MODULE 1

INTRODUCTION TO MANAGEMENT
Management is everywhere. Any time people work to achieve a goal, they are
engaging in management. At least as far back as the building of pyramids in ancient
Egypt or Mesoamerica, people have used principles of management to achieve goals.
Today, organizations of all types—social, political, and economic—use management
techniques to plan and organize their activities.

Two Aspects of Management

When people talk about management, they may be referring to very different
aspects. They may be talking about the people who are the managers, especially those
people in strategic positions who make important decisions for the organization,
such as the executive officers, president, or general manager. Or, they may be
referring to the activities and functions of an organization to achieve organizational
goals.

Management As People

The people with the responsibility and authority to determine the overall direction of
the organization are often referred to as the management of the organization.
Management has the authority to decide what the goals of the organization should be
and how those goals will be achieved. Individuals in upper management must be
aware of conditions in the organization’s environment and have knowledge of the total
resources of the organization. They put these two together to determine the most
promising path for the organization to pursue.

Let’s look at a small-scale illustration. Imagine a family considering their vacation

plans. They have a goal: to get away from home and work to spend an enjoyable
week or two together. To achieve their goal they must first make a number of related
decisions such as these: Where will we go? How will we get there? Where will we
stay? What will we do while we are there?

These decisions cannot be made without considering the resources they have available
for the trip. Perhaps they have saved money for the trip or they decide to take out a
small loan. Maybe they will rent an RV and camping equipment or buy into a
timeshare. They might be experienced backpackers or they might enjoy just chilling
at the beach. The family’s decision makers must plan on how to use their resources—
both material resources, such as money and equipment, and intellectual
resources, such as knowledge and experience—to create a successful vacation. But
deciding what they are going to do is not enough; they need to actually do things to
get ready for their trip. They may need to make reservations, schedule time off work,
get their car serviced, or buy a new camera and appropriate clothing and gear. Finally,
if they have made all the right decisions and all the necessary arrangements, they can
go on their trip and have a great time.

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Management As Process

As we saw in the earlier example, decision making and planning are required before
actions are taken. Defining the goals of the organization, planning the actions to meet
the goals, and organizing the resources needed to carry out the actions are all vital
functions of management. Planning and organizing ensure that everyone in the
organization is working together toward meeting goals.

Organizations, like families, also have goals. In large organizations, the goals are
usually formally defined. A corporate goal may be to increase market share by 12
percent in two years or to provide 250 free meals per week to a local shelter. In small
organizations or family businesses, the goals may be more general and informal, such
as to provide a unique dining experience to patrons or to be able to retire comfortably
in five years.

All organizations—businesses, the military, government departments, nonprofit

service providers, or public school systems—require management because they all are
trying to achieve goals. And although it may seem straightforward, the management
process is complex. In most cases, management functions include:

 applying and distributing organizational resources effectively

 acquiring new resources when necessary
 analyzing and adapting to the ever-changing environment in which the organization
operates
 complying with legal, ethical, and social responsibilities of the community
 developing relationships with and among people to execute the strategies and plans

Management Defined

Perhaps the most critical of all the management processes listed earlier is creating the
systems and processes that allow people to work effectively toward organizational
goals. In fact, many people define management as the art of getting things done
through people. Although technology and data are increasingly important in modern
organizations, people continue to be a primary focus of management. Putting this all
together, we can propose a definition of management: management is the process of
planning, organizing, leading, and controlling people in the organization to effectively
use resources to meet organizational goals.

Primary Functions of Management

We have defined management as a process to achieve organizational goals.
A process is a set of activities that are ongoing and interrelated. Ongoing means
that the activities are not done in a linear, step-by-step fashion where responsibility is
passed from one activity to the next. Instead, the activities are continued as new
activities are started. Interrelated means that the results of each activity influence
the other activities and tasks. It is the responsibility of management to see that

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essential activities are done efficiently (in the best possible way) and effectively (to
achieve the desired result).

Effective management involves four primary functions and related skill sets: planning,
organizing, leading, and controlling. Although there’s a logical sequence to the
functions, in practice the four functions are often performed in a dynamic manner.

For example, a manager would need to develop or reference a departmental or

organizational plan prior to executing on it just as you would reference a map prior to
embarking on a road trip. The proverb “if you fail to prepare you are preparing to fail”
underscores the importance of this function. However, just as when road or airport
closures or other factors might cause you to change your original route, unanticipated
internal or external factors might cause a manager to revisit and revise the original
plan, requiring a change in the other functions and associated tasks. Thus, achieving
organizational goals—arriving at your intended destination—requires ongoing
management of the process and an understanding of the interrelationship of the four
functions.

As Figure 1 illustrates, a factor that impacts leading, for example, will have implications
for controlling, planning and organizing. In summary, it is a management responsibility
to ensure that unanticipated changes are factored in to the process and the integrity
of the process is maintained.

Figure 1. The key functions in the management process are connected, but not always linear.

Planning

Planning means defining performance goals for the organization and determining
what actions and resources are needed to achieve the goals. Through planning,

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management defines what the future of the organization should be and how to get
there. Strategic plans are long-term and affect the entire organization. A strategic
plan bridges the gap between what an organization is and what it will
become. Tactical plans translate strategic plans into specific actions that need to be
implemented by departments throughout the organization. The tactical plan defines
what has to be done, who will do it, and the resources needed to do it.

For instance, recall the example used at the beginning of this module. It described
how ThyssenKrupp AG decided to become an elevator manufacturing and servicing
company because of increased competition from Chinese steel. The management of
the company set a goal of deriving the majority of its revenue from elevator-related
activities. To do this, the management team made plans to create partnerships or take
over existing elevator companies. The team devised plans to develop new human
resources and to acquire other material resources. The company also had to divest
existing steel-related resources to raise capital for the new initiative. This example is
a long-term strategic plan that will take years to complete and require many changes
along the way. But it starts by defining a goal and a preliminary path to achieve it.

Organizing

Once plans are made, decisions must be made about how to best implement the
plans. The organizing function involves deciding how the organization will be
structured (by departments, matrix teams, job responsibilities, etc.). Organizing
involves assigning authority and responsibility to various departments, allocating
resources across the organization, and defining how the activities of groups and
individuals will be coordinated.

In the case of ThyssenKrupp AG, the management had to determine how to support
two very different sets of activities in order to achieve its long-term goal. Management
needed to continue steel production activities to provide continuity of funds as the
emphasis gradually shifted to elevator production. It also had to develop new skills
and resources to build the company’s elevator capabilities. A new organizational
structure was needed that could support both business activities as one was
downsized and the other built up.

Leading

Nearly everything that is accomplished in an organization is done by people. The best

planning and organizing will not be effective if the people in the organization are not
willing to support the plan. Leaders use knowledge, character, and charisma to
generate enthusiasm and inspire effort to achieve goals. Managers must also lead by
communicating goals throughout the organization, by building commitment to a
common vision, by creating shared values and culture, and by encouraging high
performance. Managers can use the power of reward and punishment to make people
support plans and goals. Leaders inspire people to support plans, creating belief and
commitment. Leadership and management skills are not the same, but they can and
do appear in the most effective people.

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It is very difficult to motivate people when plans involve radical change, particularly if
they include downsizing and layoffs. Many people are naturally resistant to change.
When the change means loss of jobs or status, people will be very resistant. At
ThyssenKrupp, the labor unions vehemently opposed the shift from steel production
to elevator manufacturing. Although the people involved in the new business functions
were excited by the plans, people involved with steel production felt abandoned and
demotivated. Management would have been wise to get union support for its vision
of the company’s new future.

Controlling

There is a well-known military saying that says no battle plan survives contact with
the enemy. This implies that planning is necessary for making preparations, but when
it’s time to implement the plan, everything will not go as planned. Unexpected things
will happen. Observing and responding to what actually happens is called
controlling. Controlling is the process of monitoring activities, measuring
performance, comparing results to objectives, and making modifications and
corrections when needed. This is often described as a feedback loop, as shown in
the illustration of a product design feedback loop.

Product design feedback loop

Controlling may be the most important of the four management functions. It provides
the information that keeps the corporate goal on track. By controlling their
organizations, managers keep informed of what is happening; what is working and
what isn’t; and what needs to be continued, improved, or changed. ThyssenKrupp had
little experience in elevator manufacturing when it was making plans. It was
developing new products and processes and entering new markets. The management
knew it could not anticipate all the difficulties it would encounter. Close monitoring as
the plan progressed allowed the company to make changes and state-of-the-art
innovations that have resulted in a very successful transition.

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Who Directs Each Function?

Although these functions have been introduced in a particular order, it should be

apparent that the different activities happen at the same time in any one organization.
The control function ensures that new plans must be created. Leaders often step up
as needed when a crisis or unexpected bump demands immediate action. All managers
perform all of these functions at different times, although a manager’s position or level
in the organization will affect how much of his or her time is spent planning as opposed
to leading or to controlling.

Types of Managers
Vertical Management

Vertical management, also called top-down management, refers to the various

levels of management within an organization. Managers at different levels are free to
focus on different aspects of the business, from strategic thinking to communicating
information to operational efficiency. During the nineteenth century and much of the
twentieth century, vertical management was highly structured with many layers of
management (as depicted by a pyramid). In industries where processes and conditions
are stable and where ongoing innovation is less critical, the vertical structure of
management can still be very efficient. Workers in labor-intensive industries such as
manufacturing, transportation, and construction need to follow established procedures
and meet specific goals. Everyone knows who is in charge and assumes the job they
do today will be the same next year or in five years.

Vertical management in a traditional organizational structure

A main disadvantage of vertical management is that it limits information flow from the
lower levels of the organization to the upper levels (like water, information flows
downhill easily). Without easy two-way communication, top management can become

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isolated and out of touch with how its plans affect core processes in the organization.
It also fosters vertical thinking. Vertical thinking refers to using traditional and
recognized methods to solve particular problems. It is the opposite of “thinking outside
of the box.” The digital age exposed the shortcomings of management that addressed
problems in formal or bureaucratic approaches at the expense of creativity and
innovation. Today, many organizations use “flatter” structures, with fewer levels
between the company’s chief executives and the employee base. Most organizations,
however, still have four basic levels of management: top, middle, first line, and team
leaders.

