied by managers today.
The problem with Fayol's principles of management is known when to apply them and how to adapt
them to new situations.
15

Maximilian Carl Emil Weber. One prominent writer of the classical school of
management was Max Weber (1864-1920). Weber was born to a wealthy family
with strong political ties in Germany. As a German sociologist, editor,
consultant to government, and author, Weber experienced the social upheaval
brought on by the Industrial Revolution and saw the emerging forms of
organization as having broad implications for managers and society. Adhering
to a perspective that viewed society as becoming increasingly rational in its
activities, Weber believed that organizations would become instruments of
efficiency if structured around certain guidelines. Weber described ideal type of organization-
bureaucracy-a form of organization characterized by division of labor, clearly defined hierarchy,
detailed rules and regulations and impersonal relationships.
In order to study this movement towards "rationality" of organizations, Weber constructed a
typology, termed a bureaucracy, which described an organization in its most rational form. Weber
outlined the following structural characteristics:
A Hierarchical structure. A well-defined hierarchy of authority is essential for rationally
controlling the behavior of employees according to Weber. Positions are established and linked by a
chain of command in a continuous branching out so that multiple layers exist in the hierarchy.
Power and authority would increase as one move up through the levels of positions in the
organization. This is similar to a scalar chain.
Division of labor. A bureaucratic organization will divide the tasks to be performed as
narrowly as possible. Weber argued that the most rational division of labor would reduce a complex
task into several operations. As discussed earlier, the reduction in scope of operations would make
the task simpler for the individual performing it. This leads to greater efficiency in that the
individual performing the task develops a level of expertise and new employees can be trained in a
narrower task more quickly than if the task is broad.
Rules and regulations. Critical to the bureaucratic form of organization are explicit rules and
regulations governing decision making and interpersonal behaviors. Weber believed that continuity
in rules and regulations was necessary to maintain order and enhance organizational achievement of
goals. Where owners, managers, and workers may come and go, the rules and regulations provided
organizational stability. Moreover, rules and regulations serve to restrict decision makers who may
feecompelled to act in their own interests or beliefs rather than in the interests of the organization.
Technical competence. Managers in a rational organization will assign personnel to positions
based on adequate technical training as opposed to friendship, family ties, or other forms of
favoritism. Weber believed that an organization that did not strive to match skills objectively to the
position would ultimately end up being inefficient.
Separation from ownership. Owners were believed to be one cause of inefficiency in an
organization because decisions would be based more on profits than on increasing production
efficiency. By having organizational members separated from ownership, decisions would have a
more impersonal quality and would be based on what is best for achieving overall organizational
goals as opposed to one goal such as greater profits.
Positional power. Weber believed that organizations achieve rationality when power and
authority are vested in the positio
1
and not in the incumbent. If power and authority were individual
attributes, Weber felt that individuals would use the power and authority for their personal goals
rather than the goals of the organization. By vesting the position with power and authority,
managers who did not perform adequately would lose all power and authority by simply being
removed from their position.
Record keeping. Since the rational organization will outlive its members, it is necessary to
develop a memory. Minutes of meetings, written documents, and financial statements were all
essential information for future decisions. In order to maintain continuity and efficiency over time,
Weber felt that managers should have access to an organization's records in order to avoid previous
mistakes and identify those activities that were successful.
16
Due to the emphasis on efficiency that had developed around the turn of the twentieth
century, many management scholars and practitioners interpreted Weber's writings on bureaucracy
as a prescription for organizing. Weber, however, was more interested in developing his
bureaucratic typology as a method for comparing organizational forms across societies. While
stating that he did not believe any organization would perfectly meet the dimensions that compose
his bureaucratic model, he felt that some organizations would come closer than others. The closer to
the bureaucratic type, the more rational society was becoming, and it was Weber's interest in the
rationality of social life that directed his attention to the study of organizations.
Chester Barnard. Chester Barnard (1886-1961) drew on his own experiences
as a manager and his extensive reading of sociological theory in constructing a
theory of the organization. Born on a farm in Massachusetts, Barnard received a
scholarship to attend Harvard, which he supplemented by tuning pianos and running
a small dance band. He completed the requirements for an economics degree in
three years but was denied a degree for failing to have a laboratory science. He
stated that he was "too busy" to attend the laboratory section and felt it unnecessary
since he had passed the science course with distinction. However, he was hired by
American Telephone and Telegraph in 1909 and became the president of New
J ersey Bell in 1927. A tireless "organization man," Barnard was active in volunteer
work, helping to establish the policies of the Atomic Energy Commission, and serving as president
of both the United Service Organization and the Rockefeller Foundation. Barnard's most famous
work, The Functions of the Executive, viewed the organization as a "cooperative system" of
individuals which comprised three universal elements: (1) willingness to cooperate, (2) common
purpose, and (3) communication. The absence of any one of these three elements would lead to the
disintegration of the organization, according to Barnard.
Like Weber, whose work he had read in the original German editions, Barnard viewed the
distribution of authority as an important process within the organization. However, he felt that the
source of authority did not reside in the person who gave the orders; rather authority resided in the
subordinates who could either choose to accept or reject directives from their superiors.
Subordinates would assent to authority when four conditions were satisfied: (1) they could and did
understand the communicated directive; (2) they believed that the directive was consistent with the
purpose of the organization; (3) they believed that the directive was compatible with their own
personal interests; and (4) they were mentally and physically able to comply with the directive.
This view of authority has become known as acceptance theory.
Evaluation of Classical Management Theories
Classical theories and the principles derived from them continue to be popular today with
some modifications. Many criticisms have been directed at the classicists. Several major ones are
discussed here.
Reliance on Experience. Many of the writers in the classical school of management
developed their ideas on the basis of their experiences as managers or consultants to only a few
firms. While this does not necessarily make their principles invalid, it does tend to focus the princi-
ples on a certain type of organization. For instance, Taylor's and Fayol's work came primarily from
their experiences with large manufacturing firms that were experiencing stable environments. It
may be dangerous to generalize from those situations to othersespecially to young high-
technology firms of today that are confronted daily with changes in their competitors' products.
Untested Assumptions. Many assumptions that were made by classical writers were based
not on scientific tests but on value judgments that expressed what they believed to be proper life-
styles, moral codes, and pursuit of success. For instance, the classical approaches seem to assume
that workers are primarily motivated by money and that they work only for more money. They also
assume that productivity is the best way to measure how well a firm is performing. And, they view
the life of a worker as ending at the plant door. In this sense, they fail to recognize that employees
may have pursuits, wants, and needs outside of the workplace and view their job as a means to
other activities.
17
Failure to Consider the Informal Organization. By stressing formal relationships in the
organization, classical approaches tend to ignore informal relations as characterized by social
activities, rise of group leaders aside from that specified by the formal organization, and so forth.
When such things are not considered, it is likely that many important factors affecting satisfaction
and performance, such as letting employees participate in decision making and task planning, will
never be explored or tried.
Unintended Consequences. Classical approaches aim at achieving high productivity, at
making behaviors predictable, and at achieving fairness among workers and between managers and
workers; yet, their intentions fail to recognize that several unintended consequences can occur in
practice. For instance, the heavy emphasis on rules and regulations may cause people to obey rules
blindly without remembering their original intent. Oftentimes, rules provide employees with a
minimum level of performance that the firm expects them to achieve. Thus, firms would only be
obtaining a minimum level of performance from their employees when perhaps much more could
be achieved if the rule were not so explicit.
Human Machinery. Classical theories leave the impression that the organization is a
machine and that workers simply are parts to be fitted to the machine to make it run efficiently.
Thus, many of the principles are concerned first with making the organization efficient, with the
assumption that humans will comply with the work setting if the financial incentives are agreeable.
While many of these criticisms leveled at the classical school are harsh, several points need
to be made in defense of writers during this period. First, the work force was not highly educated or
trained to perform many of the jobs that existed at the time. It was not common to have people
think m terms of what "career" they were going to pursue. Rather, for many, the opportunity to
obtain a secure job and a level of wages to provide for their family was all that was demanded from
the work setting.
Second, much of the writing took place when technology was undergoing a rapid
transformation, particularly in the area of manufacturing. Indeed, for many writers, technology was
the driving force behind organizational and social change. Thus, it was assumed that all human
kind could do was to adapt to the rapidly changing conditions. As a result, many manufacturing
firms were inefficient and managers were in search of solutions to these problems.
Finally, very little had been done previously in terms of generating a coherent and useful
body of management theory. That is, many theorists were required to write from "scratch," relying
on experience rather than having access to knowledge about the successes and failures of other
writers in the management area. Thus, while their focus may have been narrower than what is
preferred today, it would perhaps be considered broad in light of the historical context of their
writings. With this in mind, we now turn our attention to approaches that emerged after classical
writers approaches which benefited from their successes and were attempts to rectify their
mistakes.

2.4. Behavioral Management Theory

During the 1920s and 1930s, the United States was experiencing another force of upheaval
not unlike that caused by the Industrial Revolution. Though limited in scope, there were similar
ramifications in the way people work and in the way managers manage those who work.
Culturally and socially the United States was undergoing change. People were moving to the
cities in greater numbers. Economic growth was rapidly giving people an opportunity to spend
money on leisure and household items their parents could only dream about. Women were given
the right to vote, unions were now organized and playing an integral role in politics and the
economy, and the first minimum wage legislation had been passed. Prior to the stock market
collapse of 1929, a genuine sense of optimism had swept the country and values and attitudes
toward government, people, families, and work were being transformed. As a result, many of the
techniques applied by the classical theorists to the workplace no longer seemed to work effectively.
18
Several prominent theorists began to direct their attention to the human element in the
workplace. Elton Mayo, Douglas McGregor, Chris Argyris, and Abraham Maslow were writers
who addressed this issue by contending that increased worker satisfaction would lead to better
performance. It was their belief that a greater concern by management for the work conditions of
the employee would generate higher levels of satisfaction; thus evolved behavioral management
theory.
Elton Mayo. One prominent pioneer of the behavioral school was Elton Mayo
(1880-1949), a psychologist who had conducted field research among
aboriginal tribes in his native country of Australia. Upon his arrival in the
United States, he joined the Harvard Business School faculty, convinced that
economic incentives only partially explained individual motivation and
satisfaction.
19
Along with Fritz Roethlisberger, William Dickson and others,
Mayo formulated theories concerning the factors that increased human
motivation and satisfaction which were later to become the foundations of the
human relations movement in management. However, their ideas did not reach
wide circulation until they were requested to assist in a research project that had apparently failed.
In 1924, two researchers, Vemon and Wyatt, began an experiment at the Hawthorne plant at
the Western Electric Company located in Cicero, Illinois. Their experiment was designed to
identify factors other than fatigue that would diminish worker productivity. Initially, it was
believed that physical surroundings (e.g., noise, light, humidity) would have an impact on
productivity. Testing was conducted by selecting two groups of women who would perform an
assembly operation with each group in a separate room. One group was to be the control group
where no change in the physical surroundings would be made. The second group would perform
their tasks under conditions where the physical surroundings would be altered. As various features
of the physical surroundings were altered, the researchers would record the level of output and
compare it with the output of the control group.
One such alteration of the physical surroundings of the control group was the level of lighting.
Illumination was increased and the researchers recorded an increase in output as well. To further
test their hypothesis, the light was dimmed. Much to their surprise, output by the women increased
again. Even when light was reduced to the point where it resembled moonlight, output increased.
What made this finding even more difficult to interpret was the fact that the control group was
increasing its output without having any of its physical surroundings altered. These outcomes were
also obtained when the researchers expanded the length of the work day and eliminated rest periods.
Indeed, many of the women reported that they were more satisfied with their jobs than before the
experiments began.
In 1927, Mayo and his team were called in to assist in the interpretation of the results and to
conduct further experiments as needed. One such experiment was to alter supervisory authority so
that the women could determine on their own when they would take a rest break. Another was to
increase the salary of the women in the experimental groups while the women in the control group
would keep the same pay. Again, productivity went up in both the control and experimental groups.
After several years of intensive study, Mayo and his colleagues began to piece together what was
happening. First, they concluded that a financial incentive was not a factor influencing productivity
since output went up in both groups though only the control group received more pay. Instead, they
learned through interviews and observation that an "emotional chain reaction" was causing the
increase in productivity. Having been singled out to be participants in the experiment, the women
developed a group pride that motivated them to increase their performance. No longer did they feel
that they were isolated individuals in the plant, but now felt that they were part of an important
group. The support received from their supervisors and the opportunity to make decisions about
their job contributed to this motivation.
Mayo and his colleagues realized that an important contribution to the study and practice of
management had evolved from a seemingly failed experiment. First, the Hawthorne study
established that workers were not so much driven by pay and working conditions as by psychologi-
cal wants and desires which could be satisfied by belonging to a work group. Second, the chance by
19
workers to make decisions concerning the task, whether as individuals or in a group, was a stimulus
to treat the task as more important. And finally, recognition by superiors made workers feel that
they made a unique and important contribution to the operation of the organization.
The Hawthorne experiment, therefore, served as a turning point in the study of management.
The study firmly established that organizational outcomes were often a result of human behavior
and that workers could not be treated as givens in the sense that they were merely extensions of the
machinery. As the results of the study became known among theorists and practitioners alike, an
outpouring of research was conducted based on many theories and discoveries made in psychology.
Thus, the Hawthorne study opened the study of management to a whole new arena of ideas from the
social sciences that had previously been ignored. And, as an unintended contribution to research
methodology, the experiments led to a re-thinking of field research practices. That is, the researcher
can influence the outcome of the experiment by being too closely involved with the subjects who
are participating in the experiment. This outcome, referred to as the Hawthorne effect in research
methodology, is exemplified by the Hawthorne researchers actively participating in the selection of
the subjects to be studied and discussing the intent of the experiments with the subjects.
Douglas McGregor. One individual who shared a view similar to that of Mayo
and his colleagues was Douglas McGregor (1906-1964). McGregor felt that
organizations were often designed based on faulty assumptions about human
behavior. Those assumptions were that most workers disliked work, that workers
preferred to be directed by supervisors rather than assume responsibility for their
tasks, and that workers were more interested in monetary gains than in
performing their jobs well. Because of these assumptions, McGregor felt that
managers were prone to design organizations that were centralized in decision
making, contained numerous rules and regulations, and required close supervision of subordinates.
Thus, for fear of technical and financial inefficiency, McGregor felt that organizations over-
emphasized control mechanisms.
Table 2.1.
McGregors Theories X and Y Assumptions
Theory X Assumptions Theory Y Assumptions
The average human being has an inherent dislike of
work and will avoid it if he can.
Because of their dislike for work, most people must be
controlled and threatened before they will work hard
enough.
The average human prefers to be directed, dislikes
responsibility, is unambiguous, and desires security
above everything.
These assumptions lie behind most organizational
principles today, and give rise both to "tough"
management with punishments and tight controls, and
"soft" management which aims at harmony at work.
Both these are "wrong" because man needs more than
financial rewards at work; he also needs some deeper
higher order motivation - the opportunity to fulfill
himself.
Theory X managers do not give their staff this
opportunity so that the employees behave in the
expected fashion.
The expenditure of physical and mental
effort in work is as natural as play or rest.
Control and punishment are not the only
ways to make people work, man will direct
himself if he is committed to the aims of
the organization.
If a job is satisfying, then the result will be
commitment to the organization.
The average man learns, under proper
conditions, not only to accept but to seek
responsibility.
Imagination, creativity, and ingenuity can
be used to solve work problems by a large
number of employees.
Under the conditions of modern industrial
life, the intellectual potentialities of the
average man are only partially utilized.


