Part 1
Chapter 1

Business in a Changing World

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We begin part 1 of your textbook, Business in a Changing World, with chapter 1, The Dynamics of Business and Economics.
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CHAPTER 1
The Dynamics of Business and Economics
APPENDIX A
Guidelines for the Development of the Business Plan
CHAPTER 2
Business Ethics and Social Responsibility
APPENDIX B
The Legal and Regulatory Environment
CHAPTER 3
Business in a Borderless World
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In chapter 1, we take a look at the dynamics of business and economics. First, we introduce the nature of business, including its goals, activities, and participants. Next, we describe the basics of economics and apply them to the United States economy. Finally, we establish a framework for studying business in this text.
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Learning Objectives
LO 1-1 Define basic concepts such as business, product, and profit.
LO 1-2 Identify the main participants and activities of business and explain why studying business is important.
LO 1-3 Define economics and compare the four types of economic systems.
LO 1-4 Describe the role of supply, demand, and competition in a free enterprise system.
LO 1-5 Specify why and how the health of the economy is measured.
LO 1-6 Trace the evolution of the American economy and discuss the role of the entrepreneur in the economy.
LO 1-7 Evaluate a small-business owner’s situation and propose a course of action.
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After reading this chapter, you will be able to:
Define basic concepts such as business, product, and profit.
Identify the main participants and activities of business and explain why studying business is important.
Define economics and compare the four types of economic systems.
Describe the role of supply, demand, and competition in a free enterprise system.
Specify why and how the health of the economy is measured.
Trace the evolution of the American economy and discuss the role of the entrepreneur in the economy.
Evaluate a small-business owner’s situation and propose a course of action.
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The Nature of Business
Business
Individuals or organizations who try to earn a profit by providing products that satisfy people’s needs
Products
Goods or services with tangible and intangible characteristics that provide satisfaction and benefits
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A business is defined as individuals or organizations who try to earn a profit by providing products that satisfy people’s needs.
The outcome of its efforts are products that have both tangible and intangible characteristics that provide satisfaction and benefits. When you purchase a product, you
are buying the benefits and satisfaction you think the product will provide. A Subway sandwich, for example, may be purchased to satisfy hunger.
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A Product Can Be…
Tangible goods
Automobile
Computer
Phone
Coat
Services
Dry cleaning
Doctor’s checkup
Basketball game
Concert
Ideas
Professionals generate ideas for solving problems
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Most people associate the word product with tangible goods—an automobile, computer, phone, coat, or some other tangible item. However, a product can also be a service, which occurs when people or machines provide or process something of value to customers. Examples of services include dry cleaning, having a physical with your doctor, the performance by a basketball player, and a musical concert. A product can also be an idea. Accountants and attorneys, for example, generate ideas for solving problems.
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The Goal of Business
The goal of business is to earn a profit
The difference between what it costs to make and sell a product and what a customer pays for it
$10 sale – $8 to make = $2 profit
Earning profits contributes to society by providing employment, which in turn provides money that is reinvested in the economy
Profits must be earned in a responsible manner
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The primary goal of all businesses is to earn a profit. The concept of profit is central to all business activity. Keep this very important concept in mind throughout our text.
We define profit quite simply as the difference between what it costs to make and sell a product and what a customer pays for it. Thus, the goal is to produce and sell a product at a price that a consumer will pay that is above your costs of making and selling it.
So if a product costs eight dollars to produce and is sold for ten dollars, two dollars is profit.
Earning profits contributes to society by providing employment, which in turn provides money that is reinvested in the economy. In addition, profits must be earned in a responsible manner.
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Nonprofit Organizations
Nonprofit Organizations
Provide goods and services
Do not share the purpose of earning profits
Engage in management, marketing and finance to reach goals
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Not all organizations exist to make a profit. Nonprofit organizations provide goods and services but do not have the fundamental purpose of earning profits.
Like businesses, nonprofit organizations engage in management, marketing, and finance activities to reach their goals. Examples of nonprofit organizations include the Red Cross and Special Olympics. Can you name any nonprofit organizations?
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To Earn a Profit
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Profit requires:
Management Skills
Marketing Expertise
Financial Resources
Abiding by the Law
Adapting to Change
Acting Ethically

To earn a profit, a person or organization needs management skills to plan, organize, and control the activities of the business and to find and develop employees so that it can make products consumers will buy.
A business also needs marketing expertise to learn what products consumers need and want and to develop, manufacture, price, promote, and distribute those products. Additionally, a business needs financial resources and skills to fund, maintain, and expand its operations.
Other challenges for businesspeople include abiding by laws and government regulations; acting in an ethical and socially responsible manner; and adapting to economic, technological, political, and social changes.
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Stakeholders
Groups that have a stake in the success and outcomes of a business
Customers, employees, investors, government regulators, and community.
To achieve and maintain profitability, businesses must produce quality products, operate efficiently, and be socially responsible and ethical in dealing with stakeholders
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Consumers are often willing to pay more for products they perceive as environmentally-friendly.