Top-Level Managers

As you would expect, top-level managers (or top managers) are the “bosses” of the
organization. They have titles such as chief executive officer (CEO), chief operations
officer (COO), chief marketing officer (CMO), chief technology officer (CTO), and chief
financial officer (CFO). A new executive position known as the chief compliance officer
(CCO) is showing up on many organizational charts in response to the demands of the
government to comply with complex rules and regulations. Depending on the size and
type of organization, executive vice presidents and division heads would also be part
of the top management team. The relative importance of these positions varies
according to the type of organization they head. For example, in a pharmaceutical
firm, the CCO may report directly to the CEO or to the board of directors.

Top managers are ultimately responsible for the long-term success of the organization.
They set long-term goals and define strategies to achieve them. They pay careful
attention to the external environment of the organization: the economy, proposals for
laws that would affect profits, stakeholder demands, and consumer and public
relations. They will make the decisions that affect the whole company such as financial
investments, mergers and acquisitions, partnerships and strategic alliances, and
changes to the brand or product line of the organization.

Middle Managers

Middle managers have titles like department head, director, and chief supervisor. They
are links between the top managers and the first-line managers and have one or two
levels below them. Middle managers receive broad strategic plans from top managers
and turn them into operational blueprints with specific objectives and programs for
first-line managers. They also encourage, support, and foster talented employees
within the organization. An important function of middle managers is providing
leadership, both in implementing top manager directives and in enabling first-line
managers to support teams and effectively report both positive performances and
obstacles to meeting objectives.

First-Line Managers

First-line managers are the entry level of management, the individuals “on the line”
and in the closest contact with the workers. They are directly responsible for making
sure that organizational objectives and plans are implemented effectively. They may

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be called assistant managers, shift managers, foremen, section chiefs, or office
managers. First-line managers are focused almost exclusively on the internal issues of
the organization and are the first to see problems with the operation of the business,
such as untrained labor, poor quality materials, machinery breakdowns, or new
procedures that slow down production. It is essential that they communicate regularly
with middle management.

Team Leaders

A team leader is a special kind of manager who may be appointed to manage a

particular task or activity. The team leader reports to a first-line or middle manager.
Responsibilities of the team leader include developing timelines, making specific work
assignments, providing needed training to team members, communicating clear
instructions, and generally ensuring that the team is operating at peak efficiency. Once
the task is complete, the team leader position may be eliminated and a new team may
be formed to complete a different task.

Management Roles

Roles and functions of managers in a top-down organizational structure

We have discussed the types (levels) of managers and some of their responsibilities
but not their specific activities. All managers must be comfortable with three main
types of activities or roles. To do their jobs, managers assume these different roles.
No manager stays in any one role all of the time, but shifts back and forth. These roles
are leadership (or interpersonal), informational, and decision making. They were
written about in detail in the 1970s by Henry Mintzberg, a professor at McGill University

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in Canada. His classifications are still one of the most studied descriptors of
management roles today.[1]

Leadership and Interpersonal Roles

Which type of manager spends more time in leadership activities? The short answer
is all effective managers display leadership characteristics. Leadership is the ability to
communicate a vision and inspire people to embrace that vision.

Top managers are often required to fulfill what Mintzberg described

as figurehead activities. They are the public face of the management team and
represent the business in legal, economic, and social forums.[2] Middle managers are
also leaders, although their focus may be more on interpersonal skills, such as
motivating employees, negotiating salaries, and encouraging innovation and creativity.
First-line managers lead both by example when they actively participate in the tasks
assigned to their workers and by modeling the policies and work ethics of the
organization.

Informational Roles

Informational roles involve the receiving and sending of information—whether as a

spokesperson, a mentor, a trainer, or an administrator. A top manager is a voice of
the organization and has to be aware that even personal opinions will reflect (for
better or worse) on the business. With the free flow of information on the Internet, it
is very difficult for top managers to separate their personal identities from their
corporate positions. For example, there was a consumer backlash in 2017 when Uber
CEO Travis Kalanick accepted a seat on President Trump’s economic advisory council.
Kalanick initially said that he was “going to use [his] position on the council to stand
up for what’s right.” He resigned a few days later in response to the protest.[3]

Middle managers must skillfully determine what information from top management
should be shared with others, how it should be interpreted, and how it should be
presented. Similarly, they must weigh the value of information they receive from first-
line managers and employees in order to decide what to forward to top management.
If transmitted information tends to be untrue or trivial, then the manager will be
viewed as a nonreliable source and his or her opinions discounted.

The informational role for first-line managers is primarily one of disseminating what
they have been given and helping the employees to see how their own contributions
further organizational goals. They have a responsibility to see that the employees
understand what they need to be successful in their jobs.

Decision Making Roles

All managers are required to make decisions, but managers at different levels make
different kinds of decisions. According to Mintzberg, there are four primary types of
management decision roles. These include the following:

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  Entrepreneur. The entrepreneurs in a firm are usually top-level managers. They
identify economic opportunities, lead the initiative for change, and make product
decisions.
 Disturbance handler. Top and middle managers will react to disturbances
(unexpected events) in the organization—whether internal or external. They will decide
what corrective actions should be taken to resolve the problems.
 Resource allocator. All levels of management will make resource allocation
decisions, depending upon whether the decision affects the entire organization, a
single department, or a particular task or activity.
 Negotiator. Depending on the effect on the organization, most negotiation is done
by top and middle-level managers. Top managers will handle negotiations that affect
the entire organization, such as union contracts or trade agreements. Middle-level
managers negotiate most salary and hiring decisions.[4]

To summarize, managers must play many roles. Some are better than others in
particular roles and will tend to be called on for those jobs. Putting a diverse
management team in place will ensure that the organization has enough managers to
meet most challenges.

History of Management
Scientific Management
Prior to the early 1900s, there was no management theory as we think of it today.
Work happened as it always had—those with the skills did the work in the way they
thought best (usually the way it had always been done). The concept that work could
be studied and the work process improved did not formally exist before the ideas of
Frederick Winslow Taylor.

The scientific management movement produced revolutionary ideas for the time—
ideas such as employee training and implementing standardized best practices to
improve productivity. Taylor’s theory was called scientific because to develop it, he
employed techniques borrowed from botanists and chemists, such as analysis,
observation, synthesis, rationality, and logic. You may decide as you read more about
Taylor that by today’s criteria he was not the worker’s “friend.” However, Taylor must
be given credit for creating the concept of an organization being run “as a business”
or in a “businesslike manner,” meaning efficiently and productively.

Frederick Taylor (1856–1915) is called the Father of Scientific Management.

Before the Industrial Revolution, most businesses were small operations, averaging
three or four people. Owners frequently labored next to employees, knew what they
were capable of, and closely directed their work. The dynamics of the workplace
changed dramatically in the United States with the Industrial Revolution. Factory
owners and managers did not possess close relationships with their employees. The

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workers “on the floor” controlled the work process and generally worked only hard
enough to make sure they would not be fired. There was little or no incentive to work
harder than the next man (or woman).

Taylor was a mechanical engineer who was primarily interested in the type of work
done in factories and mechanical shops. He observed that the owners and managers
of the factories knew little about what actually took place in the workshops. Taylor
believed that the system could be improved, and he looked around for an incentive.
He settled on money. He believed a worker should get “a fair day’s pay for a fair day’s
work”—no more, no less. If the worker couldn’t work to the target, then the person
shouldn’t be working at all. Taylor also believed that management and labor should
cooperate and work together to meet goals. He was the first to suggest that the
primary functions of managers should be planning and training.

In 1909, Taylor published The Principles of Scientific Management. In this book, he

suggested that productivity would increase if jobs were optimized and simplified. He
also proposed matching a worker to a particular job that suited the person’s skill level
and then training the worker to do that job in a specific way. Taylor first developed
the idea of breaking down each job into component parts and timing each part to
determine the most efficient method of working. Soon afterward, two management
theorists, Frank and Lillian Gilbreth, came up with the idea of filming workers to
analyze their motions. Their ideas have since been combined into one process (called
time and motion studies) for analyzing the most productive way to complete a task.

Scientific management has at its heart four core principles that also apply to
organizations today. They include the following:

 Look at each job or task scientifically to determine the “one best way” to perform the
job. This is a change from the previous “rule of thumb” method where workers devised
their own ways to do the job.
 Hire the right workers for each job, and train them to work at maximum efficiency.
 Monitor worker performance, and provide instruction and training when needed.
 Divide the work between management and labor so that management can plan and
train, and workers can execute the task efficiently.

Taylor designed his approach for use in places where the work could be quantified,
systemized, and standardized, such as in factories. In scientific management, there is
one right way to do a task; workers were not encouraged (in fact, they were forbidden)
to make decisions or evaluate actions that might produce a better result. Taylor was
concerned about the output more than worker satisfaction or motivation. Taylor’s work
introduced for the first time the idea of systematic training and selection, and it
encouraged business owners to work with employees to increase productivity and
efficiency. And he introduced a “first-class worker” concept to set the standard for
what a worker should be able to produce in a set period of time. Scientific
management grew in popularity among big businesses because productivity rose,
proving that it worked.

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Today, an updated version of his original theory is used by such companies as FedEx
and Amazon. Digital Taylorism is based on maximizing efficiency by standardizing
the tools and techniques for completing each task involved with a given job. Every
task is broken down to the smallest motion and translated into an exact procedure
that must be followed to complete that task. Because everyone is operating in the
same mechanistic way, it increases predictability and consistency while reducing
errors. It is relatively easy for managers to replace workers and retain the same
productivity. The criticism of this type of management approach is similar to that of
Taylor’s original theory: It reduces worker creativity; it requires management to
monitor all aspects of employee behavior; and it is unforgiving to workers who don’t
meet the standard.

Frank and Lillian Gilbreth

Two more pioneers in the field of management theory were Frank and Lillian Gilbreth,
who conducted research about the same time as Taylor. Like Taylor, the Gilbreths
were interested in worker productivity, specifically how movement and motion
affected efficiency.

As stated above, the Gilbreths used films to analyze worker activity. They would break
the tasks into discrete elements and movements and record the time it took to
complete one element. In this way, they were able to predict the most efficient
workflow for a particular job. The films the Gilbreths made were also useful for
creating training videos to instruct employees in how to work productively.