McGregor labeled these assumptions as Theory X and developed an alternative set of
assumptions which he labeled Theory Y (see Table 2.1.). Theory Y assumptions stated that workers
can enjoy their work under favorable conditions and can provide valued input to the decision-
making process of the organization. Rather than develop needless mechanisms of control in the
organization, McGregor felt that managers should emphasize coordination of activities by providing
assistance to workers when problems are identified.
20
Comments on Theory X and Theory Y Assumptions
These assumptions are based on social science research which has been carried out, and
demonstrate the potential which is present in man and which organizations should recognize in
order to become more effective.
McGregor sees these two theories as two quite separate attitudes. Theory Y is difficult to put
into practice on the shop floor in large mass production operations, but it can be used initially in the
managing of managers and professionals.
In "The Human Side of Enterprise" McGregor shows how Theory Y affects the management of
promotions and salaries and the development of effective managers. McGregor also sees Theory Y
as conducive to participative problem solving.
It is part of the manager's job to exercise authority, and there are cases in which this is the
only method of achieving the desired results because subordinates do not agree that the ends are
desirable.
However, in situations where it is possible to obtain commitment to objectives, it is better to
explain the matter fully so that employees grasp the purpose of an action. They will then exert self-
direction and control to do better work - quite possibly by better methods - than if they had simply
been carrying out an order which the y did not fully understand.
The situation in which employees can be consulted is one where the individuals are
emotionally mature, and positively motivated towards their work; where the work is sufficiently
responsible to allow for flexibility and where the employee can see her or his own position in the
management hierarchy. If these conditions are present, managers will find that the participative
approach to problem solving leads to much improved results compared with the alternative
approach of handing out authoritarian orders.
Once management becomes persuaded that it is under estimating the potential of its human
resources, and accepts the knowledge given by social science researchers and displayed in Theory
Y assumptions, then it can invest time, money and effort in developing improved applications of the
theory.
Chris Argyris. Chris Argyris (1923- ) also expanded on the work of the
Hawthorne experiments by challenging the basic assumptions of the classical
school concerning worker motivation and satisfaction. Argyris argued that an
overemphasis on control by managers encouraged workers to become passive,
dependent, subordinate, and to shirk responsibility. As a result, workers will
become frustrated and dissatisfied with the workplace and will either quit their
jobs or engage in behaviors that hamper the achievement of organizational goals.
Many of his ideas were developed from the belief that as people mature, they
develop new attitudes and behaviors that affect their life-styles. Some of those
attitudes and behaviors are a movement toward independence, a broadening of interests, greater
diversity in activities, and a desire to assume more control over their lives. Organizations that
emphasize control are, in actuality, treating individuals as if they were immature.
Abraham Maslow. Abraham Maslow (1908-1970) is most noted for
suggesting a theory that humans were motivated by needs that exist in a
hierarchy. The most basic needs were physiological and when satisfied, humans
would then be motivated to satisfy needs for safety, love, esteem, and self-
actualization. In Maslow's theory, a person moved up the ladder of needs as each
level was satisfied. The basis of Maslow's theory is that human beings are
motivated by unsatisfied needs, and that certain lower needs need to be satisfied
before higher needs can be satisfied. Per the teaching's of Abraham Maslow,
there are general needs (physiological, safety, love, and esteem) which have to be
fulfilled before a person is able to act unselfishly. These needs were dubbed "deficiency needs."
While a person is motivated to fulfill these basal desires, they continue to move toward growth,
and eventually self-actualization. The satisfaction of needs is quite healthy, while preventing their
gratification makes us ill or act evilly.
21
As a result, for adequate workplace motivation, it is important that leadership understands
which needs are active for individual employee motivation. In this regard, Abraham Maslow's
model indicates that basic, low-level needs such as physiological requirements and safety must be
satisfied before higher-level needs such as self-fulfillment are pursued. As depicted in this
hierarchical diagram, sometimes called 'Maslow's Needs Pyramid' (see Figure 2.2), when a need is
satisfied it no longer motivates and the next higher need takes its place.


Figure 2.2. Maslows needs pyramid

The five main Maslows needs:
Physiological needs are to do with the maintenance of the human body. If we are unwell,
then little else matters until we recover.
Safety needs are about putting a roof over our heads and keeping us from harm. If we are
rich, strong and powerful, or have good friends, we can make ourselves safe.
Belonging needs introduce our tribal nature. If we are helpful and kind to others they will
want us as friends.
Esteem needs are for a higher position within a group. If people respect us, we have greater
power.
Self-actualization needs are to 'become what we are capable of becoming', which would our
greatest achievement.
These are the needs that are most commonly discussed and used. In fact Maslow later added
three more needs by splitting two of the above five needs. Between esteem and self-actualization
needs was added:
Need to know and understand, which explains the cognitive need of the academic.
The need for aesthetic beauty, which is the emotional need of the artist.
Self-actualization was divided into:
Self-actualization, which is realizing one's own potential, as above;
Transcendence, which is helping others to achieve their potential
22
Mary Parker Follett. Mary Parker Follett (1868-1933) was trained in
philosophy and political science. She applied herself in many fields, including
social psychology and management. Her work was popular with businesspeople
of her day but was often overlooked by management scholars. Follett was
convinced that no one could become a whole person except as a member of a
group. Thus she took for granted Taylors assertion that labor and management
shared a common purpose as members of the same organization, but she
believed that the artificial distinction between managers (order gives) and
subordinates (order takers) obscured this natural partnership. In her behavioral
model of organizational control (see Figure 2.3) , control was sponsored by and oriented toward the
group. Self control (S) was exercised by both individuals and groups (G), with the result being
shared control or power (P). Moreover, Follett took into account such factors as politics, economics,
and biology (designated as E for environment in Figure 2.3), which influenced the interactive or
integrative nature of self-control groups (I). Because she saw this system as an integrated whole,
Follett characterized it as a holistic model of control.
















Figure 2.3. The Follett Behavior Model of Control Figure. The Follett Holistic Model of
Control

Evaluation of the Behavioral School
Contributors to the behavioral school advanced our understanding of management by emphasizing
the importance of the individual within the organizationan element ignored by writers in the
classical school. That is, social needs of individuals, group processes, and subordinate - superior
relations were all identified as integral components to the practice of management. No longer could
managers confine their attention to technical skills. Rather, they had to develop people skills as
well and develop an understanding of the relationship between the technical and human sides of
management.
However, the behavioral school did not completely resolve issues concerning the nature of
the individual. Later studies were to dispute the belief that worker satisfaction was the prime cause
of productivity. Under certain conditions, satisfaction was found to play an inconsequential role. In
addition, salaries do at times affect worker productivity, particularly in industries where salaries are
low, causing high rates of absenteeism and turnover. Thus, the psychological and social dimensions
of the individual only partially explain organizational outcomes and constitute only a part of the
larger and more complex managerial picture.
S
P G
S=self control; P=power-sharing control;
G=group control
E
I
S
S
S
S
I
I
I
I I
I
E
E
E
E
E
S=self control; I=interactive/integrative
control; E=environment.
23
2.5. Quantitative Management Theory

The advent of World War II introduced a new set of problems related to the practice of
management. Submarine warfare was introduced, as was a massive deployment of airplanes as a
means of attack. These developments made the conduct of war more complex and reduced the
margin of error that one could afford militarily. With Great Britain confronting the prospects of
defeat, the British formed an operations research team consisting of mathematicians, physicists, and
other experts to develop methods for countering the German offense. The team was able to develop
sophisticated mathematical models that could simplify scenarios of attack and counterattack and
thus reduce tactical errors by military commanders. These models, based on mathematical
equations, were credited with assisting the British military in effectively staving off the German
attack.
After World War II was over, interest in the application of operations research technology to
industry began to emerge. This interest was accelerated by advances made in computer technology
which increased the speed with which many of the complicated mathematical models could be
solved. In particular, operations research models were applied to solve production problems.
Models could, through mathematical equations, simulate a problem and bring to bear all of the
relevant factors that affect that problem. In addition, the values of these factors could be changed to
develop different scenarios, thus leading managers to devise solutions to potential problems. For
example, managers might be interested in learning about the effect that delays in shipments of raw
materials have on the cost of producing a good. By changing this variable in the equation,
production costs can be estimated and managers can then make decisions to develop plans for
reducing this problem situation.
While operations research has provided management with a valuable tool in the planning
and control of production activities, mathematical models have yet to account effectively for human
behaviors in their equations. The difficulty, of course, is that the human factor is not as easily
quantified as inanimate phenomena; thus, many equations are used for understanding situations in
their most rational form.

2.6. Systems Theory

In the 1950s, managers in the United States were confronted by a new set of problems. The
expansion of the economy, a rapid growth of the middle class, the proliferation of larger and more
complex corporations, and advances in communication and travel were each responsible for
introducing new factors and problems that had to be addressed by managers. At the same time, the
Ford Foundation and Carnegie Corporation issued reports suggesting that business education in the
United States was inadequate for developing managers because it focused more on vocational
training than on organizational problem solving. As a result, greater attention among managerial
theorists and practitioners was directed toward understanding how organizations as a whole could
be made more efficient and effective.
The systems theory approach to management is based on the assumptions and ideas of a
biologist named Ludwig von Bertalanffy (1951). Von Bertalanffy approached the field of science
from the perspective that each discipline studied forms of systems that were composed of
interrelated subsystems. Basically, a systemis an interrelated set of elements functioning as a
whole. Examples of systems would be plant cells, a clock, a hospital, or the human body. In
management theory, the system is the organization composed of subsystems such as departments or
divisions. Von Bertalanffy emphasized that the survival or failure of the system was dependent on
the interrelation of subsystems and their contribution to the overall purpose of the system. Hence,
activities in a production department will be determined largely by the sales department, which in
turn will be dependent on budget allocations from the accounting department, which in turn is
dependent on the cost efficiency of the production department, and so forth. The implication is that
24
no department is fully independent of another; it cannot act independently or make decisions
without considering its effect on other departments.
















CLOSED SYSTEM

ENVIRONMENT
Resources:
Informatikon Good
Financial and Transformation
Material Sevices
Human
Feedback












Resources:
Informatikon
Financial
Material
Human

Good
and
Sevices

Transformation
Feedback

ENVIRONMENT OPEN SYSTEM ENVIRONMENT
Figure 2.4. Closed and Open System

Systems could be further classified based on whether they are open or closed. A closed
system, as depicted in Figure 2.4., is one that does not rely on resources from the environment to
survive. In order to survive, a closed system must have internal resources to transform into goods
and services which are then consumed by members of the organization. Very few organizations
would meet the criteria of a closed system. Monasteries situated in remote mountain ranges perhaps
come closest to being closed systems, but even monasteries must obtain inputs from the
environment in the form of new members. Yet, many earlier managerial theories treated the
organization as if it were a closed system. Principles developed to solve problems were based on the
assumption that the environment was not a contributor to those problems and thus focused on ways
to become more efficient through internal design.
An open system is one that must continually seek resources from the environment in order to
survive. Figure 2.4 indicates that an open system obtains information, financial, material, and
human resources from the environment. The transformed resources must then be exported to the
environment. Organizations characterize an open system in that resources must be purchased from
suppliers, and customers must be willing to purchase the goods transformed by the production
process of the organization in order for the organization to survive.
The introduction of von Bertalanffy's systems ideas to the subject of managerial theory
spawned increased interest in its application to managerial problems. Efforts to enlarge on the
subject of subsystems were conducted by Katz and Kahn, who distinguished five types of formal
organization subsystems as shown in Figure 2.5:
25
Production. A production subsystem produces a good or service to be exported to customers
in the environment. The production subsystem focuses primarily on the transformation
inputs, such as raw materials, and includes employees who work on the production line as
well as those in inventory control.
Maintenance. The maintenance subsystem is concerned with the stable operation of
activities in the organization. Here, the focus is on employee selection procedures, cleaning
and main taining buildings and machinery, and quality control.
Boundary. Boundary subsystems, or boundary-spanning subsystems, handle transactions
involving the procurement and disposal of necessary resources. These subsystems work in
conjunction with the production subsystem but address issues concerning methods of
obtaining resources from suppliers and distributing goods to the customers. Thus, boundary
subsystems work directly with individuals and organizations in the environment. Purchasing
departments and marketing departments represent boundary subsystems.





















Figure 2.5. Subsystems of an Organization

Adaptive. The responsibility to oversee organizational planning and change rests with
adaptive subsystems. Members of adaptive subsystems scan the environment to obtain
information about technological developments, competitor activities, and regulatory
constraints. Strategic planning departments and research and development units constitute
adaptive subsystems.
A Managerial. The managerial subsystem oversees the activities of the other subsystems
with emphases on coordinating the subsystems, resolving conflicts, establishing strategies,
and directing the other subsystems toward system-level goals. Boards of directors and
executive committees are examples of the managerial subsystem.
Control within the system is obtained through feedback. Feedback is information that is
received about activities in the organization. As the system proceeds, information about activities
is fed back to key decision makers who then can invoke measures to correct situations or inform
other subsystems concerning the status of activities throughout the organization.
Kenneth Boulding further elaborated von Bertalanffy's theory by constructing a hierarchy
of systems based on their degree of complexity. Boulding identified eight levels of system
complexity after analyzing a variety of systems. The simplest form of system, located on Level 1,
would be a static framework such as a building, a molecule, or a painting. At the second level of
O
U
T
P
U
T
S
Boundary
(e.g., purchasing
department)
Managerial
(e.g., boards of directors,
executive committees))
Maintenance
(e.g., quality
control)
Adaptive
(e.g., research,
strategic planning)
Production
(e.g., manufactoring
department)
Boundary
(e.g., sales
department)
INPUTS
INTERACTIONS
I
N
T
E
R
A
C
T
I
O
N
S

ENVIRONMENT
ENVIRONMENT
26
complexity would be dynamic systems such as a solar system. Control systems, such as a computer
that is programmed to operate at certain time periods, would be at Level 3. Level 4 begins with life
forms and is represented by a plant or animal cell. Increasing in complexity at Level 5 are plant
forms and at Level 6 animal forms. The human being would be at Level 7 and, according to
Bouldmg, social organization is the most complex system form at Level 8. The reasoning behind
the social organization being the most complex system is that it contains the complexity of Level 7
(human being], but due to the grouping of individuals into an integrated system, new features
emerge. Values, norms, structures, roles, culture, etc., are all contextual dimensions that evolve
through the grouping of human beings.
Again, the implication for managers is that an awareness of the multifaceted nature of the
organization begins with knowledge of the various dimensions that impinge on organizational life.
People, technology, leaders, values, goals, and motivations do not exist in a vacuum. Rather, the
complexity of the system requires that managers understand how all of these dimensions are
integrated and affect each other. Otherwise decisions or activities designed to correct one of the
dimensions may lead to results that place the organization in a more precarious situation than
existed prior to the decision or the action.
Systems theory has been a major influence on the study and practice of management. The
idea of viewing an organization as a system of interdependent subsystemswhere a change in one
subsystem will effect change in other subsystemsenables managers to comprehend more fully
the implications of their actions. Indeed, the power of the systems theory framework has not been
solely confined to the study of management. The disciplines of physics, biology, sociology, and
mathematics have all found the principles of systems theory useful in the development and study
of their respective problems.
Systems theory, however, has had several limitations concerning its contribution to the
study of management. First, it is primarily descriptive rather than predictive. That is, the theory
provides a useful way to describe an organization, but it has had the least success in its application
to the prediction of outcomes based on changes that occur among subsystems. Second, systems
theory advocates often find themselves mired in the same problem that classical theorists have
been criticized for. Systems theory takes a similar approach to all organizations, and thus fails to
account for the role that unique contextual, organizational, and human dimensions can play on
organizational outcomes. Hence, advocates suggest that all organizations are systems and that
underlying principles appropriate to all organizations can be obtained from the theory.