Stakeholders are groups that have a stake in the success and outcomes of a business.
To achieve and maintain profitability, businesses have found that they must produce quality products, operate efficiently, and be socially responsible and ethical in dealing with customers, employees, investors, government regulators, and the community.
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Sprint’s Buyback Program
Concerns about landfills becoming high-tech graveyards plague many electronics firms
Sprint was the first wireless company to have a buyback program for customers to turn in their used mobile devices in exchange for up to $300 in credit
Cleans and updates the device
Sells them as refurbished phones at a lower cost
Reached developing markets because these devices are in high demand for an affordable price
Unusable devices are sent to a 3rd party for recycling
The EPA has recognized the program as one of the best
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Concerns about landfills becoming high-tech graveyards plague many electronics firms. Sprint became the first wireless company to institute a buyback program that encourages customers to turn in their used mobile devices in exchange for up to $300 in credit. The company cleans and updates the devices and sells them as refurbished phones at a lower cost. This initiative has reached developing markets because these devices are in high demand for an affordable price. Those devices that are unusable are sent to a certified third party for recycling. The Environmental Protection Agency (EPA) has recognized the program as one of the best.
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Overview of the Business World
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Here you see the Figure 1.1 from your text. This figure represents an overview of the business world.
Note that owners, employees, and customers are the main stakeholders and are located in the center of our figure. As you move outward, you will see the functions of the business organization, such as finance, marketing and management; then the external environment in which the business operates.
That external environment consists of competition, the economy, information technology, legal and political forces and social responsibility. All of these factors have an impact on the daily operations of the business.
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Management
Management is concerned with:
Acquiring
Developing
Using resources (including people) effectively and efficiently
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As you saw in the previous figure, management and employees are in the same segment of the circle. This is because management involves coordinating employees’ actions to achieve the firm’s goals, organizing people to work efficiently, and motivating them to achieve the business’s goals.
Management is also concerned with acquiring, developing, and using resources (including people) effectively and efficiently. Production and manufacturing is another element of management. Managers plan, organize, staff, and control the tasks required to carry out the work of the company. These responsibilities are carried out by management in both for profit and nonprofit organizations.
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Managers

Plan

Organize

Staff

Control Tasks

Marketing
The focus of all marketing activities is satisfying customers.
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Marketing is a very important function in business and is focused on satisfying customers. Marketing includes all the activities designed to provide goods and services that satisfy consumers’ needs and wants.
Marketers gather information and conduct research to determine what customers want. Using information gathered from marketing research, marketers plan and develop products and make decisions about how much to charge for their products and when and where to make them available. They also analyze the marketing environment to see if products need to be modified.
Marketers use promotion—advertising, personal selling, sales promotion (coupons, games, sweepstakes, movie tie-ins), and publicity—to communicate the benefits and advantages of their products to consumers and increase sales.

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Determine customer needs

Plan and develop product

Determine distribution

Determine place

Determine promotion

Determine price

Finance
The owner is primarily responsible for obtaining financial resources for the operation of the business, including:
Obtaining money
Using money effectively
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Although management and marketing have to deal with financial considerations, it is the primary responsibility of the owners to provide financial resources for the operation of the business.
Finance refers to all activities concerned with obtaining money and using it effectively. People who work as accountants, stockbrokers, investment advisors, or bankers are all part of the financial world. Owners sometimes have to borrow money to get started or attract additional owners who become partners or stockholders.
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Why Study Business?
Develop skills for career success
Become a well-informed consumer and member of society
Business career opportunities:
Marketing
Human resources management
Information technology
Finance
Production and operations
Wholesaling and retailing
And more
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We have seen the various functions and aspects of business. It is important to ask why we study business.
Studying business can help you develop skills and acquire knowledge to prepare for your future career, regardless of whether you plan to work for a multinational Fortune 500 firm, start your own business, work for a government agency, or manage or volunteer at a nonprofit organization.
The field of business offers a variety of challenging and interesting opportunities for your careers throughout the world, such as marketing, human resources management, information technology, finance, production and operations, wholesaling and retailing, and many more. Studying business can also help you better understand the many business activities that are necessary to provide satisfying goods and services—and that these activities carry a price tag.
Studying business can help you become a well-informed consumer and member of society. Business activities help generate the profits that are essential not only to individual businesses and local economies but also to the health of the global economy. Understanding how our free-enterprise economic system allocates resources and provides incentives for industry and the workplace is important to everyone.
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Bill Daniels
Bill Daniels founded Cablevision, building his first cable TV system in 1953 and is considered “the father of cable television”
He established a foundation that currently has funding of $1.1 billion
Supports diversity of causes from education to business ethics
Created Young Americans Bank for children to learn about financial responsibility
Remains the world’s only carter bank for young people
Created Daniels College of Business through donation of $20 million to University of Denver
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Bill Daniels founded Cablevision, building his first cable TV system in Casper, Wyoming, in 1953, and is now considered “the father of cable television.” Prior to Daniels’ passing in 2000, he had established a foundation that currently has funding of $1.1 billion and supports a diversity of causes from education to business ethics. During his career, Daniels created the Young Americans Bank, where children could create bank accounts and learn about financial responsibility, and this remains the world’s only charter bank for young people. He created the Daniels College of Business through a donation of $20 million to the University of Denver. During his life, he affected many individuals and organizations, and his business success has allowed his legacy to be one of giving and impacting communities throughout the United States.
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Economics
Economics
The study of how resources are distributed for the production of goods and services within a social system.
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The Young Americans Bank in Denver is the only bank in the world that lends money to individuals under the age of 22.