Taylor and the Gilbreths belonged to the classical school of management, which
emphasized increasing worker productivity by scientific analysis. They differed,
however, on the importance of the worker. Taylor’s emphasis was on profitability and
productivity; the Gilbreths were also focused on worker welfare and motivation. They
believed that by reducing the amount of motions associated with a particular task,
they could also increase the worker’s well-being. Their research, along with Taylor’s,
provided many important principles later incorporated into quality assurance and
quality control programs begun in the 1920s and 1930s. Eventually, their work led to
the science of ergonomics and industrial psychology. (Ergonomics is the study of
people in their operating environment, with the goal of increasing productivity and
reducing risk of work-related injury.)

Henry Gantt

Henry Gantt (1861–1919) was also an associate of Taylor. He is probably best known
for two key contributions to classical management theory: the Gantt chart and the
task and bonus system.

The Gantt chart is a tool that provides a visual (graphic) representation of what
occurs over the course of a project. The focus of the chart is the sequential

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performance of tasks that make up a project. It identifies key tasks, assigns an
estimated time to complete the task, and determines a starting date for each element
of a task. Gantt differentiated between a terminal element that must be completed
as part of a larger task. The related terminal elements together created what he called
the summary element.

An example of a simple Gantt chart

The Gantt chart has multiple benefits for project management:

 It aids in the breakdown of tasks into specific elements.

 It allows for the monitoring of projected timelines.
 It identifies which tasks are dependent upon a prior task or element and which are
independent and can be completed at any time.

Let’s apply the Gantt chart principles to a simple project. Imagine that you want to
paint a room. The summary element is the finished, painted room. The individual
terminal tasks might include calculating the square footage of the room, preparing the
walls, choosing the paint, purchasing the paint, putting down the drop cloth, taping
the windows, applying the paint, and final cleanup. Some of these elements are
independent, and some elements are dependent upon others. Purchasing the paint is
dependent upon knowing the square footage and choosing the paint color. Before
painting can start, the walls must be prepared and the paint must be purchased. But
purchasing the paint is not dependent upon preparing the walls—these tasks could be
started at the same time.

Gantt also promoted the task and bonus plan that modified Taylor’s “a fair day’s
pay for a fair day’s work” premise. Gantt wanted to establish a standard (average)
time for a piece of work or task. Then, if a worker took more that the standard time,
his pay was docked. But if he took less time, he was paid for the additional pieces of
work and a bonus of up to 20 percent more. Also known as the progressive rate
system, this plan was preferred by workers who were willing to work harder for
additional wages.

Although Gantt is not the best known of the classic management theorists, many of
his ideas are still being used in project management.

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Bureaucratic Management
Scientific management was concerned with individual tasks and how workers could do
those tasks most efficiently. Around the same time that Frederick Taylor was
developing his theory of scientific management, other theorists were considering
entire systems, such as government departments and large businesses, and trying to
figure out how to manage them more effectively. The most influential of these
theorists were Max Weber (pronounced Vay’- ber), and Henri Fayol. Between them,
they defined the characteristics of organizations and the functions of managers that
we still accept today.

Max Weber and Bureaucratic Theory

Weber was born in Germany in 1864 and grew up during the time when
industrialization was transforming government, business, and society. Weber was
interested in industrial capitalism, an economic system where industry is privately
controlled and operated for profit. Weber wanted to know why industrial capitalism
was successful in some countries and not in others. He believed that large-scale
organizations such as factories and government departments were a characteristic of
capitalist economies.

Weber visited the United States in 1904 to study the U.S. economy. It was here that
he observed the spirit of capitalism. He noted that capitalism in the United States
encouraged competition and innovation. He also realized that businesses were run by
professional managers and that they were linked through economic relationships. He
contrasted this with capitalistic practices in Germany where a small group of powerful
people controlled the economy. In Germany, tradition dictated behaviors. People were
given positions of authority based on their social standing and connections, and
businesses were linked by family and social relationships.

Weber was concerned that authority was not a function of experience and ability, but
won by social status. Because of this, managers were not loyal to the organization.
Organizational resources were used for the benefit of owners and managers rather
than to meet organizational goals. Weber was convinced that organizations based
on rational authority, where authority was given to the most competent and
qualified people, would be more efficient than those based on who you knew. Weber
called this type of rational organization a bureaucracy.

Weber identified six characteristics or rules of a bureaucracy. They are summarized in

the following table.

Six Rules of a Bureaucracy

Characteristic of the
Description
Bureaucracy

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 Each level controls the levels below and is controlled by the level
Hierarchical
above. Authority and responsibilities are clearly defined for each
Management Structure
position.

Tasks are clearly defined and employees become skilled by

Division of Labor specializing in doing one thing. There is clear definition of authority
and responsibility.

Employee selection and promotion are based on experience,

Formal Selection
competence, and technical qualification demonstrated by
Process
examinations, education, or training. There is no nepotism.

Management is separate from ownership, and managers are career

Career Orientation
employees. Protection from arbitrary dismissal is guaranteed.

Rules and regulations are documented to ensure reliable and

Formal Rules and
predictable behavior. Managers must depend on formal
Regulations
organizational rules in employee relations.

Rules are applied uniformly to everyone. There is no preferential

Impersonality
treatment or favoritism.

Weber thought bureaucracy would result in the highest level of efficiency, rationality,
and worker satisfaction. In fact, he felt that bureaucracy was so logical that it would
transform all of society. Unfortunately, Weber did not anticipate that each of the
bureaucratic characteristics could also have a negative result. For example, division of
labor leads to specialized and highly skilled workers, but it also can lead to tedium and
boredom. Formal rules and regulations lead to uniformity and predictability, but they
also can lead to excessive procedures and “red tape.” In spite of its potential problems,
some form of bureaucracy is the dominant form of most large organizations today.
The “pyramid” organizational structure, with responsibility split into divisions,
departments, and teams, is based on principles of bureaucracy. It is used by nearly
all large corporations. Weber’s idea that hiring and promotion should be based on
qualifications, not social standing, is built into U.S. labor laws.

Today, the term “bureaucracy” has taken on negative connotations. It is associated

with excessive paperwork, apathy, unresponsiveness, and inflexibility. This is
unfortunate, as Weber’s ideas have spread throughout the industrial world and
transformed the way organizations are run and structured. Your school is probably
structured as a bureaucracy. If you have shopped at a department store, it is a
bureaucracy, and your city government is also a bureaucracy.

Henri Fayol and Administrative Theory

Henri Fayol was born in Turkey in 1841. Although older than Weber, he witnessed
many of the same organizational developments in Europe that interested Weber. Fayol
was a mining engineer who became the head of a large mining company. He wanted
managers to be responsible for more than just increasing production. The story goes

15
that he came to this insight when a mine was shut down after a horse broke a leg and
no one at the mine had authority to purchase another. Fayol saw this as a direct failure
of management to plan and organize the work. Following this, Fayol began
experimenting with different management structures.

He condensed his ideas and experiences into a set of management duties and
principles, which he published in 1916 in the book General and Industrial
Management. Fayol incorporated some of Weber’s ideas in his theories. However,
unlike Weber, Fayol was concerned with how workers were managed and how they
contributed to the organization. He felt that successful organizations, and therefore
successful management, were linked to satisfied and motivated employees.

Fayol’s five duties of management were as follows:

 Foresight: Create a plan of action for the future.

 Organization: Provide resources to implement the plan.
 Command: Select and lead the best workers through clear instructions and orders.
 Coordinate: Make sure the diverse efforts fit together through clear communication.
 Control: Verify whether things are going according to plan and make corrections
where needed.

These duties evolved into the four functions of management: planning (foresight),
organizing (organization), leading (command and coordinate), and controlling
(control).

Fayol also proposed a set of fourteen principles that he felt could guide management
behavior, but he did not think the principles were rigid or exhaustive. He thought
management principles needed to be flexible and adaptable and that they would be
expanded through experience and experimentation. Some of Fayol’s principles are still
included in management theory and practice, including the following:

 Scalar chain: An unbroken chain of command extends from the top to the bottom of
the organization.
 Unity of command: Employees receive orders from only one superior.
 Unity of direction: Activities that are similar should be the responsibility of one
person.
 Division of work: Workers specialize in a few tasks to become more proficient.

Key Points

The work of Weber and Fayol forms the basis of management theory and practice still
in use today. Weber’s rules for bureaucracy govern most large organizations, from
multinational organizations to armies, hospitals, and universities. Fayol’s duties of
management help us understand the functions of managers in any type of
organization.

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Humanistic Management
As you’ve probably deduced from the name, humanistic management theory
places a great emphasis on interpersonal relationships. An earlier section discussed
scientific management and how it focused on productivity and reducing costs by
developing efficiency standards based on time and motion studies. Its critics took issue
with scientific management’s emphasis on quotas and standards that were the same
for all workers.

Very little evidence exists that the new quotas set for workers were unreasonable or
that laborers who could not meet that quota were routinely fired. But concern was
expressed by workers who complained about lower standards of workmanship and
lower wages under what was called the set-piece system. Labor unions began
addressing the growing fear of the workers that all but an elite few would soon be out
of work. Even the U.S. government got involved in the conflict between managers and
workers, calling on Frederick Taylor to testify before Congress about the aims of his
proposals. It was out of this context that a new management theory evolved that
examined social rather than economic factors. The humanistic approach looked to the
individual worker and group dynamics rather than to authoritative managers for
effective control.

Mary Parker Follett is now considered the “Mother of Modern Management.”

Mary Parker Follett’s teachings, many of which were published as articles in well-
known women’s magazines, were popular with businesspeople during her lifetime. But
she was virtually ignored by the male-dominated academic establishment, even
though she attended Radcliffe University and Yale and was asked to address the
London School of Economics. In recent years her writings have been “rediscovered”
by American management academics, and she is now considered the “Mother of
Modern Management.”

Follett developed many concepts that she applied to business and management,
including the following:

 A better understanding of lateral processes within organizational hierarchies. These

concepts were applied by DuPont Chemical Company in the 1920s in the first matrix-
style organization. A matrix organizational structure uses a grid rather than a pyramidal
system to illustrate reporting paths. An individual may report both to a functional
manager (such as sales or finance) and to a product manager.
 The importance of informal processes within organizations. This is related to the idea
of authority deriving from expertise rather than position or status. For example, an
informal group may form in an organization (during or outside of official work hours)
to socialize, form a union, or discuss work processes without management
overhearing.
 Noncoercive power sharing, which she called integration, to describe how power
operates in an effective organization. She wrote about the “group principle” that
characterized the whole of the organization, describing how workers and managers
have equal importance and make equal contributions.