2.7. Contingency Theory

The contingency, or situational, approach to management theory and practice emerged in the
early 1960s from organizational research conducted in the United States and England. With the
arrival of the sixties came the expansion of markets based not on generic products but rather on the
differentiation of products. Consumers were demanding more variety in the products they
purchased. The Henry Ford axiom from a previous generation, ''You can buy a car of any color as
long as it is black," was no longer acceptable. With consumer demand becoming more diversified,
so did the types of organizations that were being founded. Thus, not only was the number of
organizations in the society increasing, but also the diversity of organizations within and across
industries. In addition, the work force was becoming less "blue collar" and more "white collar." The
work force was changing as many more workers were being employed in activities that did not
directly involve the production of a good, but rather the production of a service. Indeed, some
scholars began to write about the end of the Industrial Revolution with predictions about the
dawning of a new age in American society.
Contingency theory attempts to provide a perspective of organizations and management
based on the integration of prior theories. Contingency theory starts with the theme of "it depends,"
where it is argued that the solution to any one managerial problem is contingent on the factors that
are impinging on the situation. For instance, it would be appropriate to have highly routine tasks
27
where little variation m materials exists in the production process. However, where variation is high
requiring many judgments concerning which material is appropriate and which is not, managers
will want to avoid making tasks routine.
One of the first applications of contingency theory came from research conducted by two
British scholars, Thomas Burns and G. M. Stalker. After studying several industrial firms in
England, such as textile mills and electronics manufacturers, they concluded that the appropriate
managerial techniques were highly dependent on the kind of task the organization was trying to
accomplish.
Burns and Stalker identified two organization typologies: mechanistic, where the
appropriate task was routine and unchanging; and organic, where the appropriate task was non-
routine and changing. They discovered that the most successful firms were those which practiced
management that corresponded to the two types. Where the task was routine and unchanging
(mechanistic), the appropriate managerial approach was to emphasize efficiency, highly specialized
jobs, and elaborate procedures for maintaining controls over behavior. On the other hand, where the
task was non-routine and changing (organic), the most successful firms were those that emphasized
low job specialization, creativity rather than efficiency, and workers controlling their own
behaviors rather than relying on rules and procedures to keep them "in line." The implication,
according to Burns and Stalkers, was that the classical and behavioral schools were neither totally
right nor totally wrong. Rather, they were right if the appropriate situation for the application of
their principles existed and they were wrong if the situation did not exist. As a result, managers
need to understand when a situation is appropriate or inappropriate for engaging in certain
activities.
Other theorists, namely Paul Lawrence and J ay Lorsch and J ohn Child, have enlarged on
this perspective and identified contingencies, such as environmental conditions, ownership patterns,
strategies, and leadership as important for assessing a situation.
One attraction to the contingency approach among theorists and practitioners alike is its
situational perspective. Those interested in research issues regarding organization and management
can use the contingency perspective to explain why some factors influence situations in one setting
but have virtually no influence in another setting. Indeed, one objective of research within the
contingency framework is to specify those dimensions and conditions that do affect a situation and
those that do not. For the manager, the requirement from the contingency perspective is to identify
which technique will, in a particular situation, best contribute to the attainment of organizational
goals. For instance, under some circumstances, an authoritarian leadership style may be more
appropriate than a leadership style that tries to get workers internally motivated.
While the contingency approach is useful in recognizing that the complexity involved in
understanding human and organizational systems makes it difficult to develop universal principles
of management, there have been several criticisms of the approach. For one, it has been pointed out
that the contingency approach has the tendency to go to the other extreme of theories advocating
universal principles. One can, for instance, extend the logic of the contingency perspective to the
point where it states that all situations are unique. If this is true, then management can be practiced
only by intuition and judgment, thereby negating the value of prior knowledge and wisdom.
On a research level, contingency theory has been criticized for being theoretical. One
requirement of theory is the ability to test its assumptions in a way that the theory can be disproved
in order to assess its validity. In a contingency framework, if contradictory results are obtained, the
contingency response would be that the situation is unique or that important dimensions affecting
the situation were not tested. Thus, disproving the theory would be difficult at best
While these limitations are recognized, we will approach the study of management utilizing
the assumptions of contingency theory. We believe that management is a highly complex discipline
in both practice and research. We build the approach from previous research and practice and
extend the findings to develop an understanding of how contextual, organizational, and human
dimensions are integrated. Specifically, we draw ideas from classical management theory regarding
the structuring of organizations to increase efficiency and productivity. Behavioral management
theory provides knowledge about human needs and motivations that can lead not only to increased
28
productivity, but also to enhancement of the workplace. Systems theory serves to identify the
context in which organizations operate, thus enabling managers to understand the environment and
how the parts, or subsystems, of the organization are interrelated, hi addition, we will draw from
quantitative management theory for the application of specific tools and techniques that are useful
for increasing managerial efficiency and effectiveness.
By applying contingency theory to the study of management, you will be able to identify
and to solve problems under different situations. You will recognize that the successful application
of a technique in one situation does not necessarily guarantee success in its application to another
situation. Rather, you will be able to examine each situation in terms of how it is affected by the
contextual, organizational, and human dimensions. As a result, your overall ability to correct
problems and to become more effective as a manager will increase. The contingency framework
that we will be using is shown in Figure 2.6.














Effective
Management
Classical Management
Theory
Systems
Theory

Emerging
Management Theory
Quantitative
Management Theory

Behavioral
Management Theory


Figure 2.6. Contingency Framework for Management

Consider the situation in which a shoe manufacturer is faced with decreasing profits. As a
manager, this person may attempt to apply time and motion analysis with the belief that sales have
declined due to lower productivity on the part of the worker (classical management theory). There
may be an attempt to involve workers more in the decision-making process concerning the methods
they are to use in producing the shoes based on the premise that this will motivate workers to
produce more (behavioral management theory). Or, the manager may establish a committee of
sales and production personnel to coordinate the production and distribution of goods under the
assumption that profits have declined due to large inventories (systems theory). Application of a
contingency perspective will enable the manager to examine the situation and to determine the
cause of decreased profits before a new procedure or program is implemented. Perhaps only one
program needs to be implemented, or perhaps all three. However, only through an awareness of all
possible solutions to the problem is the manager able to arrive at a correct solution. Contingency
theory, as presented in this book, is designed to provide the manager with the capabilities to
examine numerous possible solutions to a problem.
In addition, we will extend the framework of the contingency approach by incorporating
knowledge and ideas that have emerged from more recent perspectives on the study of organization
and management. A discussion of those emerging perspectives follows.

2.8. Emerging Perspectives In Management

The first, a resource dependence perspective, developed a framework to explain why
organizations were often forced into establishing linkages with other organizations in their
environment. As resources become scarce, managers must expand the number of suppliers and
receivers of goods in order to maintain stable operations and profits. However, as linkages are
29
created, so also are constraints on decisions managers can make to guide the organization toward
specific goals. That is, as the organization's activities become dependent on other organizations,
there are fewer opportunities to guide the organization in different and novel directions. Thus,
many organizations lose power by solving the problem of scarce resources. The success or failure
of the organization becomes more a consequence of other organizations' decisions and behaviors
than a result of the decisions and behaviors of the highly linked organization. The perspective is
expanded to account for how dependence on organizational environments affects the fortunes of
managers as they move up the career ladder. As the environment changes, either in terms of
resource distribution or organizational interdependence, so also does the probability of managers
losing their jobs. This argument is similar to that made in the contingency approach in that
environmental changes produce new situations and new situations require managers with styles
more adaptive to the new conditions.

Population Ecology
The second perspective to emerge in the late seventies is labeled population ecology.
Borrowing principles from biology concerning natural selection processes, theorists in this area
have attempted to explain why some organizations survive and others fail based on conditions in the
environment. In the population ecology framework, luck, chance, and randomness play an
important role in explaining the survival or failure of an organization. This is the same way
biologists have accounted for the survival or failure of animal and plant species throughout time.
New organizations are continuously founded by entrepreneurs with a new idea or product. It is
argued, however, that survival or success is more dependent on luck or chance than on the quality
of the idea. Thus, many products are offered in the marketplace, but it may take a chance discovery
by another person or an organization to see their usefulness. As a result, failure among new
organizations is extremely high since the probability of the product or idea being discovered by the
right person or organization at the right time is very low. The implication of this perspective is that
managerial abilities and talents in the initial stages of organizational development have very little to
do with organizational success. Rather, success is more dependent on the environment and the
various changes that are going on in the environment. As such, the perspective offers important
insight into the relationships of organizations to a changing environment and how organizations
either adapt to that change or experience failure. Hence, population ecologists would be in
agreement with the old adage that success can be largely attributed to "being in the right place at the
right time."

Theory Z
The third perspective addressing management and the organizational problems of the
seventies was developed by William Ouchi and labeled Theory Z. Theory Z presents solutions to
problems of human resource management. During the decade, many firms were confronted with the
situation of losing competitiveness to foreign companies. For instance, with the oil embargo came a
demand among consumers for more fuel-efficient automobiles, resulting in an influx of J apanese
and German car imports and a decline in market share among U. S. automobile manufacturers. To
understand methods of increasing quality and efficiency in the production process in order to make
goods more competitive with foreign products, Ouchi studied managerial practices in J apan, which
he referred to as Theory Z in contrast to McGregor's models of management labeled Theory X and
Theory Y (see Table 2.2).

30
Table 2.2.
Characteristics of American, Japanese, and Theory Z Organizations
Type A (American) Type J (Japanese) Type Z (Modified American)
Short term employment
Individual decision making
Individual responsibility
Rapid evaluation and promotion
Explicit, formalized control

Specialized career path
Segmented concern for employee as
an employee
Lifetime employment
Consensual decision making
Collective responsibility
Slow evaluation and promotion
Implicit, informal control

Nonspecialized career path
Holistic concern for employee as a
person
Long-term employment
Consensual decision making
Individual responsibility
Slow evaluation and promotion
Implicit, informal control with
explicit, formalized measures
Moderately specialized career path
Holistic concern, including family

Theory Z attempts to incorporate and integrate the best of American and J apanese styles of
management. It advocates that workers should be guaranteed employment for longer periods of
time, have a greater role in decision making by participating in group decision-making councils, and
be personally responsible for their task activities. In addition, evaluation and promotion should
proceed at a slower rate; there should be informal and implicit control mechanisms with formal and
explicit measures; moderately specialized career paths; and more emphasis on integrating the
workers' roles and responsibilities away from the workplace into the organization (such as family
and civic roles). Ouchi contends that Theory Z retains the American cultural value of individualism
by combining it with opportunities to become more a part of the organization's direction and
activities through collective decision making. As a result, it is believed that employees will feel a
greater sense of belonging to the organization; productivity and product quality will increase as
employees take more pride in their work; and absenteeism and turnover, which are costly to most
organizations, will decrease. Numerous corporations have studied the Theory Z approach and have
integrated part or all of the theory into their managerial philosophy. Perhaps the most common
example of the Theory Z approach is the use of quality circles, although this represents only one
component of the Theory Z philosophy.
Competitive Strategy
The 1980s have brought about a new set of problems that managers of organizations have
been forced to confront and integrate into their problem-solving approaches. Perhaps most notable
are changes in government policies concerning the regulation of organizational activities within and
across industries. After the economic crisis of the 1930s, the United States government took a more
active role in economic activity in order to prevent the financial collapse and human misery that
occurred during the Great Depression. One outcome of this effort was the regulation of industry to
prevent unfair competitive practices and requirements of organizations to be socially and legally
responsible for the products or services they were producing for customers. By the onset of the
1980s, many government policymakers believed that many of these regulations, while necessary
some 40 to 50 years ago, were no longer suited to the existing conditions. As a result, attention and
action were directed toward removing regulations, primarily economic, in order to increase
competition within industries.
One of the first such efforts was in the airline industry. Constraints on routes were removed,
allowing airline organizations to decide for themselves which routes to compete for. However, the
consequences were perhaps more startling than expected. Many of the large and well-established
airlines chose strategies of competition that led to economic ruin, forcing them into receivership. On
the other hand, new airlines were formed and became successful by providing service to small
communities that the major airlines had ignored because it was not economically feasible to
transport small numbers of travelers in large aircraft. Other airlines were founded with the idea of
providing no-frills transportation, thus offering dramatically reduced rates for passengers more
interested in getting to their destination than in what was provided on the flight. As a result of
deregulation, the management of airlines focused more on the formulation and implementation of
strategies that would enable them to respond to competition successfully.
31
One important theoretical development in the 1980s contributed to the study of industry
competition and strategic activity. Michael Porter's theory and models of competitive strategies
provide a framework for understanding how competition within an industry is shaped by these
forces:
The threat of new entrants;
The bargaining power of customers;
The bargaining power of suppliers;
The threat of substitute products or services; and
Competition among existing firms.
Porter's framework has been useful to managers in the formulation and implementation of
competitive strategies by helping them to understand industry dynamics and anticipate future
trends. Porter's framework for analyzing industries will receive further attention in Chapter 6, which
discusses strategic planning.

2.9. Implications For Management

The systematic study and practice of management has been in existence for over 100 years.
During this time, our knowledge and understanding of managerial issues and problems have
evolved from an approach concerned primarily with establishing principles to increase efficiency in
the workplace to those approaches that attempt to understand the total organization by examining
the interrelationships between the contextual, organizational, and human dimensions of the
workplace. The various theories each offer a different perspective for addressing managerial
problems. Many of the differences between the theories are due largely to the types of problems that
have historically emerged to confront managers.
As a manager, you should be cognizant that no one method or technique is to be applied to all
problems or situations. Rather, you should strive to develop a contingency perspective in your
application of managerial techniques. This perspective will enable you to assess different probable
causes of a situation and to recognize which application is most appropriate. For instance, a
contingency perspective of management would inform you that increasing work efficiency may
speed up the flow of work, but may also lead to greater levels of worker dissatisfaction. As a result,
you may incur greater turnover, absenteeism, and carelessness in the workplace.
A contingency perspective also enables you to weigh factors that exist in the environment of
the organization and to understand how changes in one area of the organization may require
changes in other areas as well. For instance, a decrease in sales may be the result of devaluation in
foreign currency, thus making goods or services produced by foreign competitors cheaper in price.
Or, an increase in production will, in many instances, require an increase in sales force, an increase
in budget, and perhaps the need to redefine organization goals.
Your understanding of the strengths and limitations of historical perspectives will provide you
with the knowledge needed to perform your managerial tasks effectively. We have much to learn
from the past in order to be successful in the future.
32




REVIEW QUESTIONS







?
1. Identify the major events that are associated with the coming of Industrial
Revolution.
2. What contributions did Robert Owen make to our understanding of the practice of
Management? Charles Babbage?
3. What is the difference between administrative theory and scientific management?
4. Identify the 14 principles that Fayol set down that he felt were useful for managers.

5. According to Weber, what are the seven structural characteristics of a
bureaucracy?
6. What are the four categories of principles that Frederick Taylor identified?
7. What type of system did Gantt believe would lead to more satisfied employees and
therefore better output?
8. What was the major contribution of the Gilbreths?
9. Why did McGregor assume that managers were prone to design organizations that
were centralized in decision making, contained numerous rules and regulations, and
required close supervision subordinates?
10. What is the major contribution that Abraham Maslow made to our understanding
of the human dimension?
11. What managerial issues does the resource dependence perspective address?
Population ecology? Theory Z? Competitive strategy?



33
CHAPTER 3.
ORGANIZATION
3.1. Enterprise activity conditions and establishment stages

Speaking about establishing of organization, it is necessary to look throw bellow showed
factors:
1. Consumers. New enterprise is established to satisfy their needs; therefore it is necessary to
focus to certain consumers group. Modern consumer is very mobile; he dictates his wishes, which
must be satisfied implicitly. Most of modern consumers are individuals; goods of mass production
do not satisfy them.
2. Competitors. Market of nowadays is saturated; therefore level of competitions has very
increased. Many dangers wait each enterprise, especially start-up, at market. Processes of
democratization, liberalization and globalization going in the world, very rise market
competitiveness.
3. Resources. These are not only labor, but material and financial resources as well. Labor
resources grow in the world, but only for account of developing countries or poorly developed
countries. In market economy countries the shortage of qualified and cheap labor force is felt.
Natural resources decline; therefore countries having own natural resources are in the better
situation than ones not having them. However problem of provision with material resources is less
than mobile labor resources moving from one country to another.
4. Equipment and technology. Many of technologically sophisticated products can be
produced only with application of modern equipment and technology, which, with little exceptions,
market economy countries produce and possess. This allows keeping of its prices high and impedes
their purchasing. In addition they use various means, allowing purchasing of this equipment by
companies, having less initial capital (e.g. leasing), as well. However, here it is very important to
take into account success of planned activity.
However, it is possible to produce high quality products manually and, having working
successfully to introduce new equipment and technology further.
5. Government and society. There are many environment factories joined in this group.
Political situation its stability, trust of other countries; government economical policy
guaranties, credits, custom taxes, prohibitions etc.; criminological situation level of economical
crimes, defense of personal property; the statutory basis generalized all of this. Also it is public
attitude towards business, work orientation of its members.
Only flexible and economic enterprise can work successfully under these conditions, which is
able to:
Meet customer needs, quick response to the changing situation;
Reach high production flexibility, having minimal resources and size of lots;
Ensure high supply standards, without breach of supply terms;
Implement effective logistic system;
Quickly introduce new products etc.
Following factors have impact on enterprise activity success:
1. Flexibility the ability of enterprise to change, having changed external and internal
conditions. For the flexible enterprise three features are typical: 1) adaptability to changing
conditions, following principles of changes management; 2) ability to respond quickly, which is
possible only having high level of cooperation among employees and good information and
communication system; 3) extended quality concept, when not direct quality of product is
emphasized but quality of all processes, participants activity.
2. Integration of project organization into active structure. Project structure introduction
requires flat, inwrought organizational structure. To introduce optimal structure, it is necessary to
34