Previously we discussed the nature of business. We now turn our attention to the economic foundations of business. We define economics as the study of how resources are distributed for the production of goods and services within a social system.
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Economic Foundations of Business
Natural resources
Land, forests, mineral, water, and other things not made by people
Human resources (also called labor)
The physical and mental abilities people use to produce goods and services
Financial resources (also called capital)
The funds used to acquire the natural and human resources needed to provide products
Intangible resources
Such as a good reputation for quality products or being socially responsible
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We use the term resources to refer to natural resources, human resources, financial resources and intangible resources. Natural resources are land, forest, minerals, water and other things not made by people. Human resources are the physical and mental abilities people use to produce goods and services; also called labor. Financial resources are the funds used to acquire the natural and human resources needed to provide products; also called capital.
Because natural, human, and financial resources are used to produce goods and services, they are sometimes called factors of production. The firm can also have intangible resources such as a good reputation for quality products or being socially responsible. The goal is to turn the factors of production and intangible resources into a competitive advantage.
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Economic Systems
Economic system
A description of how a particular society distributes its resources to produce goods and services
All economic systems must address these 3 important issues:
What goods and services, and how much of each, will satisfy consumers’ needs?
How will goods and services be produced, who will produce them, and with what resources will they be produced?
How are the goods and services to be distributed to consumers?
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An economic system describes how a particular society distributes its resources to produce goods and services.
A central issue of economics is how to fulfill an unlimited demand for goods and services in a world with a limited supply of resources.
Although economic systems handle the distribution of resources in different ways, all economic systems must address three important issues:
What goods and services, and how much of each, will satisfy consumers’ needs?
How will goods and services be produced, who will produce them, and with what resources will they be produced?
How are the goods and services to be distributed to consumers?
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Communism
Communism
First described by Karl Marx as a society in which the people, without regard to class, own all the nation’s resources
On paper it appears efficient, but in practice, these economies suffer from:
low standards of living
critical shortages of consumer goods
high prices
corruption and little freedom
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C
H
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N
A
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B
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Communism was first described by Karl Marx as a society in which the people, without regard to class, own all of the nation’s resources. Today, there are a few countries that are considered to be communistic but no true communist economy exists today that satisfies Marx’s ideal.
On paper, communism appears to be efficient and equitable, producing less of a gap between rich and poor. In practice, however, communist economies have been marked by low standards of living, critical shortages of consumer goods, high prices, corruption, and little freedom. Examples of communist societies include China and Cuba.
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Socialism
Socialism
An economic system in which the government owns and operates basic industries but individuals own most businesses
Most socialist countries are democratic and recognize individual freedoms
The socialist system may allow a higher standard of living and is more stable; but taxes and unemployment are generally higher in socialist countries
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D
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Socialism is an economic system in which the government owns and operates the basic industries (postal service, telephone, utilities, transportation, health care, banking, and some manufacturing) but individuals own most businesses.
Most socialist nations are democratic and recognize basic individual freedoms. Socialist economies profess egalitarianism—equal distribution of income and social services. They believe their economies are more stable than those of other nations. Although this may be true, taxes and unemployment are generally higher in socialist countries. Examples of socialistic societies include Sweden, Israel, and India.
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Capitalism
Capitalism, or Free Enterprise
An economic system in which individuals own and operate the majority of businesses that provide goods and services
Pure capitalism or free-market system happens when all economic decisions are made without government intervention; also called laissez-faire capitalism
Modified capitalism differs from pure capitalism in that the government intervenes and regulates business to some extent
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Capitalism, or free enterprise, is an economic system in which individuals own and operate the majority of businesses that provide goods and services. Competition, supply, and demand determine which goods and services are produced, how they are produced, and how they are distributed. Examples include Australia, the United States, Canada, and Japan.
There are two forms of capitalism: free-market system and modified capitalism.
In pure capitalism, also called a free-market system, all economic decisions are made without government intervention. It was first described by Adam Smith, the father of capitalism, who said the “invisible hand of competition” best regulates the economy in his famous treatise The Wealth of Nations. Smith’s system is also called laissez-faire (“let it be”) capitalism because the government does not interfere in business.
Modified capitalism differs from pure capitalism in that the government intervenes and regulates business to some extent. One of the ways in which the United States and Canadian governments regulate business is through laws.
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Comparison of Communism,
Socialism, and Capitalism (1 of 2)
Communism Socialism Capitalism
Business ownership Most businesses are owned and operated by the government. The government owns and operates major industries; individuals own small businesses. Individuals own and operate all businesses.
Competition None. The government owns and operates
everything. Restricted in major
industries; encouraged
in small business. Encouraged by market forces and government
regulations.
Profits Excess income goes to the government. Profits earned by
small businesses may be reinvested in the business; profits from government-owned industries go to the government. Individuals are free to keep profits and use them as they wish.

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Communism was first described by Karl Marx as a society in which the people, without regard to class, own all of the nation’s resources. Today, there are a few countries that are considered to be communistic but no true communist economy exists today that satisfies Marx’s ideal.
On paper, communism appears to be efficient and equitable, producing less of a gap between rich and poor. In practice, however, communist economies have been marked by low standards of living, critical shortages of consumer goods, high prices, corruption, and little freedom. Examples of communist societies include China and Cuba.

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Comparison of Communism, Socialism, and Capitalism (2 of 2)
Communism Socialism Capitalism
Product availability
and price Consumers have a
limited choice of goods and services; prices
are usually high. Consumers have some choice of goods and services; prices are
determined by supply and demand. Consumers have a
wide choice of goods and services; prices are determined by
supply and demand.
Employment options Little choice in
choosing a career;
most people work for government-owned industries or farms. Some choice of
careers; many people work in government
jobs. Unlimited choice of careers.