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  Coining the term “win-win” to describe cooperation between managers and workers.
She also talked about empowerment and facilitation rather than control.
 Promoting conflict resolution in a group based on constructive consultation of equals
rather than compromise, submission, or struggle. This is known as the constructive
conflict concept.

Follett devoted her life’s work to the idea that social cooperation is better than
individual competition. In her 1924 book Creative Experience, Follett wrote “Labor and
[management] can never be reconciled as long as labor persists in thinking that there
is a [management] point of view and [management] thinks there is a labor point of
view. These are imaginary wholes which must be broken up before [management]
and labor can cooperate.”

Elton Mayo and the Hawthorne Experiments

The Hawthorne experiments were a series of studies that took place in a Western
Electric plant near Chicago during the late 1920s and early 1930s—the heyday of
scientific management. The original experiment was designed to isolate factors in the
workplace that affected productivity. The researchers alternatively offered and then
took away benefits such as better lighting, breaks, shortened work schedules, meals,
and savings and stock plans. But regardless of whether the change was positive or
negative, the productivity of the test subjects increased. For example, when lighting
was increased, productivity increased—as expected. What was not expected was that
as lighting was diminished, productivity still increased. It was not until the lighting
levels were near candlelight luminosity and the women could not see their work that
productivity decreased. At this point, an Australian-born sociologist named Elton Mayo
became involved.

Mayo visited the Hawthorne facility and advised the researchers to adjust how they
interacted with the workers (subjects). A new trial was started with a smaller group
of subjects. Again, benefits were both added and subtracted. Previous experiments
had gathered data from the subjects by asking simple “yes or no” questions to more
easily quantify their responses. But instead of “yes or no” questions, Mayo advised
the researchers to employ the nondirective interview method. This allowed the
researchers to be more informal and social and to develop relationships with the
workers. Mayo discovered that there were several reasons why productivity increased
despite the withdrawal of benefits, including the following:

 A feeling of group cohesion

 The friendlier attitude of the researchers (supervisors)
 The attention that being part of the study brought to the individuals

In interviews with the test subjects, it was discovered that the reason productivity
increased was because the subjects were simply “having more fun.” Mayo theorized
that workers were motivated more by social dynamics than by economic or
environmental factors.

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Mayo published his findings in 1933 in “The Human Problems of an Industrialized
Civilization.” In this treatise, Mayo predicted that a group with negative behaviors and
few social bonds would have very little chance of succeeding at the task. A group with
a high sense of mission and close team awareness would be the most likely to achieve
its goals. The remaining teams would have mixed degrees of success. The implication
for organizations, of course, is to foster groups with a sense of mission and strong
interpersonal relationships.

Key Points

The humanistic approach developed to balance the super-rationality and mechanics

of scientific management theories. It recognized the importance of the social needs of
the individual workers and the effects of group dynamics on efficiency and
productivity. It expanded the traditional list of workforce motivation beyond tangible
and economic factors. But it was not the end of management theory. Many more
interpretations and theories followed.

Current Developments in Management Practices

In the twenty-first century, organizations face many new challenges. Some people
would argue that society and the economy have changed so radically that the last
century’s management practices and theories are no longer relevant. The truth is
management has become more important than ever. Almost everything we do today
as individuals or organizations requires us to interact with large-scale institutions, such
as government agencies, banks, health-care providers, insurance companies, school
systems, universities, online retailers, and technology service providers. How has
management theory and practice evolved to manage this new organizational and
business environment? Interestingly, it has become both more specific and more
general.

Forces Shaping Management

Several forces are significantly shaping management practices today, including the
pace of change, technology, globalization, diversity, and social expectations. Let’s look
at each of these in more detail.

The Pace of Change

Managers must understand that society, politics, the economy, and technology are
changing at an unprecedented rate. In 2001, Ray Kurzweil proposed that in the
twenty-first century our rate of progress would double every decade.[1] This means
that over the next one hundred years, we will experience changes that would have
taken twenty thousand years in the past. This presents a vexing problem for
management. On one hand, managers need predictability and stability to develop and

19
implement plans effectively. On the other hand, they need adaptability and flexibility
to respond to opportunities. How does management provide both stability and
flexibility?

Technology

The primary factor driving change is the development of computer and information
technology. Fifty years ago, almost no one knew about computers except from science
fiction books and movies. Today nearly everyone uses a smartphone with more power
than the computers that guided rockets to the moon in 1969. Many of the routine jobs
analyzed by Frederick Taylor and the Gilbreths are now automated, done by computers
and robots. It has been estimated that robots will perform 50 percent of current jobs
within twenty years. What is the role of management when machines instead of
people are doing work?

Globalization

Globalization refers to the increasing ease of flow between countries. It includes

economic, political, social, and cultural interactions. In particular, economic
globalization is creating one global marketplace, making it easier to conduct
business across borders. Globalization has allowed companies to perform many
manufacturing jobs in low labor-cost countries. As a result, the United States has
shifted from a manufacturing economy to a service and information economy.
Consider the following comparison:

AT&T vs. Google

MOST VALUED COMPANY IN THE MARKET NUMBER OF

YEAR
U.S. VALUE EMPLOYEES

American Telegraph and Telephone

1964 $267 billion 759,000
(AT&T)

2015 Google $370 billion 55,000

This table shows that technology workers today produce nearly twenty times more
value for a company than manufacturing workers did in the past. How does
management lead and control this new knowledge worker?

Diversity

Since the turn of the century, the U.S. workforce has become more diverse in almost
all dimensions, including race, gender, ethnicity, and age. In 1950, women made up
about 30 percent of the workforce; in 2015 women made up about 47 percent of the
workforce. By 2024, ethnic and racial minorities are expected to comprise 40 percent
of the workforce. And for the first time, there are now five generations of workers in
the workforce, from veterans born between 1928 and 1946 to iGens born after 1994.

20
This diversity provides a tremendous resource to organizations. People from different
backgrounds have unique perceptions, experiences, and strengths. This can promote
creativity and innovation that stimulates unique problem solving. But it also brings
different expectations and norms about behavior and attitudes. How can management
capitalize on the advantages of diversity while accommodating differences?

Social Expectations

From the start of the Industrial Revolution until the middle of the twentieth century,
management could look inward to determine how to best use resources to meet
organizational goals. Although government passed laws to address the worst abuses,
organizations primarily interacted with the external environment through the
marketplace. The expectation of public, private, and civic organizations was that they
would provide the goods and services society required. This attitude also began to
change around the middle of the twentieth century as organizations, especially
businesses, were viewed as social, as well as economic, actors. The positive and
negative impacts of organizations on the wider environment—alongside the products
and services they provided—were also considered outputs of production. Now
managers have to satisfy not only their customers but also a wider set of stakeholders,
from government agencies to community groups. How does managing stakeholders
get incorporated into management theory and practice?

Current Developments in Management

We don’t yet have the answers to most of these questions. No “grand theories” like
those we have discussed previously in this module have emerged to address these
new challenges. That is not to say that management has not responded; it has, in two
ways:

 Management has become more specific with the formation of different disciplines.
Managers now focus on specific aspects of organizational management: operations
management, financial management, marketing management, human resource
management, etc. By limiting the number of factors and issues they must deal with,
managers can develop practices that address the specific issues they face in their
discipline.
 Management has also become more general. Managers are not provided with an
instructional manual that tells them how to manage. Instead, they are given
a toolbox of different theories and practices. Effective managers need to know what
tool to use and how to use it in different circumstances.

Let us consider some current developments in management.

Operations Management

Operations management is concerned with all of the physical processes involved in

producing and delivering goods and services to customers. Operations management
is the “guts” of a manufacturing or service company. It is concerned with all aspects
of converting materials and labor into goods and services as efficiently as possible.

21
Operations managers must work closely with every department in the business to
ensure that products are manufactured as efficiently as possible. The same forces that
are transforming organizations and management are transforming all aspects of
operations management, from design to production.

Operations managers are involved with the initial product design to incorporate
features that facilitate production. Sometimes small changes that don’t affect function,
such as the number of different types of screws used in an assembly, can have a
significant impact on production costs. Today, many manufacturing firms are using
computer-aided design that will translate design plans directly into instructions for
computer-controlled machinery and robotics. Operations managers also manage
the supply chain to find the best sources for high-quality materials and supplies at
the lowest cost. Operations managers have become international operations
managers, as supplies come from anywhere in the world and manufacturing can be
done anywhere in the world.

Operations managers are also responsible for materials inventory. This consists of
materials that will be used in production or for performing services. Some amount of
inventory is needed to prevent delays in production or servicing. The worst thing that
can happen to an auto manufacturer is to have an assembly line stop because of a
shortage of a basic part, such as spark plugs or tires. On the other hand, maintaining
inventories is a significant cost for companies, so they want to minimize the amount
of inventory on hand. Operations managers must balance the need for maintaining
sufficient inventory with the need for reducing costs. They now schedule deliveries
and manage inventory using techniques such as just-in-time to optimize the amount
of inventory on hand. This frequently involves developing long-term, cooperative
partnerships with suppliers. Inventory management is a huge concern for Amazon, for
instance, which maintains an inventory of millions of products. It has developed
specialized techniques to maintain enough inventory to avoid lost sales without holding
costly excess inventory.

All of these activities support operation management’s main function: the

manufacturing of products or the delivery of services. Operations managers must be
concerned not only with cost and quantities but also be responsible for delivering
quality. They design and supervise production processes and service delivery using
modern methods such as lean manufacturing and Six Sigma. Six Sigma is a systematic
set of practices used to reduce defects or complaints. The goal of Six Sigma is fewer
than 3.4 defects per one million parts produced, transactions performed, or services
delivered.

Finally, operations management works with marketing and sales to make sure goods
and services are delivered where and when they are needed. They use sophisticated
technology, such as point-of-sale data collections and integrated ordering systems,
to forecast demand for products and services. This information is feedback through
the entire system, from ordering materials and supplies to scheduling production.
Operations management is responsible for making sure everything and everyone is
working together to deliver what the customer expects.