solve three problems: 1) to reach structure flexibility, without breach of its stability, and it is
possible having increased cooperation level of different functions employees; 2) organization must
be reviewed, solution ways short; 3) organizational project group introduction has to be clear and
properly planned.
3. Enlarged role of human factor, while ensuring quality and flexibility. It is said, that the
biggest problem are people, their ability to solve new problems, to take responsibility for their and
their division work.
4. Teamwork is the passport to success of solved problem. Nowadays sophisticated problems
can be solved successfully only by groups organized inter-functionally. They allow coordination of
interests of employees of different fields, to join their potential.
5. Costs, time and quality coordination the most important factor of success. These
above factors analyzed in insulation today are joined into so-called Magic triangle. While
increasing quality, shortening production time, the costs increase. It is necessary to coordinate them
optimally and to find the most optimal variant.
6. Interdependence of all processes. It is necessary to look at each activity field not in
insulation, but taking into account other field of activity. J ust in product design stage the
possibilities of both selling, and production and otherwise must be analyzed. This allows reaching
proportionality of all activitys fields.
7. Good planning grounds way to success. Only inter-coordinated processes help to
minimize costs and time of any activity field.
8. Only successfully controlling persons can expect success. The higher requirements are
raised for information, control system, their technical supply and especially managing personal.
9. Enterprise culture is important passport to success. Work provisions of collective, their
activity, traditions etc. is medium, in which planned means are successfully introduced or their
introduction is intervened.
While establishing enterprise it is necessary to follow some succession:
At the first stage the idea, the implementation of which would meet the needs of specific
consumer, to receive the profit, is formulated. It is necessary to select such products
(services), which would fill market needs. Ideas formulation depends on the capabilities of
business creator, his providence, possessed information, material conditions etc.
At the second stage the personal characteristics of enterprise creator, on which the
made decisions, company lookout and profitability will depend, are assessed. Usually small
and medium enterprises fail not due to financial difficulties, market situation, but due to
businessman incapacity to manage. Businessman talent evidences by this ability to assess
situation quickly and to work out principal action plan, to give his minds, to give
instructions, cooperate and control company activity.
At the third stage the situation in market is assessed: capital need, form what sources it
will be formed; what is raw materials, energy and labor force resources market. When
knowing this, the strong and weak characteristics become setoff and taking them into
account the form of enterprise is selected.
At the fourth stage the approximate size of enterprise is well founded, juridical form of
enterprise is selected. The necessary output of enterprise and necessary financial resources
are calculated. Selection of juridical form of enterprise is influenced by personal lust for
power, material and financial capabilities future businessman, method of profit distribution,
taxes size etc.
At the fifth stage the organizational structure and activity organization project of
future enterprise are formed. Structure must be flexible, simple, allowing rapidly transfer
information, the size of units, their material-technical supply are calculated.
The sixth stage is intended for preparation of enterprise establishment documents.
At seventh stage enterprise is registered.



35
3.2. Kinds of enterprises

The valid Lithuanian laws provide such kinds (See Fig. 3.1) of enterprises: individual
(personal), stock companies, close corporations, partnerships, commandite partnerships, cooperative
societies, agricultural enterprises, credit unions. All enterprises are classified into two groups:
having rights of juridical person (legal entities) and not having rights of juridical person (natural
persons).

















Enterprises
Close corporations
Stock companies
Special purpose stock
companies
Cooperative societies
Agricultural enterprises
Credit unions
Individual (personal)
Partnerships
Commandite partnerships
Figure 3.1. Kinds of enterprises

1. Individual (personal) enterprises
Individual (personal) company belongs proprietary to the natural person. In the name of the
individual company it is necessary to name its owner. To the enterprises of this type the laws
regulating activity of public enterprise, are applied. Individual enterprises usually belong to one
person or several persons.
Individual enterprises can be of two types: 1) enterprises, activity of which is based on the
work of owner and his family members; 2) enterprises, activity of which are based on the
owner and hired employees work.
These enterprises have both positive and negative characteristics. Positive is the fact, that
individual company establishes conditions under which owner initiative is demonstrated. Private
property is important impulse to extend and cheapen production, introduce science and technology
innovations. Additionally, it is much easier to register individual enterprise, special control bodies
are optional, simpler accounting form is possible, the income tax, tariffs are lower.
2. Partnerships
Partnership is total economical responsibility enterprise, established according to the general
common activity contract having joined property of several natural or juridical persons into general
partial property for the commercial-economical activity and having general company name. In the
company should be not less than 2 and not more than 20 members. Authorities and administrative
bodies, public and public joint-stock enterprises cannot be its members. Partnership is not legal
entity. Its members are joint and several liable by their own property.



36

3. Commandite partnerships
Commandite partnerships consist of proper members and commanditors, acting under the general
name company. In the partnership should be at least one proper member and at least one member-
commanditor. Their property is separated from commanditors property, but is not separated from
the property of proper members.
4. Stock companies and close corporations
Stock company and close corporation are enterprises of limited property responsibility having legal
entity rights, the capital of which is divided into stocks. Company property belongs proprietary to
the company as the legal entity. Stockholders have proprietary right to stocks. Circulation sphere of
close corporation stocks is close.

Kinds of legal entities according to the activity nature:
State institutions, organizations (government, police etc.)
Stock companies and agricultural enterprises
Close corporations.
Cooperative organizations and societies.
Public organizations.
The church.

3.3 Motives for selection of enterprise kind

The selection of enterprise kind is determined by: kind of selected business; production or
service volumes; market (supply, demand) and possessed (possible) capital investments (of all
financing sources) (See Table 3.1). Taking all of this and valid enterprise laws into account, the
type of enterprise, which would meet selected business strategy, is selected.

Table 3.1
Criteria of enterprise kind selection
Enterprise kinds Names of criteria
Stock
company
Close
corporation
Individual
company
Partnership Cooperative
society
Number of owners
(stockholders, members):
minimal,
maximal


1
-


1
50


1
-


2
20


3
-
The juridical status of founders
a) legal entities
b) natural persons

+
+

+
+

-
+

+
+

+
+
Minimal share capital
(thousand litas)
100 10 - - -
Accounting method
-simple
-full

-
+

-
+

-
-

-
+

+
+
Taxes tariffs
- higher
- lower

+
-

+
-

-
+

-
+

+
+



37
3.4. The Environment and its Importance for an Organization

Today the external environment is undergoing continuous, rapid changes that are having far
reaching effects on organizations and their management strategies.
To understand the external environment and its effects on organizations, we must borrow
some concepts from systems theory is that organizations are neither self-sufficient nor self-
contained. Rather, they change resources with and are dependent on the external environment.
External environment is defined as all elements
outside an organization that are relevant to its
operation; includes direct action and indirect
action elements.
The organizations take inputs (raw materials, money, labor, and energy) from the external
environment, transform them into products or services, and then send them back as outputs to
external environment.
Inputs are resources from the environment,
such as raw materials and labor, that may enter any
organizational system.
Outputs are transformed inputs that are
returned to the external environment as products and
services.
The external environment has both direct-action and indirect-action elements.
Direct action elements are elements of the
environment that directly influence organizations
activities.
Indirect action elements are elements of the
external environment that affect the climate in which
an organizations activities take place, but do not
affect the organization directly.
Figure 3.2 outlines an organizations environmental picture and shows the influence of both
direct and indirect-action elements. The same element may have different relationships with
different organizations. For example, labor unions may have only small, indirect impact on a no
unionized industry, such as a book publishing, but a major and direct impact on a heavily unionized
industry, such as automobile manufacturing. Labor unions would thus be stakeholders of an
automaker but not of book publisher.
Elements of the Direct-Action Environment. The direct-action environment is made up of
stakeholders, individuals and groups who are directly or indirectly affected by an organizations
pursuit of its goals. Stakeholders fall into two categories. External stakeholders include such groups
as unions, suppliers, competitors, customers, special-interest groups, and government agencies.
Internal stakeholders include employees, shareholders, and the board of directors.
Stakeholders are those groups or individuals
who are directly or indirectly affected by an
organizations pursuit of its goals.
External stakeholders are groups or individuals
in an organizations external environment that affect
the activities.
Internal stakeholders are groups or
individuals, such as employees, that are not strictly
part of an organizations environment but for whom
an individual manager remains responsible.
We will discuss several of external stakeholders.


38























Employees




Shareholders and the
Board of directors
Political Variables
F
i
n
a
n
c
i
a
l

I
n
s
t
i
t
u
t
i
o
n
s

Customers
S
u
p
p
l
i
e
r
s

Competitors

The Organization
The Media Special-Interest
Groups
G
o
v
e
r
m
e
n
t
s

L
a
b
o
u
r

U
n
i
o
n
s

Economic Variables
Social Variables Technological Variables
















The Direct Internal Stakeholders
Action External Stakeholders

The Indirect-Action Environment
The Flexible Boundary of an Open System
Figure 3.2. The Direct-Action and Indirect-Action Environments of an Organization

Customers exchange resources, usually in the form of money, for an organizations products
and services. A customer may be an institution, such as a school, hospital, or government agency; or
another firm, such as contractor, distributor, or manufacturer; or an individual.
Suppliers. Every organization appropriates inputs raw materials, services, energy, equipment,
and labor from the environment and uses them to produce its outputs. What the organization
brings in from the environment and what it does with what it brings in will determine both the
quality and the price of its final product. Every organization depends on suppliers of materials,
energy and labor.
Competitors. All organizations, even monopolies, have one or more competitors. Competitors
are companies which provide the same or similar products and services. The Internet is also having
an impact on whom an organizations competitors are, because it has virtually eliminated the
geographic boundaries.
Special interest groups are often called pressure groups. Managers must recognize the special-
interest groups that attempt to influence the actions of organizations. Oil, mining and forestry
companies have all been targets of Greenpeace and other environmental pressure groups. As social
and political movements change, so too does the power of pressure groups. For example, through
their persistent efforts, Greenpeace has not only managed to make significant changes in the
whaling, tuna fishing and seal fur industries, but it has also raised public awareness about other
environmental concerns such as the greenhouse effect and industrial pollution. Managers should be
aware of the power that these groups can exert on their decisions.
Elements of the Indirect-Action Environment. Elements of the indirect environment are
often called general environment. Four main elements of this environment are often called as PEST
analysis, where P is Political variables, E is Economic variables, S- Social variables and T
Technological Variables.
Political Variables are usually described in terms of the distribution and concentration of
power and the nature of political systems (e.g., democratic vs. autocratic) in those areas of the world
in which the organization operates. It depends on Government and its political rules of the country
the company exist. The political sector has close ties with the legal sector and both are influenced by
trends in other sectors.


39
Economic Variables are comprised of labor markets, financial markets and markets for good
and services. Examples of economic variables commonly founding economic sector analyses
include: the balance of payments, hard currency issues, economic alliances with other countries,
trade agreements, price controls, access to raw material markets, interest and inflation rates, price
indexes, unemployment rates, excess production capacity and investment risk.
Social Variables of the environment is associated with class structure, demographics, mobility
patterns, life styles, social movements and traditional social institutions including educational
systems, religious practices, trades and professions. In the United States and Western Europe, aging
populations, increasing workforce diversity and professionalization of many types of work,
including management, are all examples of recent trends in the social sector surrounding
organizations that do business in those parts of the world. Recent migrations of people from Eastern
Europe and North Africa into the wealthier nations of Western Europe are examples of social
mobility patterns of importance in the indirect action environment of organizations that operates in
these areas.
Technological Variables provide knowledge and information in the form of scientific
developments and their applications that the organization can acquire and use to produce output
(goods and services). In a sense, the environment possesses the knowledge to produce its desired
outputs and contributes this knowledge to various organizations that then carry out production
processes for the benefit of the others in the environment. Organizations receive knowledge from
the environment in such forms as pre-trained and culturally socialized employees, equipment and
software purchases, and the services provided by consultants and other professionals. A significant
recent trend n the technological sector of many organizations has been the availability of computer-
based technologies such as personal computers, robots, video-recording equipments and computer-
aided design and manufacturing. Applications of these technologies to multimedia and wireless
communication are creating enormous changes in organizations around the world that are rapidly
adapting to doing ever larger portions of their business over the Internet.
Knowing what the various components of external environment are is important to managers.
However, understanding how the external environment affects managers and organizations is
equally important.

3.5. Organization Charts

In designing a structure to support the efficient and effective accomplishment of
organizational goals, managers may choose to follow traditional designs. There are different
structures of organization design. These designs the simple structure, functional structure and
division structure tend to be mechanistic.
Simple hierarchical organizational chart is an organizational design with low
departmentalization, wide spans of control, centralized authority and little formalization. Most
organizations start as entrepreneurial ventures with a simple structure consisting of owners and
employees. A simple structure (See Fig. 3.3) is most commonly used by small business in which the
owner and manager are one and the same. The strengths of the simple structure are obvious: it is
fast, flexible and inexpensive to maintain, and accountability is clear. One major weakness is that it
is difficult to make it organization grows; because its low formalization and high centralization
tend to result in information overload at the top. As the organization increases in size, decision
making becomes slower and can eventually come to a standstill as the single executive tries to
continue making all the decisions. If the structure is not changed and made more elaborate, the form
is likely to lose everything depends on one person. If anything happens to that person, the
organizations information and decision making centre is lost.
Many organizations do not, by choice or by design, remain simple structures. As an
organization grows, it generally reaches a point at which it has to add employees to help cope with
the additional duties and requirements of operating at that level. As the number of employees rises,
the structure tends to become more specialized and formalized. Rules and regulations are


40
introduced, work becomes specialized, departments are created, levels of management are added,
and the organization becomes increasingly bureaucratic.












President
Vice President A Vice President B
Employee A
Manager A Manager B
Employee B Employee C
Vice President B
Figure 3.3. Simple Hierarchical Organization Chart

Functional Organization is a form of departmentalization in which everyone engaged in one
functional activity, such as marketing or finance, is grouped into one unit. Functional organization
(See Fig. 3.4) is used mainly (but not only) by smaller firms that offer a limited line of products
because it makes efficient use of specialized resources. Another major advantage of a functional
structure is that it makes supervision easier, since each manager must be expert in only a narrow
range of skills. In addition, a functional structure makes it easier to mobilize specialized skills and
bring them to bear where they are most needed.
As an organization grows, either by expanding geographically or by broadening its product
line, some of the disadvantages of the functional structure begin to surface. It becomes more
difficult to get quick decisions or action on a problem because functional managers have to report to
central headquarters and may have to wait a long time before a request for help is acted on. In
addition, it is often harder to determine accountability and judge performance in a functional
structure. If a new product fails, who is to blame research and development, production, or
marketing? Finally, coordinating the functions of members of the entire organization may become a
problem for top managers. Members of each department may feel isolated from (or superior to)
those in other departments. It therefore becomes more difficult for employees to work in a unified
way to achieve the organizations goals. For example, the manufacturing department may
concentrate on meeting cost standards and delivery dates and neglect quality control. As a result,
the service department may become flooded with complains.
Top managers who wish to use a functional structure or add a functional department to an
existing structure must weigh potential benefits against expected costs. The economic savings
brought about by a functional structure may be outweighed by the additional managerial and staff
salaries and other overhead costs that are required. Top managers also have to consider how often
they expect to use the special skills of a functional department. In a small firm, for example, it may
be more economical to retain outside legal services than to set up an in-house legal department.


President





Vice President Vice President Vice President Vice President
Production Marketing Finance Human Resources
Note: Each vice president in charge of a major organizational function.

Figure 3.4. Functional Organization Chart for a Manufacturing Company




41
Product or Market Organization is the organization of a company into divisions that bring
together all those involved with a certain type of product or market.
Division is a large organization
department that resembles a separate business;
may be devoted to making and selling specific
products or serving a specific market.
Most large, multiproduct companies have a product or market organization structure. At some
point in an organizations existence, sheer size and diversity of products make servicing by
functional departments too unwieldy. When a companys departmentalization become too complex
for the functional structure, top management will generally create semiautonomous divisions, each
of which designs, produces, and markets its own products.


President






Vice President Vice President
Finance
Vice President
Production
Vice President
Research and
Development
Marketing



General Manager
Pharmaceutical
Products
General Manager
Propietary Products
General Manager
Personal Care
Products

Note: Each general manager is in charge of a major category of products, and the vice presidents of the functional areas provide
support services to the general managers.