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Communism was first described by Karl Marx as a society in which the people, without regard to class, own all of the nation’s resources. Today, there are a few countries that are considered to be communistic but no true communist economy exists today that satisfies Marx’s ideal.
On paper, communism appears to be efficient and equitable, producing less of a gap between rich and poor. In practice, however, communist economies have been marked by low standards of living, critical shortages of consumer goods, high prices, corruption, and little freedom. Examples of communist societies include China and Cuba.
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Mixed Economies
No country practices pure capitalism, socialism, or communism
Mixed Economies
Economies made up of elements from more than one economic system
No country practices a pure form of any economic system, although most favor one system over others
China and Russia have used state capitalism to advance the economy, integrating the powers of the state with the advantages of capitalism
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No country practices a pure form of communism, socialism, or capitalism, although most tend to favor one system over the others. Most nations operate as mixed economies, which have elements from more than one economic system.
In socialist Sweden, most businesses are owned and operated by private individuals. In capitalist United States, an independent federal agency operates the postal service.
Countries such as China and Russia have used state capitalism to advance the economy. State capitalism tries to integrate the powers of the state with the advantages of capitalism. It is led by the government but uses capitalistic tools such as listing state-owned companies on the stock market and embracing globalization.
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Modified Capitalism
Modified capitalism differs from pure capitalism in that the government intervenes and regulates business to some extent
One way of regulating business is through laws
Federal Trade Commission Act created the Federal Trade Commission
Importance of government’s role in economy
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Enforces antitrust laws and monitors businesses to ensure fair competition

Modified capitalism differs from pure capitalism in that the government intervenes and regulates business to some extent. One of the ways in which the United States and Canadian governments regulate business is through laws. Laws such as the Federal Trade Commission Act, which created the Federal Trade Commission to enforce antitrust laws and monitor businesses to ensure fair competition, illustrate the importance of the government’s role in the economy.
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The Free-Enterprise System
Many large economies are free-enterprise – including the U.S., Canada and Japan
Many communist and socialist countries apply free-enterprise principles – including China and Russia
Free enterprise allows a company to succeed or fail on the basis of market demand
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An entrepreneur presents his idea for a new product. Entrepreneurs are more productive in free-enterprise systems.

Many economies – including those in the United States, Canada and Japan – are based on free enterprise, and many communist and socialist countries, such as China and Russia, are applying more principles of free enterprise to their own economic systems. Free enterprise allows a company to succeed or fail on the basis of market demand. Companies that can efficiently manufacture and sell products consumers desire will probably succeed, those companies that do not, will most likely fail.
An entrepreneur presents his idea for a new product. Entrepreneurs are more productive in free-enterprise systems.

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Individual and Business Rights
Basic individual and business rights which must exist in order to motivate companies to succeed
Right to own property
Right to earn profits and use them as one wishes
Right to determine business operations
Right to choose
Career to pursue
Where to live or where to locate a business
What goods/services to purchase and more
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A number of basic individual and business rights must exist for free enterprise to work. These rights are the goals of many countries that have recently embraced free enterprise.
1. Individuals must have the right to own property and to pass this property on to their heirs. This right motivates people to work hard and save to buy property.
2. Individuals and businesses must have the right to earn profits and to use the profits as they wish, within the constraints of their society’s laws, principles, and values.
3. Individuals and businesses must have the right to make decisions that determine the way the business operates. Although there is government regulation, the philosophy in countries like the United States and Australia is to permit maximum freedom within a set of rules of fairness.
4. Individuals must have the right to choose what career to pursue, where to live, what goods and services to purchase, and more. Businesses must have the right to choose where to locate, what goods and services to produce, what resources to use in the production process, and so on.
Without these rights, businesses cannot function effectively because they are not motivated to succeed. Thus, these rights make possible the open exchange of goods and services.
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The Forces of Supply and Demand
Supply
The number of products businesses are willing to sell at different prices at a specific time
Demand
The number of products consumers are willing to buy at different prices at a specific time
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The forces of supply and demand operate in the United States and other free enterprise systems. Supply and demand determines the distribution of resources and products. From your own experience, you probably recognize that consumers are usually willing to buy more of an item as its price falls because they want to save money.
Demand is the number of goods and services that consumers are willing to buy at different prices at a specific time. And, supply is the number of products –goods and services- that businesses are willing to sell at different prices at a specific time. In general, because the potential for profits is higher, businesses are willing to supply more of a good or service at higher prices.
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Equilibrium Price
Equilibrium price – the price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time
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Consider handmade rugs, for example. Consumers may be willing to buy six rugs at $350 each, four at $500 each, but only two at $650 each. The relationship between the price and the number of rugs consumers are willing to buy can be shown graphically, with a demand curve (shown here and as Figure 1.2 in your textbook).
A company that sells rugs may be willing to sell six at $650 each, four at $500 each, but just two at $350 each. The relationship between the price of rugs and the quantity the company is willing to supply can be shown graphically with a supply curve.
The supply and demand curves intersect at the point where supply and demand are equal. The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time is the equilibrium price .
In our rug example, the company is willing to supply four rugs at $500 each, and consumers are willing to buy four rugs at $500 each. Therefore, $500 is the equilibrium price for a rug at that point in time, and most rug companies will price their rugs at $500.
If the cost of making rugs goes up, businesses will not offer as many at the old price. Changing the price alters the supply curve, and a new equilibrium price results. This is an ongoing process, with supply and demand constantly changing in response to changes in economic conditions, availability of resources, and degree of competition.
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Supply and Demand
Critics of supply and demand say the system does not distribute resources equally
The forces prevent sellers who have to sell at higher prices and buyers who cannot afford to buy goods at the equilibrium price from participating in the market
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Critics of supply and demand say the system does not distribute resources equally. The forces of supply and demand prevent sellers who have to sell at higher prices (because their costs are high) and buyers who cannot afford to buy goods at the equilibrium price from participating in the market. According to critics, the wealthy can afford to buy more than they need, but the poor may be unable to buy enough of what they need to survive.
31