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Systems Approach to Management

Organizations operate as open systems

A systems approach to management recognizes that organizations are open

systems that interact with and are dependent on their environment. In a continual
process, they obtain necessary inputs, transform the inputs into finished goods and
services, and deliver their outputs to the market. The organization gets feedback from
the market in two forms. First, it receives revenue. The revenue provides finances to
support the organization and to acquire additional inputs needed for production.
Revenue can also finance organizational improvements, such as upgraded equipment,
development of new or improved products and services, or expansion of facilities. Any
revenue that is not reinvested in supporting or improving the organization can be
disbursed to owners as dividends.

The second form of feedback is information on how well the organization is doing.
Organizations get direct information from customer surveys, customer service
complaints, and social media. Starbucks, for example, started a customer blog to get
feedback on the customer’s experience. Based on the results, it made changes to
speed up service even though that increased cost.

The systems approach to management focuses on performance of the whole

production process, including the customers’ process. The process is usually split by
specialties within the company, and each specialist tries to optimize his contribution.
But more efficiency for one function may cause delays or bottlenecks elsewhere in the
process, hurting overall production. The systems approach analyzes these interactions
and makes decisions to improve overall production.

The system model also shows that companies are open to environmental influence.
Factors such as political instability, economic conditions, consumer tastes,
demographics, legal requirements, and the physical environment all can affect an
organization. Successful organizations must be able to detect, understand, and
respond effectively to changes in the external environment. These factors are
discussed in more detail in the following module.

23
Information Management
Data security has become a critical element of systems management.

If operations management is the guts of a business, information management is the

nervous system. Organizations today depend on the availability and accuracy of
information to make decisions at every level. Information management is concerned
with the collection, preservation, storage, processing, and delivery of information. The
purpose of information management is to make sure information is available to the
right people at the right time in a form that they can apply.

Information management is not a new concept. Businesses and organizations of all

sorts have always required information about their internal and external conditions to
manage effectively. Although the need for information is not new, the volume of
information available, the means of gathering information, and the methods of
processing information into useful knowledge have all been transformed.

A recent development in information management is the use of big data. Big

data refers to incredibly large amounts of data available to organizations today and
how that data can be analyzed for useful information. Big data comes from a variety
of sources, including social media, business transactions, government interactions,
and education and health experiences, to name a few. It also comes in a variety of
formats from structured, numeric data to unstructured text data, social media, and
telephone calls.

Methods are being developed to mine this data to extract useful information about
individual behaviors. An example of using big data that went viral a few years ago was
how Morton’s Steak House delivered a steak dinner to a man getting off a plane at
Newark airport. The man had tweeted: “Hey @Mortons – can you meet me at newark
airport with a porterhouse when I land in two hours?” Morton’s continually mines social
media for use of its name. Its data analytics captured the tweet, identified the man’s
name, determined that he was a frequent customer (and a frequent tweeter), and
determined what his favorite meal was. Within two hours, Morton’s had a tuxedo-clad
waiter deliver the meal as the man got off the plane.[2] Think of the amount of data
that had to be analyzed to make this happen—the amount of information on social
media, the number of customers Morton’s has served, and the number of meals that
have been ordered. This is more than finding a needle in a haystack. It is more like
finding a specific pebble in a mountain of gravel.

Contingency Management

Unlike the topics discussed earlier, contingency management is not a specific

function. It is a general approach to management practice that basically says there is
no one best way to manage.

The management theories we discussed earlier had implicit assumptions that

management concepts were universal. That is, what worked in one organization would
work in others. Certainly some modifications would be made for specific
circumstances, but the principles of scientific management and bureaucracy were

24
assumed to apply in any organization. The contingency view rejects this assumption.
In contingency management, every situation is considered unique. Managers must
adapt theory and practice to match the situation by identifying the key contingencies,
or factors, in the situation.

Contingencies might include the industry in which the company operates. For example,
an effective organizational structure for an Internet company such as Google would
not be the same as a manufacturing company such as General Motors. Another
contingency factor is the country in which the company operates. US management
methods do not work well in France. The type of employee is also a contingency
factor—incentive systems that work for manual laborers do not work for knowledge
workers. Effective managers need to be able to interpret the contingencies of a
situation to determine which approach would be more effective.

Key Points

Conditions are much different now than they were a hundred years ago when many
management theories were developed. However, many of the ideas that originated
then are still relevant. Rather than abandon years of management experience,
managers today need to adapt and modify theory and practice to meet today’s
conditions. Understanding the historical concepts in management provides a
foundation for developing new practices and methods.

PLANNING
Pros and Cons of Planning

Planning is the process of setting goals and defining the actions required to achieve
the goals.

Planning begins with goals. Goals are derived from the vision and mission statements,
but these statements describe what the organization wants to achieve, not necessarily
what it can achieve. The organization is affected both by conditions in its external
environment—competitors, laws, availability of resources, etc.—and its internal
conditions—the skills and experience of its workforce, its equipment and resources,
and the abilities of its management. These conditions are examined through a process
called a SWOT analysis. (SWOT will be discussed in greater detail in another module.)
Together, the vision and mission statements and the results of the situation analysis
determine the goals of the organization. This idea is illustrated by the figure that
follows.

25
Using the mission, vision, and values of a company, along with situation analysis, can help
the company set goals.

The rest of the planning process outlines how the goals are to be met. This includes
determining what resources will be needed and how they can be obtained, defining
tasks that need to be done, creating a schedule for completing the tasks, and providing
milestones to indicate progress toward meeting goals. The planning process will be
discussed in more detail in the following section.

Benefits of Planning

In today’s chaotic environment, planning more than a few months in advance may
seem futile. Progress, however, is rarely made through random activity. Planning does
provide benefits that facilitate progress even when faced with uncertainty and a
constantly changing environment. Some of the benefits include the following:

 Planning provides a guide for action. Plans can direct everyone’s actions toward
desired outcomes. When actions are coordinated and focused on specific outcomes
they are much more effective.
 Planning improves resource utilization. Resources are always scarce in
organizations, and managers need to make sure the resources they have are used
effectively. Planning helps managers determine where resources are most needed so
they can be allocated where they will provide the most benefit.
 Plans provide motivation and commitment. People are not motivated when they
do not have clear goals and do not know what is expected of them. Planning reduces
uncertainty and indicates what everyone is expected to accomplish. People are more
likely to work toward a goal they know and understand.
 Plans set performance standards. Planning defines desired outcomes as well as
mileposts to define progress. These provide a standard for assessing when things are
progressing and when they need correction.
 Planning allows flexibility. Through the goal-setting process, managers identify
key resources in the organization as well as critical factors outside the organization
that need to be monitored. When changes occur, managers are more likely to detect
them and know how to deploy resources to respond.

26
Drawbacks to Planning

Planning provides clear benefits to organizations, but planning can also harm
organizations if is not implemented properly. The following are some drawbacks to
planning that can occur:

 Planning prevents action. Managers can become so focused on planning and trying
to plan for every eventuality that they never get around to implementing the plans.
This is called “death by planning.” Planning does little good if it does not lead to the
other functions.
 Planning leads to complacency. Having a good plan can lead managers to believe
they know where the organization is going and how it will get there. This may cause
them to fail to monitor the progress of the plan or to detect changes in the
environment. As we discussed earlier, planning is not a one-time process. Plans must
be continually adjusted as they are implemented.
 Plans prevent flexibility. Although good plans can lead to flexibility, the opposite
can also occur. Mid- and lower-level managers may feel that they must follow a plan
even when their experience shows it is not working. Instead of reporting problems to
upper managers so changes can be made, they will continue to devote time and
resources to ineffective actions.
 Plans inhibit creativity. Related to what was said earlier, people in the organization
may feel they must carry out the activities defined in the plan. If they feel they will be
judged by how well they complete planned tasks, then creativity, initiative, and
experimentation will be inhibited. Success often comes from innovation as well as
planning, and plans must not prevent creativity in the organization.

The Planning Cycle

Organizations have goals they want to achieve, so they must consider the best way
of reaching their goals and must decide the specific steps to be taken. However, this
is not a linear, step-by-step process. It is an iterative process with each step
reconsidered as more information is gathered. As organizations go through the
planning, they may realize that a different approach is better and go back to start
again.

Remember that planning is only one of the management functions and that the
functions themselves are part of a cycle. Planning, and in fact all of the management
functions, is a cycle within a cycle. For most organizations, new goals are continually
being made or existing goals get changed, so planning never ends. It is a continuing,
iterative process.

In the following discussion, we will look at the steps in the planning cycle as a linear
process. But keep in mind that at any point in the process, the planner may go back
to an earlier step and start again.

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Stages in the Planning Cycle

The stages in the planning cycle

Define objectives

The first, and most crucial, step in the planning process is to determine what is to be
accomplished during the planning period. The vision and mission statements provide
long-term, broad guidance on where the organization is going and how it will get
there. The planning process should define specific goals and show how the goals
support the vision and mission. Goals should be stated in measurable terms where
possible. For example, a goal should be “to increase sales by 15 percent in the next
quarter” not “increase sales as much as possible.”

Develop premises

Planning requires making some assumptions about the future. We know that
conditions will change as plans are implemented and managers need to make
forecasts about what the changes will be. These include changes in external conditions
(laws and regulations, competitors’ actions, new technology being available) and
internal conditions (what the budget will be, the outcome of employee training, a new
building being completed). These assumptions are called the plan premises. It is
important that these premises be clearly stated at the start of the planning process.
Managers need to monitor conditions as the plan is implemented. If the premises are
not proven accurate, the plan will likely have to be changed.

Evaluate alternatives

There may be more than one way to achieve a goal. For example, to increase sales
by 12 percent, a company could hire more salespeople, lower prices, create a new
marketing plan, expand into a new area, or take over a competitor. Managers need to
identify possible alternatives and evaluate how difficult it would be to implement each

28
one and how likely each one would lead to success. It is valuable for managers to
seek input from different sources when identifying alternatives. Different perspectives
can provide different solutions.

Identify resources

Next, managers must determine the resources needed to implement the plan. They
must examine the resources the organization currently has, what new resources will
be needed, when the resources will be needed, and where they will come from. The
resources could include people with particular skills and experience, equipment and
machinery, technology, or money. This step needs to be done in conjunction with the
previous one, because each alternative requires different resources. Part of the
evaluation process is determining the cost and availability of resources.