Figure 3.5.Product/Market Organization Chart for a Manufacturing Company: Division by
Product

Unlike a functional department, a division resembles a separate business. The division head
focuses primarily on the operations of his or her division, is accountable for profit or loss, and may
even compete with other units of the same firm. But a division is unlike a separate business in one
crucial aspect: it is not an independent entity; that is, the division manager cannot make decisions as
freely as the owner of a truly separate enterprise because he or she must still report to central
headquarters. As a rule, a division heads authority ends at the point where his or her decisions have
a significant effect on the workings of other divisions.
A product / market organization can follow one of three patterns. Most obvious is division by
product, shown in Figure 3.5. Setting up product divisions is logical when each product requires
different manufacturing technology and marketing methods.
Service, financial, and other nonmanufacturing firms generally use division by geography,
although mining and oil-producing companies also use geographic divisions (See Fig. 3.6).

President




Vice President
Human Resources
Vice President
Marketing
Vice President
Finance
Vice President
Production

Vice President
North America
Vice President
Europe
Vice President
Middle and Far East
Note: Each area vice president is in charge of the companys business in one geographic area. The functional vice presidents provide
support services and coordination assistance for their areas of responsibility.
Figure 3.6. Product/Market Organization Chart for a Manufacturing Company:
Division by Geography


42
This organization is logical when a plant must be located as close as possible to sources of raw
materials, to major markets, or to specialized personnel, such as the diamond-cutting operations in
New York, Tel Aviv, and Amsterdam.
In division by customer, a division sells most or all of its products to a particular customer
(See Fig. 3.7). An electronics company, for example, might have separate divisions for military,
industrial, and consumer customers. As a general rule, manufacturing firms with highly diversified
lines of products tend to be organized wither by customer or by product.

President




Vice President
Industrial Products
Vice President
Consumer Products
Vice President
Military Products
Note: Each area vice president is in charge of a set of products grouped according to the type of customer to whom they will be
marketed.

Figure 3.7. Product/Market Organization Chart for a Manufacturing Company:
Division by Customer

Organization by division has several advantages. Because all the activities, skills, and
expertise required to produce and market particular products are grouped in one place under a
single head, a whole job can be more easily coordinated and high work performance maintained. In
addition, both the quality and the speed of decision making are enhanced because decisions made at
the divisional level are closer to the scene of action. Conversely, the burden on central management
is eased because divisional managers have greater authority. Perhaps most important,
accountability is clear. The performance of divisional management can be measured in terms of
that divisions profit or loss.
There are, however, some disadvantages to the divisional structure. The interests of the
division may be placed ahead of the needs and goals of the total organization. For example, because
they are vulnerable to profit-and-loss performance reviews, division heads may take short-term
gains at the expense of long-range profitability. In addition, administrative expenses increase
because each division has its own staff members and specialists, leading to costly duplication of
skills.
Matrix Organization is an organizational structure in which each employee reports to both a
functional or division manager and to a project or group manager. Neither of the two types of
structures we have discussed meets all the needs of every organization. In a functional structure,
specialized skills may become increasingly sophisticated but coordinated production of goods
may be difficult to achieve. In a divisional structure, various products may flourish while the
overall technological expertise of the organization remains undeveloped. The matrix structure
attempts to combine the benefits of both types of designs while avoiding their drawbacks.
In a matrix organization, employees have in effect two bosses that is, they are under dual
authority. One chain of command is functional or divisional, diagrammed vertically in preceding
charts. The second is shown horizontally in Figure 3.8. This lateral chain depicts a project or a
business team, led by a project or group manager who is an expert in the teams assigned area of
specialization. For this reason, matrix structure is often referred to as a multiple command
system. (In mathematics, a matrix is an array of vertical columns and horizontal rows.)









43

















Board Chairman
President
Human Resources
(HR)
Production Marketing Finance
Production
Group
Marketing
Group
Finance
Group
HR
Group
Alpha
Project
Production
Group
Marketing
Group
Finance
Group
HR
Group
Beta
Project

Production
Group
Marketing
Group
Finance
Group
HR
Group
Gamma
Project

Figure 3.8. Matrix Organization

All structures have their advantages and disadvantages. Table 3.2 summarizes the strengths
and weaknesses of each of simple, functional and divisional structures.

Table 3.2
Strengths and weaknesses of common traditional organizational designs
Strengths Weaknesses
Simple structure Fast, flexible, inexpensive to
maintain, clear accountability
Not appropriate as organization grows,
and reliance on one person is risky
Functional structure Cost-saving advantages from
specialization (economies of scale,
minimal duplication of people and
equipment) and employees are
grouped with others who have similar
tasks
Pursuit of functional goals can cause
managers to lose sight of whats best for
overall organization , and functional
specialists become insulated and have
little understanding of what other units
are doing
Divisional structure Focuses on results division
managers are responsible for what
happens to their products and services
Duplication of activities and resources
increases costs and reduces efficiency





1. Enumerate organizations establishment stages.
2. What factors do have impact on enterprise activity success? Enumerate and discuss
them.
3. Explain the main organizations charts.
4. When would the simple structure be the preferred organizational design?
5. Discuss advantages and disadvantages of organization charts.
6. Define an organizations environment and explain the differences between direct
action and indirect-actions environments.

REVIEW QUESTIONS


?


44
CHAPTER 4.
OPERATION MANAGEMENT
4.1. The operation system
Operations refers to the way an organization
transforms inputs labor, money supplies,
equipment, and so on into outputs goods or
services.
Operations include any process that accepts inputs and uses resources to usefully change those
inputs. The actual practice of operations is more complex; of course, it takes all day-to-day
activities by which the members of organization strive to reach its goals. A basic operations system
is shown in Figure 4.1. Inputs to the system include labor, capital (land equipment building),
materials, technology and information. The transformation process alters the inputs in some useful
way. The outputs are goods and services. For Ford Motor Co., desired outputs are cars, trucks and
parts of a certain quality; for Red Cross, desired outputs are safe supplies blood and emergency aid
to disaster victims; for a hospital, desired outputs would be patient care and perhaps preventive
health care through free lectures and screening medical tests. Outputs may include both positive and
negative by-products, such as new jobs and air pollution, which affect other subsystems as well as
external environment. If the human resources subsystem declares a six-month moratorium on
hiring, the operation subsystem and the surrounding community will certainly feel the effects
when workers who leave are not replaced.
The external environment means any or all of the elements of the direct - action and indirect
action environments, including government regulations, inflation, suppliers, social values, and the
weather. The feedback loop in Figure 4.1 reflects the information gained during the entire process,
making it possible to monitor the systems performance and decide whether corrective changes are
needed.

EXTERNAL ENVIRONMENT







Figure 4.1. The transformation process

Inputs may be transformed in a variety of ways from organization to organization. Physical
transformation of raw and semi finished materials into finished occur mainly in production
organizations, although service organizations also transform materials (forms and writing
equipment) into finished goods (completed tax forms). Retailing involves exchange
transformations (money for good).In a synthetic transformation process, basic parts, components;
chemicals are combined to form a finished product. The production of appliances from steel,
Labour
Capital
Material
Goods
INPUTS
OUTPUTS
TRANSFORMATION OR
CONVERSION PROCESS
Change in:
FEEDBACK
Form
Time
Space
Services
Technology
Other
Information
45

plastic, and other inputs is an example of a synthetic transformation in form. In an analytic
transformation process, a basic material is broken down into one or more final products. Examples
include the refining of iron ore or crude oil and the milling of logs into lumber, plywood,
composite board, and other building materials.
Inputs can also be transformed in time or space temporal transformation and spatial
transformation, respectively. Storage is an example of a temporal transformation. Rental
warehouse space is the output, and it is purchased for a period of time. A transportation service,
such as commercial air travel or package shipment via DHL, is an example of a spatial
(locational) transformation. Here, the transformation process involves the movement of people or
packages from one place to another. In legal and accounting firms, information is usually
transformed from one form to another; while in entertainment, emotions are transformed from
boredom, say to laughter or tears.
As these examples show, operations may include both production operations and service
operations. Production operations, aimed at producing goods, would include such organizations as
computer manufactories, building contractors, and coal mines. The goal of service operations,
such as hospital, university, bank, is to provide personal services. While there are some basic
differences between production and service operations, many operations management techniques
are applicable to either.

4.2. Operations in Production and Service Organizations

Production and service organizations are alike in that they both use operations. Beyond this
basic similarity, though, there are some major differences in the nature of their outputs and their
transformation processes, as shown in Table 4.1.
Production organization is organization
that produces tangible goods that can be mass-
produces and stored for later consumption.
4.1. Table
Characteristics of Products and Services
PRODUCT SERVICE
Output Tangible Intangible
Output consumption Over time; can be stored Immediate; cannot be stored
Nature of work Product intensive Labor intensive
Costumer contact Minimal, indirect Direct
Customer participation Little or none Essential
Performance measurement Sophisticated Elementary

A production organization is primarily concerned with producing physical goods, such as cars,
computers, plastic bottles, or paint. These goods can be stored in warehouse and consumed over
time. Some customizing is available, of course customers can order extra cost options on cars or
request special tinting of paint, for example but the overall emphasis is on making uniform, mass
produces goods. As a result, there is little customer contact or participation in the production of
individual products, although many progressive companies do seek customer advice when designing
mass-produced goods. As a result, there is little customer contact or participation in the production
of individual products, although many progressive companies do seek customer advice when
designing mass-produced goods. Ford Motor Co., for example, used
a customer advisory committee in designing the Ford Taurus, and
Chrysler used customer feedback in revising its successful minivans.
To evaluate production performance, managers use sophisticated
techniques to measure components and finished goods; these
measurements are then compared to reestablished standards.

Picture Ford Taurus, 2005, http://en.wikipedia.org/wiki/Ford_Taurus


46
As we saw above, production can be of different types: producing individual or mass
produced goods. Usually production can be divided into three types:
Piece/ unit (unique products, there are a lot of products of different type and
quantity of them is small).
Serial (production smaller then in unit production. The same products repeat in some
periods as different candies or paint. Serial production is intermediate between unit
and mass productions).
Mass/ quantity (a big quantity of the same product: factories of tractors or cars).
The main characteristics of productions types are provided in Table 4.2.
Table 4.2.
Piece and mass productions technical and economical characteristics

Characteristics Piece/ unit production Mass/ quantity production
1. Variety of product
2. Size of product production program
3. The level of work places specialization
4. Equipments
5. Main staffs
- qualification,
- number
6. Auxiliary workers
- qualification,
- number
7. Costs of production preparation
8. Cost per unit
9. Productivity of work
very large
small
small
universal

high
large

low
small
small
large
low
small
large
large
special (automatic machines)

low
small

high
large
large
small
high

Service organization is organization
that produces intangible goods that
require consumer participation and
cannot be stored.
A service organization, in contrast, produces largely intangible good that cannot be stored.
Doctors, lawyers, accountants, and barbers, for example, produce customized labor in the form of
advice and services that reflect the needs of individual customer. Output of services is intangible. It
can be information, good mood, colored hairs and similar.

4.3. Material Resource Regulation

In production management we have subsidiary economies. The main task of subsidiary
economies is to ensure the continuous work of production process and to help to achieve the
maximum social and economic efficiency with the lowest production costs.
We need some kind of material resource to produce a product. And it is important to calculate
how much we need these materials and for how long. Therefore material resource regulation is very
important in production management. There are different methods of resource regulations but ABC
method is one of the most popular. This method is described in this textbook.
ABC method of resources regulation
This method of material resources regulation is based on the fact that they are classified in to ABC
classes:
To A class are classified those material resources at warehouses that make the biggest
comparative part and to those the most capital is invested. It is particularly important that
they would be received on regular basis.


47
The materials of average importance are attributed to B class, i.e. they are not so important
as materials in A class.
Insignificant materials are classified as C class; the minimal part of capital is invested in
them. The expenses of these resources storekeeping make a little part of capital resources,
but their regulation method gives a substantial economical effect, therefore it is
recommended to use it in the enterprises.
It is important to analyze the ABC diagram (see Figure 4.2). The objective of the analysis is to
define what material resources are at some moment of time and what amount of them is used per
some period. It is conducted in the following way:
1. Materials of all kinds are grouped in accordance with their weight and value.
2. It is defined how much of material is used.
3. It is calculated what part of all material costs make costs of each material.
4. Materials are grouped according to their importance level.
5. The presumptive values of costs are defined.


0
10
20
30
40
50
60
70
80
90
100

0 10 20 30 40 50 60 70 80 90 100


C B
A















Materials in percent

Figure 4.2. ABC methods Diagram of Resources Regulation

The ABC analysis allows materials of all kinds to group in accordance with the costs level.
Referring to the diagram one can make the following conclusions:
Values of A group: 15% of warehouse positions receive 65% of all costs;
Values of B group: 20% of warehouse positions receive 20% of all costs;
Values of C group: 65% of warehouse positions receive 15% of all costs.
Values of A group include only the little part of material range, but by valuable expression they
are used the most. Therefore the resources of these materials must be planned very exactly. The
materials of A group have to be used especially economically.
The values of B group take average position. They must be more controlled and planned than
values of C group.
Values of C group make a little part, although their range is very wide. Therefore the values of
C group can be added having exhausted cumulated materials. In addition, it must be seeking to
reduce the volumes of C group values.
ABC analysis can be applied not only in the supply field, but in realization field as well, when
analyzing structures of production volume and market. This analysis method is widely applicable in
other fields as well.



48
4.4. Planning and Control Procedures

Operations managers have several analytical tools available to help them with production
planning and control. We'll consider two such tools.
Schedule Charts. One simple way to keep track of work in process is with the schedule
chart. The schedule chart shows when each of a series of job orders is to be performed at each
machine, work station, or department. The process of house building is shown in Gants chart (see
Figure 4.3).


Figure 4.3. A Gant Chart

You can see 9 tasks for this process, duration of these tasks, predecessors, which show
after which task can be started the next one. As you see to put up walls you can only after laying
the foundation, not before and not at the same time as that task. But you can install electrics and
plumbing, and to make landscaping in the same time after then when roof will be put on. Blocks
on the right side of the chart show tasks with their duration and priority. Red blocks show the
critical way the maximum time when all process will be finished.
With scheduling charts, operations managers are able to monitor the flow of materials
through a production process or the flow of work through a job shop. And the operations manager
always knows the status of work performed in relation to work scheduled.
PERT and the Critical Path. Many times, an operations manager has a major project to
finish by a contract deadline. The project is made up of many separate activities or steps, each of
which requires a certain amount of time for completion. Usually, one activity cannot be started until
another is completed. This activity, in turn, is followed by still others. The goal is to coordinate all
these activities. Most projects, from the company picnic to the construction of an offshore oil
drilling platform, fit this description. Some projects can involve many thousands of separate
activities.
The operations manager who is faced with such a project often develops a program
evaluation and review technique (PERT) chart. An example of a PERT chart is shown in Figure
4.4. It depicts each activity involved in the completion of a project, the sequencing of these
activities, and the time allotted for each activity.
Whenever possible, it is desirable to carry out several activities at the same time ("in
parallel") rather than one after another ("in series"). In Figure 4.4, activities B and C can be
performed at the same time because the start of one does not depend on the completion of the
other. However, Activity A and Activities B and C must be performed "in series." In an employee
attitude survey, for instance, the choice of specific research goals necessarily precedes the writing
of the survey questionnaire and the selection of data analysis methods.






49




2

3













Figure 4.4. A Pert Chart

The aim of a PERT network is to minimize project delays through effective scheduling of
project activities. Such scheduling depends on the identification of the critical path. The critical
path is the sequence of in-series activities requiring the longest time for completion. In Figure 4.5,
the sequence of activities along the critical path is such that the project cannot be completed in
fewer than ten weeks. Activities B and C are in parallel, but Activity B is along the critical path
because that path (ABDFG) takes the most time to complete. Activity C is on a path (ACEG) which
takes only seven weeks to complete. So, Activity C could be delayed as much as three (10 - 7)
weeks without slowing project completion. Because Activity C can be delayed without slowing
down the project, it is not on the critical path. Instead, it is said to have three weeks of slack time.
It should be apparent by now that the completion of a project on time depends on the careful
management of activities along the critical path. When necessary, the operations manager can divert
resources from non-critical activities to critical activities to get them done sooner. Also, the
operations manager can look for other opportunities to schedule activities in parallel which are now
in series.



1. Describe four types of transformation process.
2. Enumerate 5 features of unit production.
3. Enumerate 5 features of serial production.
4. Enumerate 5 features of mass production.
5. Explain operation system.
6. What inputs do you know?
7. What outputs do you know?
8. What output is tangible product and what intangible?
9. In which process is immediate consumption?
10. What differences are between manufacturing and service operations?
11. Explain Just in Time method.
12. Describe ABC method of resources regulation.
13. What is a Gant chart?