Marriott International
Competition should improve the quality of the goods and services available or reduce prices
Marriott International went from small root beer stand in 1927 to its current status of 3,900 high-quality hotels in 72 countries
If you treat employees well then they will provide good service to customers
Competing to attract younger travelers with:
Reinvented lobbies with amenities
Convenient ways to check in and out
Significantly expanding in Africa and Asia capitalizing on new market opportunities
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Competition should improve the quality of the goods and services available or reduce prices. Consider Marriott International, for example. It went from a small root beer stand in 1927 to its current status of 3,900 high-quality hotels in 72 countries. Marriott believed that if it treated its employees well, they in turn would provide good service to customers. Marriott has garnered a reputation as a high-quality hotel chain. It is now competing to attract younger travelers with reinvented lobbies filled with amenities and convenient ways to check in and out of a hotel, among other changes. It is also significantly expanding in Africa and Asia to capitalize on new market opportunities. The Marriott has been ranked as one of the leading hotel groups across the world. Competition and its drive to succeed have helped the firm achieve its current high status.
32

The Nature of Competition (1 of 2)
Competition is the rivalry among businesses for consumer’s dollars
Pure competition
The market structure that exists when there are many small businesses selling one standardized product
Monopolistic competition
Fewer businesses than in a pure competition and the differences among the goods they sell are small
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Competition represents the rivalry among businesses for consumers’ dollars. According to Adam Smith, competition fosters efficiency and low prices by forcing producers to offer the best products at the most reasonable price; those who fail to do so are not able to stay in business. Thus, competition should improve the quality of the goods and services available or reduce prices. Within a free-enterprise system, there are four types of competitive environments: pure competition, monopolistic competition, oligopoly, and monopoly.
Pure competition is the market structure that exists when there are many small businesses selling one standardized product. No one business sells enough of the product to influence the product’s price. And, because there is no difference in the products, prices are determined solely by the forces of supply and demand.
Monopolistic competition is the market structure that exists when there are fewer businesses than in a pure competition environment and the differences among the goods they sell are small. Aspirin, soft drinks, and vacuum cleaners are examples of such goods. These products differ slightly in packaging, warranty, name, and other characteristics, but all satisfy the same consumer need.
33

The Nature of Competition (2 of 2)
Oligopoly
The market structure that exists when there are very few businesses selling a product
Monopoly
The market structure that exists when there is only one business providing a product in a given market
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An oligopoly is the market structure that exists when there are very few businesses selling a product. In an oligopoly, individual businesses have control over their products’ price because each business supplies a large portion of the products sold in the marketplace. Nonetheless, the prices charged by different firms stay fairly close because a price cut or increase by one company will trigger a similar response from another company.
A monopoly is the market structure that exists when there is only one business providing a product in a given market. Utility companies that supply electricity, natural gas, and water are monopolies. The government permits such monopolies because the cost of creating the good or supplying the service is so great that new producers cannot compete for sales. Government-granted monopolies are subject to government-regulated prices.

34

Economic Cycles and Productivity (1 of 3)
Economic expansion occurs when an economy is growing and people are spending more money; their purchases stimulate the production of goods and services, which in turn stimulates employment.
This may lead to inflation – a continuing rise in prices
Economic contraction is a slowdown of the economy characterized by a decline in spending and during which businesses cut back on production and lay off workers.
This may lead to recession – a decline in production, employment and income
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Economies are not stagnant; they expand and they contract. Economic expansion occurs when an economy is growing and people are spending more money. Their purchases stimulate the production of goods and services, which in turn stimulates employment.
The standard of living rises because more people are employed and have money to spend. Rapid expansions of the economy, however, may result in inflation, a continuing rise in prices. Inflation can be harmful if individual’s incomes do not increase at the same pace as rising prices, reducing their buying power.
Economic contraction is a slowdown of the economy characterized by a decline in spending and during which businesses cut back on production and lay off workers. Contractions of the economy lead to recession – a decline in production, employment and income.
35

Economic Cycles and Productivity (2 of 3)
Recessions are often characterized by rising levels of
Unemployment – the condition in which a percentage of the population wants to work but is unable to find jobs
Deflation occurs when rising unemployment stifles demand, forcing prices down
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Recessions are often characterized by rising levels of unemployment, which is measured as the percentage of the population that wants to work but is unable to find jobs. Rising unemployment levels tend to stifle demand for goods and services, which can have the effect of forcing prices downward condition known as deflation.
36

Economic Cycles and Productivity (3 of 3)
Severe recession may turn into a
Depression – a condition of the economy in which unemployment is very high, consumer spending is low, and business output is sharply reduced
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A severe recession may turn into a depression, in which unemployment is very high, consumer spending is low, and business output is sharply reduced.
Economies expand and contract in response to changes in consumer, business, and government spending. Although fluctuations in the economy are inevitable and to a certain extent predictable, their effects—inflation and unemployment—disrupt lives and thus governments try to minimize them.