Plan and implement tasks

Management will next create a road map that takes the organization from where it is
to its goal. It will define tasks at different levels in the organizations, the sequence for
completing the tasks, and the interdependence of the tasks identified. Techniques
such as Gantt charts and critical path planning are often used to help establish and
track schedules and priorities.

Determine tracking and evaluation methods

It is very important that managers can track the progress of the plan. The plan should
determine which tasks are most critical, which tasks are most likely to encounter
problems, and which could cause bottlenecks that could delay the overall plan.
Managers can then determine performance and schedule milestones to track progress.
Regular monitoring and adjustment as the plan is implemented should be built into
the process to assure things stay on track.

The Planning Cycle: Essential Part of Running a Business

Following the planning cycle process assures the essential aspects of running a
business are completed. In addition, the planning process itself can have benefits for
the organization. The essential activities include the following:

 Maintaining organizational focus: Defining specific goals requires managers to

consider the vision, mission, and values of the organization and how these will be
operationalized. The methods and selected goals can demonstrate that the vision,
mission, and values statements are working documents that are not just for show but
prescribe activities.
 Encouraging diverse participation: Planning activities provide an opportunity for
input from different functions, departments, and people. Some organizations establish
planning committees that intentionally include people from diverse backgrounds to
bring new perspectives into the planning process.

29
  Empowering and motivating employees: When people are involved in developing
plans they will be more committed to the plans. Allowing diverse input into the planning
cycle empowers people to contribute and motivates them to support the outcomes.

Types of Plans and Common Planning Tools

Long-term and Short-term Plans

When you decided to attend college, you had a long-term plan in mind. You would
spend the next four or five years preparing to become a teacher, a businessperson,
or perhaps an ecologist. Or, you may have committed two or three years to become
a nurse, a medical technician, or an electrician. Your long-term goal was necessary to
make sure that your daily activities would help you achieve your desired outcome. You
could have just enrolled in a school and taken classes that looked interesting, but then
where would you be in four years? You most likely would not have taken the courses
required to qualify you for the job you want. An organization, especially a business, is
not so different. It also needs a long-term plan to make sure that the daily activities
of its employees are contributing to the mission and value statements of the
organization.

A long-term plan is crucial to the ultimate success of the organization. A long-term

plan for many businesses, such as construction, hospitality, or manufacturing,
generally extends four to five years into the future. For other faster-changing
industries, especially technology companies, a long-term plan may only look two or
three years into the future. After that, it becomes too difficult to predict the future
with any degree of certainty.

Top management is responsible for the development of the long-term plan. It is up to

the CEO to make sure that changing conditions (both external and internal) are
reflected in the organization’s long-term plan. The larger and more complex the
organization, the larger and more complex the long-term plan will be to include all of
the individual departments and functions.

Short-term plans generally allocate resources for a year or less. They may also be
referred to as operational plans because they are concerned with daily activities and
standard business operations. Like long-term plans, short-term plans must be
monitored and updated, and this is the role of middle- and first-level management.
Different managerial levels have responsibility for implementing different types of
short-term plans. For example, a department manager may be comfortable
implementing an operational plan for the entire year for her department. A marketing
manager may direct a three- to four-month plan that involves the introduction of a
new product line. A team leader may only be comfortable planning and implementing
very specific activities over the period of a month.

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Figure 1. Organizational Plan Hierarchy: The figure above summarizes the relationship
between these types of management planning

Operational Plans: Standing Plans and Single-Use Plans

An operational plan describes the specific goals and objectives and milestones set
by an organization during a specific period. (Objectives are specific tasks undertaken
to meet broader goals. A goal may be to increase product sales by 3 percent; an
objective may be to hire two additional sales agents.) It will allocate the tangible
resources (labor, equipment, space) and authorize the financing necessary to meet
the objectives of the plan. There are two types of operational plans: standing plans
and single-use plans.

 Standing plans are plans designed to be used again and again. Examples include
policies, procedures, and regulations. The advantage of standing plans is that they
foster unity and fairness within an organization and help to support stated
organizational values. Managers don’t have to make unique decisions already
addressed by various organizational policies. Standing plans also save time because
managers know in advance how to address common situations. Finally, standing plans
aid in the delegation of work, because employees are already familiar with the
procedures and regulations followed by the organization.
 Single-use plans refer to plans that address a one-time project or event. The length
of the plans varies, but the most common types are budgets and project schedules.
The obvious advantage of a single-use plan is that it can be very specific in how it
addresses the needs of a particular situation.

Policies, Procedures, and Regulations

As stated above, the most common examples of standing use plans are policies,
procedures, and regulations. These plans are usually published and handed out to
new hires or posted on the organization’s employee website for easy reference.

 Policies provide broad guidelines for the smooth operation of the organization. They
cover things like hiring and firing, performance appraisals, promotions, and discipline.

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 For example, a company may have a policy to encourage recycling in the workplace
or a policy that prohibits personal cell phone use in manufacturing areas.
 Procedures are steps to be followed in established and repeated operations.
Procedures should reflect the policies of the company and support the organization’s
long-term goals. Procedures may also detail steps that should be followed to ensure
employees are disciplined in a fair and unbiased manner. For example, if employees
feel that other employees interacted with them in an inappropriate manner, then they
should follow the procedure for bringing this to management’s attention. Or, the
organization may establish procedures for what to do in cases of emergencies, such
as a fire or toxic spill.
 Regulations refer to what is allowable and what is strictly prohibited in an
organization. In other words, a regulation is a kind of rule that addresses general
situations. In many hospitals and laboratories, for example, there are safety
regulations against wearing open-toed shoes or shoes with slippery soles. State and
federal governments frequently issue regulations for industries that impact public
safety.

The Role of Budgets in the Planning Process

Refer back to Figure 1 and locate the box labeled “Budgets.” Notice that budgets are
examples of single-use, short-term plans. An organization’s budget is a document that
details the financial and physical resources allocated to a project or department. They
are single-use plans because they are specific to a particular period or event. For
example, departments may have a hiring budget that allocates a certain number of
positions and a total salary value for a calendar year. Next year, that budget may be
the same or it may change, depending upon conditions in the organization. But it
cannot be assumed that the budget will stay the same. Zero-based budgets look at
each budget as if it were brand new and require managers to justify each of the
budgeted items. This process ensures that budgets are closely tied to the latest
organizational goals.

Managers deal with a variety of budget types:

 Financial budgets include balance sheets, income/expense statements, and statements

of cash flow.
 Operating budgets project revenue against expenditures.
 Nonmonetary budgets allocate resources such as labor, workspace, and equipment
use.
 Fixed budgets are budgets that do not change with increased or decreased activities,
such as sales revenue. They are also called static budgets.
 Flexible budgets will vary with the level of activity (grow or be reduced according to
changing conditions).

Budgets are a very important planning tool, and organizations take their budgeting
process very seriously. Some managers spend most of their time making sure that the
expenses and projects they control do not exceed authorized spending limits. To
routinely “go over budget” is a sign of a poor planning—and planning is one of the
basic management functions. In some cases, to routinely come in under budget is also

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viewed negatively, because with more accurate budgeting those committed resources
could have been allocated to other projects. Often, projects compete for limited
resources so the best budget is the one that most closely projects actual expenses
and revenue.

Forecasting, Scenario Planning, and Contingency Planning

Forecasting is simply making a prediction about the future. Anyone can make a
forecast—the trick is to be right or close enough so that important planning decisions
can be based on the forecast. Some “botched” forecasts by business leaders follow:

“This telephone has too many shortcomings to be seriously considered as a means of

communication.” – President of Western Union, 1876

“There is a world market for maybe five computers.” – Chairman of IBM, 1943

“Television won’t be able to hold on to any market it captures after the first six months.
People will soon get tired of staring at a plywood box every night.” – Darryl Zanuck,
president of 20th Century Fox, 1946

“There is no chance that the iPhone is going to get any significant market share.” –
Microsoft CEO Steve Ballmer, 2012

Scientific forecasting is using mathematical models, historical data, and statistical

analysis to make predictions about what will happen in the future. Businesses
use short-term forecasting all the time when creating budgets and anticipating
expenses. Mostly, these forecasts are based on what they sold and what they paid
providers in the recent past. Long-range forecasting requires both quantitative
numerical data and qualitative data based on expert opinions and insights. Often,
organizations will create a number of long-range forecasts based on “best-case” and
“worst-case” scenarios. They will then make plans on how they would respond to each
situation and, as time goes on, they will update and adapt the long-term plan.

One other important type of planning is the contingency plan. A contingency plan
describes what will happen in a possible—but not expected—situation. Usually,
contingency plans are designed to handle emergency situations. For example, airports
have contingency plans for plane crashes on takeoffs or landings, and popular tourist
attractions have begun developing contingency plans in case of terrorist threats.

An example of the critical importance of contingency planning involves the Deepwater

Horizon oil spill in the Gulf of Mexico in 2010. Eleven people lost their lives and
seventeen were badly injured when an explosion on an oil rig released almost five
million barrels of oil into the Gulf of Mexico. It was the worst marine oil spill in history,
and its effects were even more devastating because BP Oil did not have contingency
plans in place for that kind of disaster. The spill went on for months while BP and its
partners tried to figure out how to shut off the oil’s source. Even though BP spent $62
billion on the response and cleanup activities, there was extensive damage to marine

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and wildlife habitats and fishing and tourism industries. Getting employees involved in
planning may help prevent tragedies similar to this one.

Management By Objectives (MBO) and SMART Goals

Management by objectives, or MBO for short, is a tool that can be used to improve
the performance of an organization by creating clearly defined objectives agreed upon
by management and by the employees. Peter Drucker, a prolific author and a leader
in management theory, coined the phrase “management by objectives” in 1954. The
intent of MBO is to improve employee motivation and organizational communication
by focusing on aligning individual goals to corporate objectives. In MBO, a manager
and an employee do the following:

 jointly set goals and objectives for a period.

 together plan tasks that the employee performs with the support of management.
 agree on the standards for evaluating performance of the task.
 regularly meet to review progress.