START

FINISH

1

5

4
A
B
C
D
F
E
G
1
4
2
3 1
1
2
Activity
Completion of Activity

1 Activity Time ShownBelow Activity


Critical Path
REVIEW QUESTIONS



?


50
51

CHAPTER 5.
MARKETING
5.1. Introduction to Marketing

Marketing is the competitive process by
which goods and services are offered for
consumption at a profit.
Marketing combines product and service substance with effective presentation, convenience
and acceptability to engage the interest and commitment of customers and client, and the public at
large.
Marketing processes and activities are normally classified as follows:
Customer marketing: which comes in two basic forms:
Unconsidered purchases, leading to instant satisfaction (or dissatisfaction);
Considered, high value purchases, leading to ensuring satisfaction (or
dissatisfaction).
Industrial and business-to-business marketing: unconsidered purchases (e.g. the office
coffee), and considered purchases (e.g. capital goods, access to information), which are based
on the development of relationships so that considered purchases carry trust and confidence,
as well as enduring utility.
Public services marketing: an area in which substantial development is required, particularly
in response to political drives to engage commercial interests in these activities.
The not-for-profit sector: advantages gained by engaging interest, sympathy and, above all,
action from those targeted.
Internal marketing: activities designed to build mutuality of interest and confidence, and
enduring workplace relations, across organizations.
A core outcome of the marketing process is the development of relationships between the
organizations and its customers and clients. Every interaction between the organization, its staff and
customers makes a contribution to the development of these relationships. This is a function of
generating customer loyalty, and of getting customers to relate that loyalty to purchasing and
consumption activities.

5.2. Customers and Consumers

A customer is one who buys; a consumer is one who consumes. A problem is that many
careless marketers use either customer or consumer to mean both! We have to be very careful to say
what we mean because the difference is important,
A customer is motivated by simplicity and by profit. A customer is concerned to move goods
down the 'channel of distribution' as easily as possible so that profits are earned. Obviously he will
be concerned to sell goods that are of an acceptable quality but he will tend to regard products as
'boxes on the shelf that contain goods that others want to buy. Provided they are legal, safe, fast
moving and profitable he has little other direct interest.
A consumer is concerned with the product in use. He relies on the purchase to do what he
bought it for and so is motivated by the value in use.
In many cases a consumer has only advisory involvement in a purchase:
A young child eats what his mother gives him. If he doesn't like it the mother may find it
easier to change brands, but it is her decision.
A workman uses the tools bought by his company. He may prefer a different make or
model, but can only ask that it be provided. He does not have the power of decision.
In some cases, of course, a consumer is also a customer. When you buy a hamburger for
your lunch you are both a customer and a consumer.

5.3. Product Life Cycle

All products have a beginning, a middle and an end (see Figure 5.1). The concept of product
lifecycle defines more precisely these stages and identifies the points at which specific marketing
initiatives and activities might usefully be generating.
















Figure 5.1. Product Life Cycle Diagram

Introduction Stage.
In the introduction stage, the firm seeks to build product awareness and develop a market for
the product. The impact on the marketing mix is as follows:
Product branding and quality level is established and intellectual property protection such
as patents and trademarks are obtained.
Pricing may be low penetration pricing to build market share rapidly, or high skim
pricing to recover development costs.
Distribution is selective until consumers show acceptance of the product.
Promotion is aimed at innovators and early adopters. Marketing communications seeks to
build product awareness and to educate potential consumers about the product.
Growth Stage.
In the growth stage, the firm seeks to build brand preference and increase market share.
Product quality is maintained and additional features and support services may be added.
Pricing is maintained as the firm enjoys increasing demand with little competition.
Distribution channels are added as demand increases and customers accept the product.
Promotion is aimed at a broader audience.
Maturity Stage.
At maturity, the strong growth in sales diminishes. Competition may appear with similar
products. The primary objective at this point is to defend market share while maximizing profit.
Product features may be enhanced to differentiate the product from that of competitors.
Pricing may be lower because of the new competition.
Distribution becomes more intensive and incentives may be offered to encourage
preference over competing products.
Promotion emphasizes product differentiation.

52
Decline Stage.
As sales decline, the firm has several options:
Maintain the product, possibly rejuvenating it by adding new features and finding new
uses.
Harvest the product - reduce costs and continue to offer it, possibly to a loyal niche
segment.
Discontinue the product, liquidating remaining inventory or selling it to another firm that
is willing to continue the product.
The marketing mix decisions in the decline phase will depend on the selected strategy. For
example, the product may be changed if it is being rejuvenated, or left unchanged if it is being
harvested or liquidated. The price may be maintained if the product is harvested, or reduced
drastically if liquidated.
Marketing interventions are made at each stage to ensure that the product potential is
maximized. The product must take off so that the full range of benefits to be gained from the
consumers is realized by the sector at which it is aimed.

5.4. Marketing strategies

All organizations require a core foundation or generic strategic position, and all effective
marketing strategies consequently need to reflect the core foundation or generic position chosen.
Marketing strategies are then used to build on that position as follows:
Pioneering or first in the field: opening up new markets or new outlets for existing
products, or new products for existing outlets; taking an original and distinctive view of the
marketing process and devising new methods and campaigns.
Follow the leader: the great benefit of being second in the field is to learn from the
mistakes and experience of the pioneer, and make informed judgments about the nature of
the involvement to be taken based on their experience. Or it may be that the second
organization can see opportunities that were not exploited by the first.
Me too or all-comers: where the market is wide open, entry to and exit from it are
relatively easy, where the products and services in question are universal or general, and
where there are many suppliers but where there are more buyers than suppliers.
Supply led: where the product is produced because the organization has complete faith in it
and knows that, once made, it can be sold at a profit.
Technology led: where the organization finds itself in a particular line of business because it
has at its disposal a particular type of technology which can be turned to productive and
profitable advantage in variety of sectors.
Staff led: because of the skills, qualities and preferences of the staff of an organization that
happen to be gathered together, the products or offerings reflect these (very prevalent in the
small business sphere).
Market lead: where the organization looks first at arrange of markets, then assesses their
requirements, and finally decides which of these it can most valuably and profitably operate
in and fill.
Moral or ethical marketing: creating and developing a high-value reputation as the result of a
distinctive moral or ethical stance, for example using Fair-trade ingredients (eg. Starbucks),
or using trading practices as a presentational feature (eg. The Body Shop).
In relation to each of the above, marketing strategies may be either offensive or defensive.
Offensive marketing activities seek to make inroads into competitive position and customer and
client bases of others. Defensive and responsive marketing activities are undertaken with the object
of preserving the present position in response to the offensives of others.



53
5.5. Marketing Mixes

Marketing activities are based on mixes of elements described below. Each is present to a
greater or lesser extent in all marketing activities, though the balance of each clearly varies between
different products and services.
The 4Ps
Product: variety, branding quality, packaging, appearance and design.
Price: basic, discounting, credit, payment method, appearance.
Place: coverage, outlets, transport, distribution and accessibility.
Promotion: advertising, sponsorship, selling, publicity, mail shots.

Product.
Product in this context is the term habitually used to describe anything that is offered to a market
sector for consumption, including commercial and public services. The product mix is the range of
products offered by an organization. This is determined by the matching of the organizations
capabilities and capacities with the markets and niches to be serviced and by the scope and scale of
its operations. People buy the benefits that they expect to accrue from a product or services as
follows:
Quality and durability: product and service quality and durability must be considered from
the point of view of the balance required, and also in terms of customer demand (for
example, there is no point in offering a highly durable product to the chosen market sector if
that is not what the customers want).
Branding: which gives credence and confidence, especially where the brand is well known
and consumer is content with what is offered and comfortable with the appearance of the
name on the product.
Packaging: used to present the product to its best advantage and to protect it up to the point
pf consumption. Packaging also reinforces the identity of all products and services for
example, Barbie (toys), Persil (soap powders) and brochure presentation (e.g. package tours).
Product and service benefits: these should be seen in their widest context. The full offering
often includes after-sales service, spare parts, help and emergency lines, call-out facilities,
and product and service advice and familiarity sessions.
Product and service ranges and portfolios: reflecting the total range. Ideally, the confidence
and reputation of each feeds all the others. When one product or service is perceived to be
bad or unreliable, it is likely to have a knock-on effect to all of the others. There are various
different ways of looking at product and service portfolios and ranges. Example is when
yesterdays breadwinners, todays breadwinners, tomorrow are breadwinners, twinkles and
sparkles, and dead weights. This show Bostons group matrix (see at Figure 5.2), where we
can define products as:
Cash cows: high share of low growth market; todays breadwinners; that main source
of income.
Stars: high share of high growth market, todays and tomorrows breadwinners from
which future cash will come; normally need high investment and support to maintain
positions.
Question marks: low share of high growth market; tomorrows potential
breadwinners; not all will succeed.
Dogs: low share of low growth market; normally only kept if they have some
distinctive feature (e.g. something on which a traditional or enduring reputation has
be built, and without which, the present reputation may be diluted).
54














Question mark

Star
Cash cow

Dog


M
a
r
k
e
t


g
r
o
w
t
h

Market share Small
B
i
g

Big
S
m
a
l
l


Figure 5.2. The Boston group matrix

Price and cost.
In simple terms, the price of an item covers at least the variable costs incurred in producing it. It
also reflects the levels of perceived quality and value held by the customers, clients and consumers.
Beyond this, organizations set price levels that enable them to generate sufficient income to keep
shareholders and other stakeholders happy and contented. They must further set prices to ensure that
sufficient income is generated to ensure continuity of operations and to provide sufficient general
cash flow to meet the needs of the organization (above all, it must be profitable).
The price of an item must reflect both the willingness and capability of the customer to pay. If
one is offering in niches where the customers and costumers always pay cash (as distinct from
cheques, credit or debit cards or finance plans) then prices must reflect the volume of cash carried
and must be sensitive to the competing demands on it.
Organizations need both an understanding of the full range of constrains on price, and also a
measure of flexibility in its determination, enabling them to respond to competitive moves elsewhere
in the market.
It is also necessary to consider what is actually included in the total price of an item or
commodity. For example, when a car is bought the consumer achieves personal transport and
mobility. However, the price paid may also include the concept of the lifetime of the car, including
regular servicing, after-sales arrangements, emergency cover, insurance policies, and finance plans
that cover the purchase of the car as well as the other accessories that may go with it. In addition, a
relationship with the garage or dealer may be bought that takes all the worry out of motoring
provided that you continue to patronize the establishment, to have the servicing and after-sales
conducted by them, and possibly also to replace the car through them in a period of years hence.
Customers and consumers may also be prepared to pay for convenience of access to products and
services, provided that quality and satisfaction are assured.

Place and convenience.
One more element of the marketing mix is place; getting the product and services to the
customers and clients. This means knowing who they are, where they are, how they want the
products and services delivered, what the nature and level of their expectations are, and how these
may best be satisfied. Part of the creative process involved in marketing is concerned with both
meeting this requirement on the part of the customer and also generating an expectation that if they
do go to a particular place then this particular need will be satisfied.
Effective location marketing has been achieved by the supermarket, retail and shopping mail
sectors in Europe and North America. People now go to edge-of-town and out-of-town locations,
because the benefits of ease of access and having for the hypermarkets and the generation of
55
business for shopping malls took steps to understand the nature of the requirements of their target
customers, and the products and services they would require, and designed a consumer environment
where all this could be satisfied. This has had a major impact upon the location of commercial
activity, and those who continue to do business in the centre of towns have had to consider much
more carefully the attractions of their particular location to the consumers that continue to come to
them.
Distribution may be hard to secure during the introduction stage where it is needed fast.
Coverage must extend throughout growth. By maturity, we may fight for continuing shelf space as
new competing products are moved into their introduction and growth stages. In the decline stage
there may be need to extract the product from the channels so that there is a clean termination. One
does not want consumer complaints coming in years after the product has been discontinued.
Location also reflects any sectoral or regional demands or desires or constraints.

Promotion to customers.
Promotion one of the four marketing mix
variables is communicating information
between seller and buyer to influence attitudes
and behavior.
Promotion is a combination of methods used to generate public awareness, identity, confidence,
desire and conviction about a product, and ultimately its adoption and usage by the general public. In
Figure 5.3 basic promotion methods are shown.
Promotion

Figure 5.3. Basic promotion methods and strategy planning

Personal selling involves direct face- to face communication between sellers and potential
customers. Salespeople can be very important parts of a marketing mix because they are
able to adapt the companys marketing mix to the needs of each target market and, in the
extreme, to each potential customer. Face-to-face selling also provides immediate feedback
which helps salespeople to adapt effectively. Salespeople are included in most marketing
mixes especially when target customers are industrial buyers. But their services come at a
price. Sometimes personal selling is very expensive and it is desirable to supplement this
effort with mass selling and sales promotion.
Mass selling is communicating with large numbers of customers at the same time. It is less
flexible that personal selling. But when the target market is large and scattered mass selling
can be less expensive.
Advertising is the main form of mass selling. Advertising is any paid form of non-
personal presentation of ideas, goods, or services by an identified sponsor. It includes the use
of such media as magazines, newspapers, radio and TV, sign and direct mail.
Publicity is any unpaid form of non-personal presentation of ideas, goods, or
services. Although, of course, publicity people get paid, they try to attract attention to the
firm and its offerings without having to pay media costs. For example, book publishers try to
get authors on TV talk shows because this generates a lot of interest and book sales wt
no cost to the publisher. If a firm has a really new message, publicity may be more effective
Personal selling Sales promotion
Advertising Publicity
Mass selling
56
than advertising. Trade magazines, for example, may carry articles featuring the newsworthy
products of regular advertisers in part because they are regular advertisers.
Sales promotion refers to those promotion activities other than advertising, publicity, and
personal selling which stimulate interest, trial, or purchase by final customers or others in
the channel. Sales promotion may be aimed at consumers, at middlemen, or even at a firms
own sales force. Examples include displays at trade shows, samples of consumer products,
and special sweepstakes and contests. Many more examples are listed in Table 5.1.

Table 5.1
Examples of sales promotion activities
Aimed at final consumers or
users
Aimed at middlemen Aimed at companys own sales
force
Banners
Streamers
Samples
Calendars
Point-of-purchase materials
Aisle displays
Contests
Coupons
Trade shows
Trading stamps
Price deals
Promotion allowances
Sales contests
Calendars
Gifts
Trade shows
Meetings
Catalogs
Merchandising aids
Contests
Bonuses
Meetings
Portfolios
Displays
Sales aids
Training materials

Possible 4P or basic strategy policies for Baby Shore Company are shown in the left-hand
column of Table 5.2., and likely operational decisions are shown in the right hand column.

Table 5.2
Relation of Strategy Policies to Operational Decisions for Baby Shore Company
Marketing Mix
Decision Area
Strategy Policies Likely Organizational Decisions
Product

Carry as limited a line of colors, styles,
and sizes as will satisfy the target
market
Add, change, or drop colors, styles,
and/or sizes as customer tastes dictate
Place

Distribute through selected baby
products retailers who will carry the
full line and provide good in-store sales
support and promotion
In market areas where sales potential is
not achieved, add new retail outlets
and/or drop retailers whose performance
is poor
Price

Maintain a premium price, but
encourage retailers to make large-
volume orders by offering discounts on
quantity purchases
Offer short-term introductory price
deals to retailers when a new style is
first introduced.
Promotion Promote the benefits and values of the
special design and how it meets
customer needs
When a retailers hires a new salesperson,
send current training package with details
on product line; increase use of local
newspaper print ads during peak demand
periods (before holidays, etc.)

The 4Cs
Customers: directing marketing and presentational activities at the needs and wants of
customers.
Convenience: a combination of establishing the required and desired outlets, and of
educating customers and clients to access the available outlets.
57
Cost: the equivalent of price in the 4Ps, with the additional management discipline implicit
that requires the balancing of cost and price with value and benefits.
Communication: the production of advertising, sponsorship, selling publicity, mail shot and
Internet material that is customer, client and consumer-friendly rather that technically or
visually brilliant per se.

Marketing mixes arise from combinations and interactions of each of these elements.
Consumers of products and services offerings will normally hold one of the elements more
important than the others. In turn, the forces and pressure of the markets in which the offerings are
made also reflect their relative importance. The are legal and ethical restraints on marketing
activities in the Western world. In general, spurious or misleading claims may not be made for
products, nor should misleading impressions be deliberately fostered apart from anything else this
is very bad for repeat business. Actual products must reflect the reality or impression given by both
promotion and packaging. Products must also not be harmful or detrimental to their consumers,
minimum standards or performance, manufacture, quality and safety have therefore to be met.