37

Hyperinflation
Inflation can be harmful if individuals’ incomes do not increase at the same pace as rising prices, reducing their buying power
The worst case of hyperinflation: Hungary in 1946
At one point, prices were doubling every 15.6 hours
A more recent case occurred in Zimbabwe
Suffered from hyperinflation so severe that inflation percentage rate rose into the hundreds of million
With the elimination of the Zimbabwean dollar and certain price controls, the inflation rate began to decrease
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Inflation can be harmful if individuals’ incomes do not increase at the same pace as rising prices, reducing their buying power. The worst case of hyperinflation occurred in Hungary in 1946. At one point, prices were doubling every 15.6 hours. One of the most recent cases of hyperinflation occurred in Zimbabwe.19 Zimbabwe suffered from hyperinflation so severe that its inflation percentage rate rose into the hundreds of millions. With the elimination of the Zimbabwean dollar and certain price controls, the inflation rate began to decrease, but not before the country’s economy was virtually decimated.
38

Measuring the Economy
Gross Domestic Product (GDP)
The sum of all goods and services produced in a country during a year
Does not include profits from companies’ overseas operations
Budget Deficit
The condition in which a nation spends more than it takes in from taxes
U.S. budget deficit has recently grown to record levels; remedies include raising taxes or reduce spending
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Countries measure the state of their economies to determine whether they are expanding or contracting and whether corrective action is necessary to minimize the fluctuations.
One commonly used measure is gross domestic product (GDP) —the sum of all goods and services produced in a country during a year. It does not include profits from companies’ overseas operations; it does include profits earned by foreign companies within the country being measured. However, it does not take into account the concept of GDP in relation to population (GDP per capita).
Another important indicator of a nation’s economic health is the relationship between its spending and income (from taxes). When a nation spends more than it takes in from taxes, it has a budget deficit. In recent years, however, the budget deficit has reemerged and grown to record Levels. To reduce the debt to a manageable level, the government either has to increase its revenues (raise taxes) or reduce spending on social, defense, and legal programs, neither of which is politically popular.
39

Gross Domestic Product (GDP)
In 2008 the System of National Accounts (SNA) serves as a set of standards by which to measure economic activity in every country
Overseen by the United Nations (UN)
Broadened the definition of assets to include intellectual property (IP) such as patents
Investments in research and development have spurred new products that have contributed to the GDP making them an important asset
While the calculations are still difficult, Canada and the United States have included IP in their GDP
Other countries are expected to follow
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Gross Domestic Product (GDP) – In 2008 the System of National Accounts (SNA), which is overseen by the United Nations (UN) and serves as a set of standards by which to measure economic activity in every country, broadened the definition of assets to include intellectual property (IP) such as patents. Over the last decade investments in research and development have spurred new products that have contributed to the GDP making them an important asset. While the calculations are still difficult, Canada and the United States have included IP in their GDP and other countries are expected to follow by 2014.
40

Evaluating Our Economy
Unit of Measure Description
Trade balance The difference between our exports and our imports. If the balance is negative, as it has been since the mid-1980s, it is called a trade deficit and is generally viewed as unhealthy for our economy.
Consumer
Price Index Measures changes in prices of goods and services purchased for
consumption by typical urban households.
Per capita
income Indicates the income level of “average” Americans. Useful in determining how much “average” consumers spend and how much money Americans are earning.
Unemployment
rate Indicates how many working-age Americans are not working who otherwise want to work.*
Inflation Monitors price increases in consumer goods and services over specified periods of time. Used to determine if costs of goods and services are exceeding worker compensation over time.
Worker
productivity The amount of goods and services produced for each hour worked.

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This table describes some of the other ways we evaluate our nation’s economy:
Trade balance: The difference between our exports and our imports. If the balance is negative, as it has been since the mid-1980s, it is called a trade deficit and is generally viewed as unhealthy for our economy.
Consumer Price Index: Measures changes in prices of goods and services purchased for consumption by typical urban households.
Per capita income: Indicates the income level of “average” Americans. Useful in determining how much “average” consumers spend and how much money Americans are earning.
Unemployment rate: Indicates how many working age Americans are not working who otherwise want to work. (Americans who do not work in a traditional sense, such as househusbands/housewives, are not counted as unemployed.)
Inflation: Monitors price increases in consumer goods and services over specified periods of time. Used to determine if costs of goods and services are exceeding worker compensation over time.
Worker productivity: The amount of goods and services produced for each hour worked.
41