MBO must be a top-down management tool, because organizational goals are

cascaded down to create the various operational levels. Drucker showed that as long
as employee goals support short-term and long-term organizational objectives, MBO
will help move the company forward. Critics, however, charge that managers using
the approach focus more on creating goals than on helping the employee achieve
them.

SMART goals are a technique often paired with MBO. SMART stands for specific,
measurable, achievable, realistic, and time-bound. The SMART goal paired well with
MBO theory by

1. Providing incentives to employees by rewarding them when they meet key goals.
2. Empowering employees by allowing them to set their own objectives for achieving
their individual goal.
3. Communicating honestly about what went well and what did not, and focusing on
developing the missing skills.

The chart that follows summarizes the most important characteristics of each part of
a SMART goal.

SMART Goal Criteria

Objectives must be specific enough to avoid confusion. They

SPECIFIC should identify what the objective is in terms of action to be
done.

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 The objective should be numerical and quantifiable. Avoid term
MEASURABLE
such as some, most, many, and enough.

An objective should be able to be met with reasonable effort.

ACHIEVABLE They should not be the source of undue physical or emotional
stress.

The objective should contribute in some way to the success of

RELEVANT
the organization as well as the development of the employee.

Objectives should come with firm dates—not “soon” or “in a

TIME-BOUND
timely manner.”

For example, let’s say you set a goal to become a recognized department expert in a
subject relevant to advancement within the organization. How could you turn this into
a SMART goal?

 Specific: I will learn about the liabilities of six major nonprofit organizations.
 Measurable: I will make presentations to the advertising, grant writing, and
donor/client committees.
 Achievable: I will interview one nonprofit organization every week for six weeks.
 Relevant: This expertise will fill a current knowledge gap in the new client
department.
 Time-bound: I will fulfill this goal before my next scheduled annual performance
evaluation.
Benchmarking

The last planning tool we’ll discuss in this section is benchmarking. You may think that
your organization has an excellent long-term plan and effective short-term plans, but
how do you really know? Even if your company is showing growth, is it growing as
fast as your competitor? A benchmark is a standard used for comparison
purposes. Benchmarking is looking at performance levels outside of your
organization, or sometimes across departments or divisions inside your organization,
to evaluate your own performance. You can benchmark using several different criteria:

 Industry: Let’s say you produce technology widgets. Benchmarking can answer
questions about how your company is doing in comparison to other tech widget
makers. This approach is a type of competitive benchmarking.
 Geography: Your state is showing a lot of economic growth. You can use
benchmarking to determine if your company is sharing in that wealth or
underperforming compared to the regional economy.
 Organization: You are a small business owner. Benchmarking can help answer
questions about whether the economic climate is friendlier to big business than it is to
small business, or whether nonprofits are failing whereas for-profits are succeeding.

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  Processes: You can use benchmarking to determine what processes other firms are
using that are helping or hurting them. Are there lessons to be learned from them?
This is also called strategic benchmarking or process benchmarking.
 Innovation: Benchmarking can help you discover what partners or techniques your
competitors are using that are missing in your organization. Are there functions in your
products or programs that should be eliminated and others that could be added?
Functional benchmarking is key in technology-related organizations.

Internal benchmarking means comparing a department’s performance with

another department in your company or branch within the same larger organization.
The important thing about benchmarking is that it gives you a standard against which
to compare your progress.

Key Points

Planning tools are designed to help you determine goals, guide behaviors within the
organization, and help you evaluate your performance against external benchmarks.
Plans are essential, but good managers know to be flexible when conditions demand.

STRATEGIC MANAGEMENT
The Role of Strategy in Management
Businesses do not exist in isolation. They exist as one element of a complex situation
that comprises the social, political, economic, and competitive environment. A firm’s
strategy is a comprehensive plan to achieve its goals in the face of these conditions.
Strategy defines how a firm will achieve long-term success. Determining the strategy
is a critical decision for management because it involves a significant commitment of
resources and, once initiated, it is very difficult and costly to change.
In the movie The Godfather II, Michael Corleone says: “My father taught me many
things. He taught me: keep your friends close, but your enemies closer.” This applies
in strategy, as well. A company’s friends are its customers. Strategy must keep the
company aligned with its customers’ needs. Its enemies are its competitors.
Competitors are firms that provide similar products or services and try to attract the
same customers. Competitors are likely to have similar business goals in terms of
sales, profitability, and market share. To succeed and achieve its goals, a firm has to
“beat” its competitors by constantly striving to improve its offerings to customers and
to be better than the competitors’ alternatives.
In this section we look at how companies address competitors in their strategy.

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Competitive Advantage
In a competitive environment, businesses try to stand out from their competitors.
Consider the following car companies. Is there a particular characteristic or quality
that you associate with each of them?
 Porsche
 Volvo
 Hyundai
 Toyota
 Ford
Companies try very hard to create a perception that they are different from their
competitors. If you are looking for a high performance sports car you probably won’t
go to a Ford dealer. But if you are looking for a durable truck you wouldn’t go to a
Porsche dealer. Companies strive to provide a product or service that is distinct, or
differentiated, in some way from their competitors. When customers perceive the
distinction as being valuable, they will prefer to purchase the business’s product over
a competitor’s products. This is called a competitive advantage. Competitive
advantage means that the business outperforms its rivals in the market because
customers prefer its products or services.
Businesses can achieve competitive advantages in a number of different ways. Their
product may provide superior performance; it may be of higher quality; it may be
more durable; or it may have unique features. The businesses may provide better
customer service or have better availability. They may advertise and promote their
products better, or they may offer their products at a lower price. The best businesses
provide a combination of unique attributes that competitors cannot match.

Creating Competitive Advantage

Businesses create competitive advantage by doing some things better than their
competitors. For example, look at the companies in the chart that follows. By doing
some things much better than competitors, the businesses are able to create a
valuable distinction for customers.

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Creating Competitive Advantage

Company How Company Creates Distinction

Research and development: creates new or improved products with

Apple
leading-edge technology

Nike Marketing: uses celebrity endorsements to create a powerful brand image

Supply chain management: created a highly integrated system to keep

Walmart
supplier costs low and keep products that customers buy on the shelf

Zappos Customer service: strives to deliver “Wow!” in the customer’s experience

UPS Logistics: integrates package delivery with customer needs

Zara Rapid responsiveness: quickly gets the latest styles into stores

It may seem that the best way to create competitive advantage is to

do everything well. Unfortunately, this is not possible. Generally, resources are limited
and it would be much too costly to try to excel at everything. Businesses that try to
do too many things well often don’t succeed at doing anything extremely well and
don’t produce distinction. This is referred to as being “stuck in the middle.”

Creating competitive advantage is not the only goal of business. Companies also must
be able to maintain their competitive advantage. When competitors see a company is
doing something that customers value, they will try to copy it. Some things can be
copied quickly. For example, when American Airlines introduced the AAdvantage
frequent flier program to reward loyal customers, it was copied within months by
Delta, United, and British Airways. Other things are more difficult to copy. Walmart,
for example, has created a tightly linked supply chain to provide low costs. No other
company has figured out how to duplicate this system. The goal of companies is to
create competitive advantage in ways that are difficult or costly for competitors to
copy. This is called a sustainable competitive advantage.

Strategy and Competitive Advantage

Achieving competitive advantage is not likely to be a formal goal of a business.

However, having competitive advantage means a company will have resources to

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pursue its goals. When firms beat their competitors it means they can finance more
research and development to improve their products or services; they can spend more
on advertising and promotions to attract customers; they can donate to charities to
improve community relations; and they can provide greater profits to their owners. In
short, competitive advantage is the means to meeting organizational goals.

Because strategy is a plan to achieve long-term goals, we can define strategy as a

plan to create sustainable competitive advantage.

The Value Proposition

Companies strive to produce a unique product or service that will give them an
advantage in the market place. But this produces competitive advantage only if
customers perceive the difference and understand why this difference matters to
them. A value proposition is a statement that a company uses to convince
customers that its product or service provides more value to them than a competitor’s
product or service. The value proposition communicates to the customer the main
reason a product or service is the one best suited to their needs.

The value proposition is communicated through a company’s webpage, advertising, or

social media. It should have a bold headline or graphic that grabs attention and depicts
the benefits delivered to the customer. This brief “announcement” can be followed by
a short paragraph or a few bullet points that list the key features of the product.

An excellent example is the value statement for the Apple MacBook. It shows an edge-
on image of a MacBook with the caption “MacBook: Light. Years ahead.” This very
cleverly conveys the important distinctions of the MacBook. First, it’s a really slick
design. In the edge-on view the computer almost disappears. Second, it is light. In
the laptop market, weight is important. Both the image and the statement emphasize
that the MacBook is easy to carry around. Finally, it emphasizes MacBook’s advanced
technology, “Light years ahead.” In a very small space, Apple conveys the main
differentiators for the MacBook—its weight and its advanced technology.

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Strategic Management

Strategic management is the process of integrating all the functions and activities in
an organization into a coherent whole. We previously defined management as the
process of planning, organizing, leading, and controlling people in the organization to
effectively use resources to meet organizational goals. Strategy management provides
the “glue” that holds these processes together. Rather than looking at individual
functions or activities, strategic management considers the entire organization and
how the pieces fit together. Good strategic management allows an organization to
develop synergy. That is, the pieces support each other so that the total output is
greater than the sum of the output of individual functions.

Strategic management best fits with the planning function, and it involves two broad
functions. The first is to determine how the company will create competitive
advantage. That is, how will the company produce distinction and value to its
customers? The answer to this question is the company’s business strategy.
Management must make sure that all activities in the company support its business
strategy. This is called “doing the right things.” It means everyone must be focused
on excelling at the things that create competitive advantage, making sure that
resources are allocated to the departments that create competitive advantage, and
closely controlling the activities that create competitive advantage. That doesn’t mean
they can ignore other things; successful businesses have to do many things well but
excel at only a few.

Strategic management’s second function is to make sure that the people in the
organization support the strategy. As we discussed previously, almost everything an
organization accomplishes is achieved by people doing things. Management must
make sure that the people in the organization are willing and capable of excelling at
the things that create competitive advantage. This is called “doing things right.” They
can do this by providing training and development opportunities for employees to
improve skills that support the strategy, by creating a compensation system that
rewards behaviors that support the strategy, and by implementing a supervisory
system that encourages and recognizes behaviors that support the strategy.