5.6. Marketing Segmentation

Market segmentation is the identification of
portions of the market that are different from one
another. Segmentation allows the firm to better
satisfy the needs of its potential customers.

The Need for Market Segmentation. Segmentation is the foundation of successful
marketing. It must be accurate, valid and up to date. The marketing concept calls for
understanding customers and satisfying their needs better than the competition. As many
consumer perspectives exist as there are consumers to hold them. Thus the ultimate position in
segmentation must include every individual - some 56 million 'segments' in the UK alone. But
different customers have different needs, and it rarely is possible to satisfy all customers by
treating them alike. Mass marketing refers to treatment of the market as a homogenous group
and offering the same marketing mix to all customers. Mass marketing allows economies of
scale to be realized through mass production, mass distribution, and mass communication. The
drawback of mass marketing is that customer needs and preferences differ and the same
offering is unlikely to be viewed as optimal by all customers. If firms ignored the differing
customer needs, another firm likely would enter the market with a product that serves a specific
group, and the incumbent firms would lose those customers. Target marketing on the other
hand recognizes the diversity of customers and does not try to please all of them with the same
offering. The first step in target marketing is to identify different market segments and their
needs. Requirements of Market Segments In addition to having different needs, for segments to
be practical they should be evaluated against the following criteria:
Identifiable: the differentiating attributes of the segments must be measurable so that
they can be identified.
Accessible: the segments must be reachable through communication and distribution
channels.
Substantial: the segments should be sufficiently large to justify the resources required to
target them.
Unique needs: to justify separate offerings, the segments must respond differently to the
different marketing mixes.
Durable: the segments should be relatively stable to minimize the cost of frequent
changes.
A good market segmentation will result in segment members that are internally homogenous
and externally heterogeneous; that is, as similar as possible within the segment, and as different as
possible between segments.
58
Bases for Segmentation in Consumer Markets
Consumer markets can be segmented on the following customer characteristics.
Geographic. The following are some examples of geographic variables often used in
segmentation.
Region: by continent, country, state, or even neighborhood
Size of metropolitan area: segmented according to size of population
Population density: often classified as urban, suburban, or rural
Climate: according to weather patterns common to certain geographic regions
Demographic Some demographic segmentation variables include:
Age
Gender
Family size
Family lifecycle
Generation: baby-boomers, Generation X, etc.
Income
Occupation
Education
Ethnicity
Nationality
Religion
Social class.
Many of these variables have standard categories for their values. For example, family
lifecycle often is expressed as bachelor, married with no children (DINKS: Double Income, No
Kids), full-nest, empty-nest, or solitary survivor. Some of these categories have several stages, for
example, full-nest I, II, or III depending on the age of the children. Psychographic Segmentation
Psychographic. Psychographic segmentation groups customers according to their
lifestyle. Activities, interests, and opinions (AIO) surveys are one tool for measuring
lifestyle. Some psychographic variables include:
Activities
Interests
Opinions
Attitudes
Values
Behavioralistic. Behavioral segmentation is based on actual customer behavior toward
products. Some behavioralistic variables include:
Benefits sought
Usage rate
Brand loyalty
User status: potential, first-time, regular, etc.
Readiness to buy
Occasions: holidays and events that stimulate purchases.
Behavioral segmentation has the advantage of using variables that are closely related to the product
itself. It is a fairly direct starting point for market segmentation.

Bases for Segmentation in Industrial Markets
In contrast to consumers, industrial customers tend to be fewer in number and purchase larger
quantities. They evaluate offerings in more detail, and the decision process usually involves more
than one person. These characteristics apply to organizations such as manufacturers and service
providers, as well as resellers, governments, and institutions. Many of the consumer market
segmentation variables can be applied to industrial markets. Industrial markets might be segmented
on characteristics such as:
Location. In industrial markets, customer location may be important in some cases.
Shipping costs may be a purchase factor for vendor selection for products having a high
59
bulk to value ratio, so distance from the vendor may be critical. In some industries firms
tend to cluster together geographically and therefore may have similar needs within a
region.
Company type. Business customers can be classified according to type as follows:
Company size
Industry
Decision making unit
Purchase Criteria
Behavioral characteristics. In industrial markets, patterns of purchase behavior can be a
basis for segmentation. Such behavioral characteristics may include:
Usage rate
Buying status: potential, first-time, regular, etc.
Purchase procedure: sealed bids, negotiations, etc.
Effective marketing management stems from the successful identification of a core or generic
strategic position, and then relating this to the distinctive marketing strategic approach, whether that
is first-in field, me-too, all-comers, products or service-led, staff and expertise-led, or market-led.
The management of marketing requires continued attention to all aspects and details. Activities that
are acceptable and effective today have to be maintained, developed and improved in order to
ensure that their value is retained into the future. The development of marketing strategies must be
entwined with the wider aspects of organizational directions, purpose and priorities. Marketing, as
with all functional activities, has to be directed and managed in support of this, in order to ensure
that the presentation of the organization, its products and services, remains as effective as the
substance.


REVIEW QUESTIONS



?
1. What is marketing?
2. How do you understand marketing segmentation?

3. Explain, in your own words, what each of the four Ps involves.
4. What is difference between customer and consumer?
5. What products life cycle steps do you know? Explain every of them.
6. Describe what are promotion and its possible methods.
7. What is marketing segmentation and what kinds of customers characteristic do you
know?
8. Outlet a marketing strategy for each of the following new products: a) a radically new
design for a toothbrush, b) a new fishing reel, c) a new wonder drug, and d) a new
industrial stapling machine.




60
CHAPTER 6.
HUMAN RESOURCE MANAGEMENT
6.1. The Human Resource Management Process in Organizations

The HRM process, shown in figure 6.1, includes seven basic activities:
1. Human resource planning, designed to ensure that personnel needs will he constantly and
appropriately met, is accomplished trough analysis of:
internal factors, such as current and expected skill needs, vacancies, and departmental
expansions and reductions;
and factors in the external environment, such as the labor market the use of computers to
build and maintain information about all employees has enabled organizations to be much
more efficient in their planning of human resources,




Human Resource
Planning
Recruitment Selection



Training and
Development
Socialization





Performance
Appraisal
Promotions, Transfers,
Demotions, and Separations



Figure 6.1. The Human Resource Management Process in Organizations

2. Recruitment is concerned with developing a pool of job candidates in line with the human
resource plan. Candidates are usually located through newspaper and professional journal
advertisements, employment agencies, word of mouth, and visits to college and university
campuses.
3. Selection involves using application forms, rsums, interviews, employment and skills
tests, and reference checks to evaluate and screen job candidates for the managers who will
ultimately select and hire candidate.
4. Socialization is designed to help the selected individuals fit smoothly into the organization.
Newcomers are introduced to their colleagues, acquainted with their responsibilities, and informed
about organizations goals, policies, and expectations regarding employee behavior.
5. Training and development aim to increase employees ability to contribute to organizational
effectiveness. Training is designed to improve skills in the present job; development programs are
designed to prepare employees for promotion.
6. Performance appraisal compares an individuals job performance to standards or objectives
developed for the individuals position. Low performance may prompt corrective action, such as
additional training, a demotion, or separation, while high performance may merit a bonus or
promotion. Although an employees immediate supervisor will perform the appraisal, the HRM
department is responsible for working with upper management to establish the policies that guide
all performance appraisals.
60

7. Promotions, transfers, demotions, and separations reflect an employees value to the
organization. High performers may be promoted or transferred to help them develop their skills,
while low performers may be demoted, transferred to less important positions, or even separated.
Any of these options will in turn, affect human resource planning.
In next chapters some of human resource management process jobs will be discussed more
detailed.

6.2. Human Resource Planning, Recruitment, Selection and Socialization

Human resource planning is the process of
analyzing an organizations human resource
needs under changing conditions and developing
the activities necessary to satisfy those needs.
It would be unthinkable for a company to fail to plan for its future needs for materials, plant
capacity, or financing. Similarly, firms must plan to insure that their human resource needs are
satisfied.
Human resource planning has four basic aspects:
1. planning for future needs by deciding how many people with what skills the organization
will need;
2. planning for future balance by comparing the number of needed employees to the number of
present employees who can be expected to stay with the organization, which leads to
3. planning for recruiting or laying off employees and
4. planning for the development of employees, to be sure the organization has a steady supply
of experienced and capable personnel.
Planning is connected with labor turnover. A common index of labor performance used in
organizations is Labor Turnover. This provides information about the ratio of leavers to the
average numbers employed during the course of a year. This is usually expressed in such a way:

Number of employees leaving during the year
* 100
Average numbers employed during the year

The labor turnover index is useful in broad terms, but it has some disadvantages:
1. it does not indicate in which areas of the organization the rate of leavers is high;
2. it does not indicate the length of service of leavers;
3. it does not indicate any sudden changes in the numbers employed from one year to the next.

Also some organizations in addition use a Labor Stability Index which links the leaving rate
with the length of service. It is expressed in such a way:

Number of leavers with more than one years service
* 100
Number employed one year ago

Staff turnover has some advantages and disadvantages, which are shown in Table. 6.1.


62
Table 6.1.
Staff turnover advantages and disadvantages
Staff turnover Advantages Staff turnover Disadvantages
it provides an incentive to recruit fresh staff;
it enables organizations to shed staff more easily
when redundancies are planned;
it opens up promotion channels for longer
serving employees;

additional costs of replacement recruitment;
disruptions to production of goods or services
caused by leavers;
additional training costs;
wasted investment in people;
may lead to difficulties in attracting new staff.

The next step after planning is recruitment.

Recruitment refers to the process of sourcing,
screening, and selecting people for a job at an
organization or firm, or for a vacancy in a
volunteer-based organization or community
group.
The first step in staffing is to put together a group of job applicants from which to choose. This
step is called recruiting. No matter how employees are later selected, trained, and motivated, it is
important to start out with a good group of job applicants. The greater the number of applicants and
the better their qualifications, the more likely the firm is to build a solid personnel base.
While generalist managers or administrators can undertake some components of the recruitment
process, mid- and large-size organizations and companies often retain professional recruiters or
outsource some of the process to recruitment agencies.
J ob applicants can be found in many ways. These sources differ in terms of ease of use, cost,
and the quality of applicants obtained:
Newspaper advertisements. The simplest and best known way to publicize a job opening is
through newspaper and magazine advertisements. Although they often bring in many
applicants, such advertisements do not function as a screening device. That is, the ads may
attract many jobs seekers, but only a few of them may be qualified for the position
advertised.
Referrals. Current and past employees sometimes refer their friends and relatives to the firm.
Because these employees usually understand the firms personnel needs, referrals can be a
very good source of job applicants. When companies in the computer industry need new
employees, they routinely ask current employees for referrals. The assumption is that their
current employees will know the best people in the industry.
Private Employment Agencies. These firms are in the business of matching job seekers with
suitable jobs. They charge a fee for their services, sometimes to the job seeker and
sometimes to the hiring firm. In effect, when a company contracts with an employment
agency, it is turning over the task of recruiting and screening applicants to someone else.
Many private employment agencies specialize in finding people to fill top management
positions.
Public Employment Agencies. Most cities have an office of the state employment agency
whose role is to find jobs for unemployed people and to keep track of people receiving
unemployment compensation. Some of these agencies also offer training programs.
Educational Institutions. Universities, colleges, vocational schools, and high schools may all
be good sources of job applicants For jobs in great supply, companies may send recruiters to
campuses for the purpose of finding and interviewing job applicants.


63

Selection is the mutual process whereby the
organization decides whether or not to make a
job offer and the candidate decides whether or
not to accept it.

Even in times of high unemployment, selection is very much a two way process with the
candidate assessing the organization as well as the other way round.

The salient features of the selection process are:
the application details (forms, CVs, and letters);
the interview;
selection tests, where applicable, and other supporting evidence, such as references.
Steps of selection process are provided in Figure 6.2.













APPLICATIONS
Application forms
CVs
Letters
Short listing process
INTERVIEWS
One-to-one
Two-to one
Panels
SELECTION TESTS
Intellectual ability
Aptitudes
Personality
SELECTION
DECISION

REFERENCES

Figure 6.2. Steps of the selection process

Key stages in the selection process are:
shifting through application;
drawing up a shortlist of candidates;
inviting these candidates for interview;
conducting interviews;
making a decision about choice of candidates;
making an attractive offer and confirming it;
writing to unsuccessful candidates;
notifying appropriate managers of decisions.

Careful selection procedures can be time-consuming and costly. However, if costs of wrong
decision are high, if there are a large number of applicants relative to the number of openings, and if
selection tools have high degrees of accuracy, careful procedures are probably worth the cost.

Socialization.
Socialization is called orientation too. It involves introducing new employees to their jobs and to
the company. It is their first inside look at the company, and it can make an important impression. If
properly done, job socialization reduces employee uncertainties, makes company policies and
expectations clear, and provides a good idea of what the firm, plant, and co-workers are like. Often,
both the personnel department and the new employees supervisor are involved in the orientation
efforts.


64

6.3. Human Resource Training and Development

Training refers to a planned effort by a company to facilitate employees learning of job-related
competencies. These competencies include knowledge, skills, or behaviors that are critical for
successful job performance. The goal of training id for employees to master the knowledge, skill,
and behaviors emphasized in training programs and to apply them to their day-to-day activities.
The training design process refers to a systematic approach for developing training programs.
Figure 6.3 presents the seven steps of this process. Step 1 is to conduct a needs assessment, which
is necessary to identify. Managers can use four procedures to determine the training needs of
individuals in their organization or subunit:
Performance appraisal. Each employees work is measured against the performance
standards or objectives established for his or her job.
Analysis of job requirements. The skills or knowledge specified in the appropriate job
description are examined, and those employees without necessary skills or knowledge
become candidates for a training program.
Organizational analysis. The effectiveness of the organization and its success in meeting its
goals are analyzed to determine where differences exist. For example, members of a
department with a high turnover rate or a low performance record might require additional
training.
Survey of human resources. Managers as well as nonmanagers are asked to describe what
problems they are experiencing in their work and what actions they believe are necessary to
solve them.










2. Ensuring Employees
Readiness for Training
Attitudes and Motivation
Basic Skills
3. Creating a Learning
Environment
Learning Objectives
Meaningful Material
Practice
Feedback
Community of Learning
Modeling
Program Administration
1 Conducting Needs
Assessment
OrganizationalAnalysis
Person Analysis
Task Analysis

5. Developing an Evaluation Plan
Identify Learning Outcomes
Choose Evaluation Design
Plan Cost-Benefit Analysis
4. Ensuring Transfer of
Training
Self-Management
Peer and Manager Support





6. Selecting Training Method
Traditional or E-learning
On-the job or off-the-job
7. Monitoring and Evaluating the Program
Conduct Evaluation
Make Changes to Improve the Program
Figure 6.3. Training Design Process

If training is needed Step 2 is to ensure that employees have the motivation and basic skills
necessary to master training content. Step 3 is to create a learning environment that has the features
necessary for learning to occur. Step 4 is to ensure that trainees apply the training content to their
jobs. This step involves having the trainee understand how to manage skill improvement as well as
getting coworker and manager support.
Step 5 is to develop an evaluation plan. Developing an evaluation plan includes identifying
what types of outcomes training is expected to influence (for example, learning, behavior, skills),
choosing an evaluation deign that allows you to determine the influence of training on these
outcomes, and planning how to demonstrate how training affects the bottom line (that is, using a
cost-benefit analysis to determine the monetary benefits resulting from training).


65
Step 6 is to choose the training method based on the learning objectives and learning
environment. This step may include a traditional training method of face-to-face interaction with a
trainer or e-learning using CD-ROM or Web-based training. Managers have available a variety of
training approaches. There are two types of possible training:
The most common of these are on-the-job-training methods, including job rotation, in
which the employee, over a period of time, works on a series of jobs, thereby learning a
broad variety of skills; internship, in which job training is combined with related classroom
instruction; and apprenticeship, in which the employee is trained under the guidance of a
highly skilled coworker.
Of-the-job training takes place outside the workplace but attempts to simulate actual
working conditions. This type of training includes vestibule training, in which employees
train on the actual equipment and in a realistic job setting but in a room different from the
one in which they will be working. The object is to avoid the on-the-job pressures that might
interfere with the learning process. In behaviorally experienced training, some of the
methods used in assessment centers business games, simulations, case studies, and so on
are employed so that trainee can learn the behavior appropriate for the job through role
playing. Off-the-job training may focus on the classroom, with seminars, lectures, and films,
or it may involve computer-based training as e-learning.
Step 7 is to evaluate the program and make changes in it or revisit any of the earlier steps in the
process to improve the program so that learning, behavior, change, and the other learning objectives
are obtained.