The American Economy
Early Economy
Agricultural economy
People produced everything they needed at home
Industrial Revolution
New technologies and factories
Factories combined material, machines and workers
Manufacturing and Marketing Economies
Assembly line production and concern with customer needs
Service and Digital Economy
The U.S. is a service economy and technology is leading us into a new digital economy
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The United States is a mixed economy with a foundation based on capitalism. To understand the current state of the American economy and its effect on business practices, it is helpful to examine its history and the roles of the entrepreneur and the government.
Before the colonization of North America, Native Americans lived as hunter/gatherers and farmers, with some trade among tribes. The colonists who came later operated primarily as an agricultural economy. As the nation expanded slowly toward the West, people found natural resources such as coal, copper, and iron ore and used them to produce goods such as horseshoes, farm implements, and kitchen utensils. Some families also spent time turning raw materials into clothes and household goods. Because these goods were produced at home, this system was called the domestic system.
The 19th century and the Industrial Revolution brought the development of new technology and factories. The factory brought together all the resources needed to make a product—materials, machines, and workers. Railroads brought major changes, allowing farmers to send their surplus crops and goods all over the nation for barter or for sale. Factories began to spring up along the railways to manufacture farm equipment and a variety of other goods to be shipped by rail.
Industrialization brought increased prosperity, and the United States gradually became a manufacturing economy—one devoted to manufacturing goods and providing services rather than producing agricultural products. Businesses became more concerned with the needs of the consumer and entered the marketing economy. Because these developments occurred in a free-enterprise system, consumers determined what goods and services were produced. They did this by purchasing the products they liked at prices they were willing to pay.
After World War II, with the increased standard of living, Americans had more money and more time. The profile of the family is also changing: Today there are more single-parent families and individuals living alone, and in two-parent families, both parents often work. Americans are increasingly paying others to do tasks they used to do at home, like cooking, laundry, landscaping, and child care. These trends have gradually changed the United States to a service economy—one devoted to the production of services that make life easier for busy consumers. Service industries such as restaurants, banking, health care, child care, auto repair, leisure-related industries, and even education are growing rapidly and may account for as much as 80 percent of the U.S. economy. These trends continue with advanced technology contributing to new service products based on technology and digital media that provide smart phones, social networking, and virtual worlds.

42

Mobile Payment Systems
Google Wallet is a mobile payments system
Allows users to store their credit card or debit card information
When checking out at stores, users can bring up the app and use the information to pay for their purchases
Apple Inc. has released its version of a mobile payment system called Apple Pay
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Google Wallet is a mobile payments system that allows users to store their credit card or debit card information. When checking out at stores, users can bring up the app and use the information to pay for their purchases.
Apple Pay is a mobile payment and digital wallet service by Apple Inc. that lets users make payments using the iPhone 6, iPhone 6 Plus, Apple Watch-compatible devices (iPhone 5 and later models), iPad Air 2, and iPad Mini 3. Apple Pay does not require Apple-specific contactless payment terminals and will work with Visa’s PayWave, MasterCard’s PayPass, and American Express’s ExpressPay terminals

43

The Role of the Entrepreneur
Entrepreneur
An individual who risks his/her wealth, time and effort to develop for profit an innovative product or way of doing something.
Entrepreneurship requires:
Risk
Innovation
Creativity
Reward
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An entrepreneur is an individual who risks his or her wealth, time, and effort to develop for profit an innovative product or way of doing something.
The free-enterprise system provides the conditions necessary for entrepreneurs to succeed. In the past, entrepreneurs were often inventors who brought all the factors of production together to produce a new product. Other entrepreneurs, so-called captains of industry, invested in the country’s growth.
Entrepreneurs are constantly changing American business practices with new technology and innovative management techniques. Entrepreneurship requires risk, innovation, creativity, and reward. Bill Gates and Warren Buffett are highly successful entrepreneurs. Can you think of others? Why are entrepreneurs important to the economy?

44

The Role of Government in the
American Economy
The U.S. economy is best described as modified capitalism because:
The government regulates industry to encourage competition and protect stakeholders like consumers, employees, or the environment
Laws force businesses to adhere to government standards
Government agencies like the U.S. Department of Commerce or the Federal Reserve Board occasionally intervene to regulate the economy and spur growth
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The American economic system is best described as modified capitalism because the government regulates business to preserve competition and protect consumers and employees. Federal, state, and local governments intervene in the economy with laws and regulations designed to promote competition and to protect consumers, employees, and the environment. Additionally, government agencies such as the U.S. Department of Commerce measure the health of the economy, and, when necessary, take steps to minimize the disruptive effects of economic fluctuations and reduce unemployment.
When the economy is contracting and unemployment is rising, the federal government through the Federal Reserve Board tries to spur growth so that consumers will spend more money and businesses will hire more employees. When the economy expands so fast that inflation results, the government may intervene to reduce inflation by slowing down economic growth. This can be accomplished by raising interest rates to discourage spending by businesses
and consumers.

45

The Role of Ethics and Social Responsibility in Business
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In the past few years, you may have read about a number of scandals at a number of well-known corporations, including Enron, Countrywide Financial, BP, and even leading banks such as Bank of America and Citigroup. Business ethics generally refers to the standards and principles used by society to define appropriate and inappropriate conduct in the workplace. In many cases, these standards have been codified as laws prohibiting actions deemed unacceptable.
Society is increasingly demanding that businesspeople behave ethically and socially responsibly toward not only their customers but also employees, investors, government regulators, communities, and the natural environment. No area is more debated as online piracy. While one view is that ethics and social responsibility are a good supplement to business activities, there is an alternative viewpoint. Research has shown that ethical behavior can not only enhance a company’s reputation but can also drive profits.
To promote socially responsible and ethical behavior while achieving organizational goals, businesses can monitor changes and trends in society’s values. Businesses should determine what society wants and attempt to predict the long-term effects of their decisions. A company’s reputation depends on profit and ethics and social responsibility.