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Management can also instill a culture of excellence throughout the
organization. Organizational culture is the shared values and beliefs that guide
individual behaviors in the organization. Managers can induce a culture that supports
the strategy by communicating and modeling behaviors and values they want to see
throughout the organization.

For example, when Tom’s of Maine introduced a new deodorant that disappointed
customers, company founder Tom Chappell pulled the product from the market and
reimbursed the customers who had purchased it. The company lost the money it had
put into developing and producing the product, as well as the reimbursement cost.
But it reinforced the core values of fairness and honesty that the company espoused,
and demonstrated that quality and customer satisfaction were the company’s
competitive advantage.

In another example, Southwest Airlines’ management implemented the “Walk a Mile”

program in which managers and executives pitch in to help front-line employees.
Executives clean planes, load luggage, and attend gates. Flight attendants were
surprised when Herb Kelleher, the company chairman, showed up to help them
provision a plane. This program reinforces the family culture at Southwest, where
everyone is valued and considered equal. It also emphasizes the company’s focus on
customer service by demonstrating that everyone has to support activities that directly
affect the customer.

Industry Analysis

The purpose of strategic management is to create competitive advantage. But how do

companies know they have competitive advantage? In the long term, competitive
advantage will lead to greater profitability. But in the shorter term, it is difficult for
companies to assess how well they are creating competitive advantage. An industry
analysis is a method for a company to assess its market position relative to its
competitors. An industry analysis is meant to help a company review various market
and financial factors in its industry that affect the business, including evaluating the
competition. This analysis helps managers understand the important factors of the

41
marketplace and how these factors may be used to gain a competitive advantage.
Industry analyses are an important tool for companies to assess their strategy in a
shorter time frame.

Because conditions in the business environment are constantly changing, industry

analyses need to be done periodically to keep up with developments. This can be a
very time-consuming process and, if not done accurately, can lead to bad strategic
decisions. For this reason, managers may go to outside firms, either to produce the
analysis or to provide data for the company to complete an analysis. A number of
companies exist that maintain huge databases of information about particular
industries, such as Hoovers and IBIS. These companies have methods for gathering
the data and for analyzing the data to produce reports.

How Environment Affects Strategy

Managers develop strategies to guide their organizations to success. They analyze
external and internal conditions to make sure that their assumptions are based as
much as possible on solid data. The truth is, however, that the environment today is
changing faster than it ever did in the past. And the rate of change is increasing, as
well. There are some attributes in the modern environment that make strategic
planning a risky business.

We’ve talked about how organizations use strategy to integrate their functions and
activities. Strategy also integrates the firm with its external environment. This means
that the structure of the firm must align with external conditions. The problem this
presents is that the environment constantly changes and the firm has little control
over the changes. Strategy and structure must be flexible to adapt to changes in the
environment.

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 Strategy integrates the organization with its external environment.
Strategy and Change
To determine the appropriate strategic response to changes in the environment,
managers must be able to understand the impact of the changes. There are four
components that describe the nature of change in the environment: stability,
complexity, resource scarcity, and uncertainty.
Stability
Stability refers to the rate at which change occurs. In a stable environment, change
is slow. Managers have time to monitor and respond to changes in a deliberate
manner. The grocery industry is relatively stable. A dynamic environment is
changing rapidly. Managers must react quickly and organizations must be flexible to
respond. Today’s business environment is generally very dynamic. Technology,
consumer tastes, laws and regulations, political leaders, and international conditions
are all changing rapidly and dramatically. Failure to monitor and respond to changing
conditions often results in a company’s demise. Consider the Nokia example we
introduced in an earlier section. Nokia was a market leader just a few years ago
(2011). It didn’t respond quickly to the emergence of smartphones and has now been
acquired by Microsoft. Or we can look at the example of True Religion Jeans, a market
leader in fashion jeans very recently. It did not respond to the shift in consumer taste
to casual sportswear and the company has filed for bankruptcy.
Complexity
Complexity refers to the number of elements in the organization’s environment and
their connections. In a highly complex environment there are many variables that can
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affect the company. The variables are hard to identify and measure and are connected
in ways that are hard to understand. Managers must monitor and respond to more
sources of change, which makes it more difficult to make decisions. Complexity can
be modeled with chaos theory, where small changes in one factor can produce a major
change in another. For example, the failure of an Ohio power company to trim tree
branches near its highvoltage lines lead to the biggest power blackout in US history,
affecting more than 50 million people. Should GM, a global auto manufacturer, have
anticipated that an increase in default rates on US home mortgages would begin a
series of financial crises that would eventually lead to declaring bankruptcy?

Resource Scarcity
Resource scarcity refers to the availability of resources critical to a company or that
are in high demand by other companies. Resource scarcity is usually the result of a
shortage of supply, but it can also result from demand driving up prices. In conditions
of resource scarcity, a company may not be able to acquire the resources it needs to
operate or grow. For example, lithium ion batteries are now used extensively in
electronic devices, tools, and electric cars. But lithium supplies are in a severe shortage
and new sources are slow to arise. Tesla, the US electric car manufacturer, will require
about one-third of the available lithium to supply its new battery factory. Its ambitious
growth plans could be jeopardized if new sources are not developed.

Uncertainty
Instability, complexity, and resource scarcity all lead to uncertainty. Uncertainty refers
to how predictable environmental conditions are. In an uncertain environment it is
very difficult for managers to predict where and how change will occur. Instead,
managers must make decisions based on assumptions rather than clear facts.
Companies that “guess” right benefit from uncertainty and companies that guess
wrong suffer. For example, in the 1990s when oil prices were around $50 per barrel,
there was no clear information to predict what would happen in the near future.
Southwest Airlines bet that fuel prices would go up and hedged against oil price
increases. Other airlines bet that prices would be stable or decline. When oil prices

44
soared to more than $100 per barrel, Southwest was able to remain profitable whereas
other airlines lost more than $6 billion.

Summary
Nothing stays the same. This simple fact underlies strategic management, which seeks
to adapt to and benefit from change. However, in today’s environment, it is difficult
for managers to identify and understand rapid or unexpected changes in the
environment. Conditions of instability, complexity, resource scarcity, and uncertainty
make it impossible for managers to anticipate change and make rational decisions.
Instead, they must operate with incomplete data and base decisions on assumptions
and best guesses. This makes good managers, who use their experience and training
to guess right more often, even more important to organizations.

Environments and Strategic Management

Let’s return to the scenario that we considered at the outset of this module. As the
new head of North American operations for Walmart, you’ve been asked by your boss
to outline your strategy for dealing with the threat posed by Amazon. Let’s apply the
strategic management process you just learned about.

Step One: Strategic Objectives and Analysis

You start by reviewing the mission statement to ensure that your strategy is focused
appropriately: “We save people money so they can live better.” You will want to make
sure that your strategy is consistent with this vision.

Next, you will move to an external analysis of the business environment using the
PESTEL methodology.

PESTEL Methodology
Factor Analysis of External Environment
Minimum wage pressure
Political
Working conditions of international suppliers (child labor)

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 GDP growth forecasts are modest
Economic
Low interest rates, but Fed signaling increases
Aging population
Social
Large millennial demographic
Technological Growth of online shopping (greater consumer acceptance)
Environmental Impact of emissions standards on truck fleet
Legal Healthcare regulation impact on large part-time workforce

Once you have evaluated the external factors impacting Walmart, it’s time to look
inward. An important tool that you learned about in this module was the SWOT
analysis. You decide to use this framework next.

SWOT Analysis Example

Strengths Weaknesses
 Low-cost supply chain  E-commerce presence one-fifth the
 Large network of brick and size of Amazon’s
mortar stores  Negative PR—employee wages
 Large fleet of commercial trucks  Low brand acceptance among
 Exceptional logistics millennials
 Database of consumer
shopping habits
Opportunities Threats
 Improvement in HR practices  Aggressive competition (Amazon)
 Increase investment in  Ease of entry to online selling
technology  Intense price competition
 Online shopping growth
 Improve quality standards
Step Two: Strategic Formulation

You have gathered a lot of important information about the organization and the
environments in which it operates. Now you need to turn that data into concrete goals
consistent with the established vision. It’s becoming clear to you that your competitive
advantage lies in three areas. First, Walmart has the lowest-cost supply chain of any
retailer in the world. Walmart’s buying power gives it considerable leverage in supplier
negotiations. However, in the minds of consumers, Amazon is the low-cost place to
shop online.

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Strategic Goal: Use the company’s low-cost advantage to put financial pressure on
Amazon and other competitors and clearly market this differentiation to consumers.

Another clear competitive advantage you have over Amazon is your massive network
of distribution centers and fleet of commercial vehicles. One of the things you noticed
when studying Amazon’s financials is that they spend a lot of money on next day and
second-day delivery. If you leverage your network, you can establish a clear
advantage.

Strategic Goal: Leverage the distribution centers and commercial fleet to provide
excellent delivery service at a fraction of the competition’s cost.

Finally, you recognize that although everyone is focused on moving retail online,
Walmart’s existing brick and mortar stores are an asset that is being underused. Many
consumers want to have the option of interacting with both an online and physical
presence when shopping. There is a tactile dimension to shopping that is lost in an
online transaction.

Strategic Goal: Better integrate the online and physical aspects of shopping that
Walmart can offer (for instance, offer in-store pick-up of online purchases) and
communicate that experience to consumers.

With these strategic goals in mind, you are ready to move to the next step in the
strategic management process.

Step Three: Strategic Implementation

Now it’s time to move to action. As the head of North American operations, you pull
together your key executives and work on specific goals for each division and
functional area. All leaders are aware of their specific responsibilities and deliverables
and have been given the necessary authority to execute the plan. As stated earlier in
the module, a good plan is not enough—the right action is what will determine success
or failure.

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Step Four: Strategic Evaluation and Control

As you’ve learned, internal and external conditions are always changing. Although you
feel good about the plan you’ve constructed, you know environments are fluid. So you
implement processes to measure performance and frequently test the plan’s
assumptions. Doing so helps ensure that the ongoing actions will deliver the desired
results.

In this module you have learned the importance of strategic management and how to
analyze the factors that impact an organization. The best leaders know that the
proper application of these tools can result in lasting competitive advantage.

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