6.4. Promotions and Demotions

Promotion.
The most pleasant job move is the promotion. A promotion is a move up, generally to a new
title, more responsibility, and better benefits. Promotions are handled carefully because they usually
mean moving a person into a position of greater potential impact on the firm. Legal restrictions also
complicate the promotion process. Additionally, the fact that the promoted individual did well at the
old job is no guarantee that that person will do well at the new, higher level job. J obs at different
levels in the firm may require vastly different skills and interests.
Promotions can also cause problems for the people promoted. Many employees are happier in
their current jobs that they would be if promoted to positions requiring greater responsibility, new
skills, and geographic moves. Such changes can cause stress. Employees accepting promotions
should be guaranteed that if they are unhappy, they can fall back to the old positions or positions
of equal stature.
Demotion.
A movement down in title, responsibility, or benefits called demotion- is rare in organizations.
Demotions are especially stressful for employees, of course, and they are likely to be resisted by
unions. Still, especially during economic recessions, employees may have to make the choice
between demotion and unemployment. Some companies have experimented with demoting
employees temporarily so that they can relate better to their subordinates. Also, some employees
ask for their old, lower level jobs back if they are unhappy, feel stress or have health problems with
their promotions.


66

6.5. Components of a wage, salary or reward package

The following elements are required:
Payment: annual, quarterly, monthly, four-weekly, weekly, daily. Commission, bonus,
increments, fees. Profit, performance and merit-related payments.
0
Material Moral
Direct part Fixed part. It depends on job's specific.
Changing part. It depends on individual
characteristics of employee's.
Psychological comfort, good
work conditions, thanks.
Premium Premium is money for the group or individual
person when they do something unique which
helped to reach better quality, efficiency or
more profit.


Allowances: attendance, disturbance, shift, weekend, unsocial hours, training and
development, location and relocation, absence from home.
Benefits: loans (e.g. for season tickets), pension (contributory or non-contributory),
subsidies (on company products, canteen, travel), car, telephone/car phone, private
healthcare, training and development, luncheon vouchers.
Chains of gold or super-benefits: school holidays (teachers); cheap loans (banks);
free/cheap travel (railway, shipping, airlines); pension arrangements (for older or
longer-serving staff).
Economic rent: high rates of pay for particular expertise (especially scarce expertise
or that which is required at short notice).
Work/life and rewards: in which people who have to balance work demands with
outside pressures accept a given level of pay in return for flexible working
arrangements.
Performance and profit-related pay: in which bonuses are delivered in return for
meeting performance criteria, particular targets, and collective and individual profit
and output levels.
Specific incentives: related to particular occupations, partly reflecting peoples
expectations and partly reflecting performance.
Speaking about wages systems, there are two main forms: piece wage form and timework wage
form.

1. Piece wage form
Referring to the simple piece wage form, the wage is calculated as follows:
D
u
=t
v
*N
Here: t
v
is rate: per one piece of product; N- is quantity of production

Having chosen direct piece wage form, the worker wage is directly proportional to his/her
output. The basis of piece wage form is piece tariff - size of wages for made work piece (operation,
part, article etc.)
The essence at progressive (of high daily output) piece wage form is as follows: for the planned
in the task volume of works it is paid in accordance with nominal piece tariff, and for works made
over the task - in accordance with enlarged tariffs.
The essence of the regressive piece wage form is the higher percent of performance oi' work
norms the slower growth of the wages.


67
Differentiated (of fines) piece wage form is very old. F. Taylor was the first who used it. Here
the different tariff wages are used in accordance with the level of norms performance.
The piece wages of fixed perks form stimulates workers to increase production volume; for each
unit produced over the set norm the fixed perk is paid.
The essence of piece wages of personal perks is that tariff in accordance with which the wage is
calculated consists of the work tariff rate, depending on work complexity and work effectiveness
and personal tariff rate (personal perk), which is determined by age and experience.
It is characteristic of the indirect piece wage form that the size of personnel (usually of helpers)
wages depends on the work results of the workers served by them.
The characteristic of bonus piece wages form is that the size of remuneration for performed
works is determined not for each production operation separately, but for total complex of works,
that is for bonus task.
2. Timework wage form.
Referring to the simple timework wage form, the wage is calculated as follows:
D
u
=a
v
*T
f

Here: a
v
is hour rate: T
f
- is number of actually worked hours.

The characteristic of timework wage form with obligatory to perform rated task is that worker is
paid for the set worked time, however worker has to perform the set rated task.
The feature of personal perks of timework wage form is that hour tariff rate consists of two
parts. One, the main part, depends on evaluation of work (of necessary skills, responsibility,
requirements for mental and physical competence, work conditions). Second (additional) part is
defined "in accordance with deserts", subject to the worker universality, adoption in team and to
current work conditions, reliability and loyalty to firm, level of timework use, level of rated tasks
implementation.
Two (or several) remunerations timework wage form provides two tariff rates or more; they are
applied discriminating to workers depending on whether they fulfill or not fulfill rated tasks. By 20
percents lower tariff remunerations usually are used to those who do not fulfill rated tasks. This
wage form is analogous to the differentiated (of fines) piece wage form.
The Japan traditional according to the age timework wage form is based on tariff
remunerations, the size of which depends on worker age.
Japan synthetic according to results timework form widely spread since 1976. This form is
based on two tariff rates: personal and of work. The size of personal tariff rate depends on worker
age and experience, and work tariff rates - on qualification and work effectiveness expressed in
points.



1. Enumerate the main steps of human resource process.
2. What is the basic goal of staffing?
3. Define human resource planning.
4. What is labor turnover?
5. What are the main stages of selection?
6. Why is socialization (adaptation) important in organization?
7. In what sense do recruiting, selection, and placement differ from training and
development?
8. Enumerate and explain each of training processs steps.
9. How do differ on-the-job and off-the job training?
10. What main wage forms do you know, how they differ from each other?
11. Enumerate timework and piece wage forms.

REVIEW QUESTIONS



?


68
CHAPTER 7.
FINANCIAL MANAGEMENT
Finance is the lifeblood of all organizations, in whatever sphere they operate. Companies in the
private sector are required to make profits, to generate a surplus of income exceeding expenditure
over a period of time that supports the continuation of the business and provides an adequate return
to the backers. Public, social and health services, working to targets allocated by governments and
other authorities, must use these resources to best advantage to satisfy the sectors that they serve,
and to cope with any constraints under which they may be placed.

7.1. Financial Statements

Financial statement is monetary analysis of
the flow of goods and services to, within, and
from the organization.
Financial statements are used to track the monetary value of goods and services into and out of
the organization. They provide a means for monitoring three major financial conditions of an
organization:
1. Liquidity: the ability to convert assets into cash in order to meet current financial needs and
obligations.
2. General financial condition: the long-term balance between debt and equity; the assets left
after liabilities are deducted.
3. Profitability: the ability to earn profits steadily and over an extended period of time.
Since financial statements are usually prepared after events have occurred, they cannot be used
to influence past events. This limits their value as control measures. However, they are widely used
by managers, shareholders, financial institutions, investment analysts and other stakeholders to
evaluate the organizations performance.
Balance sheet is description of the
organization in terms of its assets, liabilities, and
net worth.
In its simplest form, the balance sheet describes the company in terms of its assets, liabilities
and net worth. A companys assets range from money in the bank to the goodwill value of its name
in the marketplace. The left side of the balance sheet lists these assets in descending order of
liquidity. A distinction is made between current and fixed assets. Current assets cover items such as
cash, accounts receivable, marketable securities and inventories assets that could be turned into
cash at a reasonably predicable value within a relatively short time period (typically, one year).
Fixed assets show the monetary value of the companys plant, equipment, property, patents, and
other items used on a continuing basis to produce its goods or services.
Liabilities are also made up of two groups, current liabilities and long-term liabilities. Current
liabilities are debts, such as accounts payable, short-term loans, and unpaid taxes, that will have to
be paid off during the current fiscal period. Long-term liabilities include mortgages, bonds, and
other debts that are being paid off gradually. The companys net worth is the residual value
remaining after total liabilities have been subtracted from total assets.
Something that is bought as an asset can quickly turn into liability. Production and information
technology, bought as a long-term investment, may be rendered obsolete at any time by new
inventions. Building companies that bought land banks find that these become a liability if the
demand for buildings dries up or if the price of land falls. Projects for which capital goods have
been bought may be cancelled if other costs or unforeseen problems make the project no longer
worthwhile.
69

The fundamental equation shows the firms existing resources on the left and tells how these
resources have been financed on the right. Assets (A) must have been financed either by borrowed
capital (L) or contributed capital (OE). Liabilities are often termed creditor equities.

Assets Liabilities =Owners equity
A L =OE

This equation is the fundamental equation of accounting.
A =L +OE

7.2. Depreciation

Depreciation is an accounting convention that shows the period of time over which an item is
gradually paid for, paid for in installments, or written off altogether. It is important to remember
that it is purely an accounting convention and not a managerial tool.
A noncash expense that reduces the value of an asset as a result of wear and tear, age, or
obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be
replaced once the end of their useful life is reached. There are several accounting methods that are
used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a
non-cash expense, depreciation lowers the company's reported earnings while increasing free cash
flow.
For example, a piece of equipment may have cost 100000 Eur. The organizations accounting
function may set out to depreciate it, quite legitimately from their point of view, at 20000Eur annual
for five years. If it does become obsolete after two years, then the managerial stance must be to
scrap it and replace it, whatever the accounting convention may say.
There are different possibilities to count depreciation. One of the most popular methods is linear
method:
T
V V
N
2 1

=
;
where V
1
present value of property, Lt; V
2
value of property liquidity, Lt; T time of using
property in years.

7.3. Costs

It is usual to distinguish between the following:
Fixed costs (FC): these are the costs incurred by organizations whether or not any
business is conducted. They consist of capital charges, the costs of premises and staff, and
administrative, managerial and support function overheads. Total fixed costs (TFC) are
represented in Figure 7.1. Examples of fixed costs are:
Salary paid to a supervisor
Advertising in the trade journals
Business rates paid to the local authority
Depreciation of machinery calculated on the straight line basis.



70

Figure 7.1. Diagram of fixed costs

Variable costs (VC): these are the costs incurred as a result of engaging in activities.
They consist of raw materials, packaging and distribution costs, and also relate to the
frequency and density of usage of equipment (e.g. production technology, telephone and
information systems). Examples of variable costs are:
Materials used to manufacture a unit of output or to provide a type of service
Labor costs of manufacturing a unit of output or providing a type of service
Commission paid to a salesperson
Fuel used by a haulage company.
Total variable costs (TVC) are represented in Figure 7. 2.

Figure 7.2. Diagram of variable costs

Semi-variable costs (SC) are those that vary with the volume of work performed but not
in a directly proportional way. Semi-variable costs often represent a major part of an
organizations expenses. Examples of semi-variable cost are:
Office salaries where there is a core of long-term secretarial staff plus employment of
temporary staff when activity levels rise
Maintenance charges where there is a fixed basic charge per year plus a variable
element depending on the number of call-outs per year.
Other possible costs are as follows:
Marginal cost (MC): this is the cost incurred by the production of one extra item of
output and reflects the extent to which production capacity may be extended without
incurring additional fixed costs in the forms of investment in new plant, staff, equipment
and technology.
Opportunity costs (OC): these represent the opportunities foregone as the result of
being involved in one area in preference to others.


71
Sunk costs (SC): these ate those costs incurred on which there is no reasonable prospect
of any return at all.
Consequential costs (CC): these are the costs additionally incurred as the direct
consequence of taking a particular decision.
Switching costs (SwC): these are incurred as a direct consequence of switching from one
thing to another. Switching costs are incurred when new products and services are
developed and implemented; old products and services are discontinued when new
production, service and information technology is installed; and when the centers of
product and service delivery are switched from one location to another.
Total cost (TC): the total cost is the summary of all costs incurred under each of the
above headings by organizations as the result of taking particular decisions, and
implementing initiatives. When fixed costs are added to variable costs, then the total costs
(TC) of the business can be calculated. In other words, TFC + TVC = TC. Total costs
are represented in Figure 7. 3.


Figure 7.3. Diagram of Total costs

The costs of a business activity may also be classified as direct costs and indirect costs. Direct
costs are those which are directly related to the activity, while indirect costs are incurred in respect
of all activities of the type and have to be allocated on a basis of sharing which is as fair as can be
devised. The definition of direct and indirect costs depends on the purpose for which the cost will
be used.
Direct costs are directly traceable to an activity of the business for which costs are to be
determined.
Indirect costs are spread over number of activities of the business for which costs are to
be determined.

7.4. Balancing the Cash Book

Account is an accounting record designed to
classify and accumulate money effect of financial
transaction.
In book-keeping the term balancing simply means adding up both the debit and credit sides of
an account, and deducting the smaller side (in value) from the larger side. The difference between
the two sides is called the balance of the account. The Cash Account is kept in a special ledger
known as the cash book. In practice this would be balanced up of every month. A simplified
account, often used for illustrative purposes, is referred to as a T-account, because it resembles the
letter T (see Table 7.1). The term debit is used to describe the left side of the account, the term
credit, the right side.


72

Table 7.1
T-account form
Debit (always the left side)
A debit records a decrease in liabilities, equity, and
revenues.
Credit (always the right side)
A credit records an increase in liabilities, equity, and
revenues.

The ledger system of double entry book-keeping entails the use of a number of account books,
giving accurate information, in money values, of the day-to-day trading transactions of the business.
From these permanent records periodical statements can be prepared disclosing the trading profit or
loss made by the business, and its financial position or net worth, at any given date.
The following summary shows how debits and credits are used to record increases and
decreases in various types of accounts.

Assets
Expenses,
Dividends
Liabilities,
Equity,
Revenues
Increases are DEBITED
Decreases are CREDITED
Increases are CREDITED
Decreases are DEBITED

The records of trading transactions are kept, in money value, on the folios or pages of these
ledgers, generally termed accounts. The cash account is first explained as part of the ledger system.

7.6. Break even analysis

Break-even analysis depends on the following variables:
1. Selling Price per Unit: The amount of money charged to the customer for each unit of a
product or service.
2. Total Fixed Costs: The sum of all costs required to produce the first unit of a product. This
amount does not vary as production increases or decreases, until new capital expenditures are
needed.
3. Variable Unit Cost: Costs that vary directly with the production of one additional unit.
4. Total Variable Cost The product of expected unit sales and variable unit cost, i.e., expected
unit sales times the variable unit cost.
5. Forecasted Net Profit: Total revenue minus total cost. Enter Zero (0) if you wish to find
out the number of units that must be sold in order to produce a profit of zero (but will recover all
associated costs)
Each of these variables is interdependent on the break-even point analysis. If any of the
variables changes, the results may change.
Total Revenue: The product of forecasted
unit sales and unit price, i.e., forecasted unit
sales times unit price.
Break-Even Point: Number of units that
must be sold in order to produce a profit of zero
(but will recover all associated costs).
In other words, the break-even point is the point at which your product stops costing you money
to produce and sell, and starts to generate a profit for your company.
One may use the J avaScript to solve some other associated managerial decision problems, such
as:
setting price level and its sensitivity
targeting the "best" values for the variable and fixed cost combinations
determining the financial attractiveness of different strategic options for your company


73
The graphic method of analysis (below) helps you in understanding the concept of the break-
even point. However, the break-even point is found faster and more accurately with the following
formula:
Q =F
C
/ (U
P
- V
C
)
where:
Q =Break-even Point, i.e., Units of production (Q),
F
C
=Fixed Costs,
V
C
=Variable Costs per Unit
U
P
=Unit Price
Therefore,
Break-Even Point Q =Fixed Cost / (Unit Price - Variable Unit Cost)
A break even diagram is shown in Figure 7.4.


Figure 7.4. A break-even diagram

It is important to remember that financial statements may not show all relevant financial
information.




1. What is an account?
2. What is the difference between the terms debit and credit?
3. What is the fundamental equation of accounting?
4. Enumerate all costs as you know and show examples of them.
5. What is depreciation?
6. Draw and explain a break-even diagram.
7. Mathematically count a break-even point?
8. What is the difference between fixed and variable costs?



REVIEW QUESTIONS



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Websites:
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