46

Business ethics are standards set by society

Reputation depends on profit and ethics and social responsibility

Stakeholders demand ethical and socially responsible behavior

Can You Learn Business in a Classroom?
Absolutely!
To be successful in business, you need:
Knowledge
Skills
Experiences and
Good judgment
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Do you think you can learn about business in the classroom? Absolutely. Through study and discussion you will gain the knowledge, skills, experiences and develop good judgment which are critical for success in business. The challenge in business is in the area of judgment, and judgment does not develop from memorizing an introductory business textbook. If you are observant in your daily experiences as an employee, as a student, and as a consumer,
you will improve your ability to make good business judgments.
47

Solve the Dilemma
Mrs. Acres Homemade Pies (1 of 3)
Produces specialty pies and sells them in local supermarkets and family restaurants
In each of the first six months sold 2,000 pies for $4.50 each netting $1.50 profit/pie
Had problems keeping up with demand
To meet demand: expanded operations, borrowed money, and increased staff
Production and sales increased to 8,000 pies/month, and profits soared to $12,000 per month
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This Solve the Dilemma is taken from Chapter 1, page 29:
Shelly Acres, whose grandmother gave her a family recipe for making pies, loved to cook, and she decided to start a business she called Mrs. Acres Homemade Pies. The company produces specialty pies and sells them in local
supermarkets and select family restaurants. In each of the first six months, Shelly and three part-time employees sold 2,000 pies for $4.50 each, netting $1.50 profit per pie. The pies were quite successful and Shelly could not keep up with demand. The company’s success results from a quality product and productive employees who are motivated by incentives and who enjoy being part of a successful new business.

48

Solve the Dilemma
Mrs. Acres Homemade Pies (2 of 3)
Shelly has several options:
Maintain current production levels and raise prices
Expand the facility and staff while maintaining the current price
Contract the production of the pies to a national chain, giving Shelly a percentage of profits with minimal involvement
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To meet demand, Shelly expanded operations, borrowing money and increasing staff to four full-time employees. Production and sales increased to 8,000 pies per month, and profits soared to $12,000 per month. However, demand for Mrs. Acres Homemade Pies continues to accelerate beyond what Shelly can supply. She has several options:
maintain current production levels and raise prices;
expand the facility and staff while maintaining the current price; or
contract the production of the pies to a national restaurant chain, giving Shelly a percentage of profits with minimal involvement.

49

Solve the Dilemma
Mrs. Acres Homemade Pies (3 of 3)
Discussion Questions
Explain and demonstrate the relationship between supply and demand for Mrs. Acres Pies.
What challenges does Shelly face as she considers the 3 options?
What would you do in Shelly’s position?
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Discussion Questions
1. Explain and demonstrate the relationship between supply and demand for Mrs. Acres Homemade Pies.
2. What challenges does Shelly face as she considers the three options?
3. What would you do in Shelly’s position?
50

Discussion
What is the fundamental goal of business? Do all organizations share this goal?
Who are the main participants of business? What are the main activities? What other factors have an impact on the conduct of business in the United States?
Explain the terms supply, demand, equilibrium price, and competition. How do these forces interact in the American economy?
List and define the various measures governments may use to gauge the state of their economies. If unemployment is high, will the growth of GDP be great or small?
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What is the fundamental goal of business? Do all organizations share this goal?
 
The fundamental goal of business is to earn profits. Nonprofit organizations do not share this fundamental goal, although they often provide goods and services.
Who are the main participants of business? What are the main activities? What other factors have an impact on the conduct of business in the United States?
 
The main participants in business are owners, employees, and customers. The main business activities include management, marketing, and finance. Other factors having an effect on the conduct of business are legal and regulatory forces, the economy, competition, technology, and ethical and social concerns.
Explain the terms supply, demand, equilibrium price, and competition. How do these forces interact in the American economy?
 
Supply is the quantity of goods or services that businesses are willing to sell at different prices at a specific time, while demand is the quantity of products and services that consumers are willing to buy at different prices at a specific time. Equilibrium price is the price at which the quantity of products that businesses are willing to supply equals the quantity of products consumers are willing to buy at a specific point in time. Competition is the rivalry among businesses to convince customers to buy their products. These forces interact in the American economy, causing the distribution of resources and products to be determined by supply and demand. Supply and demand change in response to changes in economic conditions, availability of resources, and degree of competition.
List and define the various measures governments may use to gauge the state of their economies. If unemployment is high, will the growth of GDP be great or small?
 
The gross domestic product is the sum of all goods and services produced by a country during a year. It measures only those products made within a country and therefore excludes profits from companies’ overseas operations. It does include profits earned by foreign companies within the country being measured. The existence of a budget deficit indicates that a nation is spending more than it is getting from taxes. Inflation is characterized by a continuing rise in prices. When unemployment is high, the demand for products and services is low; thus, the level of production decreases. Accordingly, the growth of the GDP is small.

51

Part 3
Chapter 6

Managing for Quality and Competitiveness

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We begin part 3 of your textbook, Managing for Quality and Competitiveness, with chapter 6, The Nature of Management.
1

CHAPTER 6
The Nature of Management
CHAPTER 7
Organization, Teamwork, and Communication
CHAPTER 8
Managing Service and Manufacturing Operations
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2

In chapter 6, we take a look at the nature of management. For any organization—small or large, for profit or nonprofit—to achieve its objectives, it must have equipment and raw materials to turn into products to market, employees to make and sell the products, and financial resources to purchase additional goods and services, pay employees, and generally operate the business. To accomplish this, it must also have one or more managers to plan, organize, staff, direct, and control the work that goes on. This chapter introduces the field of management. It examines and surveys the various functions, levels, and areas of management in business. The skills that managers need for success and the steps that lead to effective decision making are also discussed.
2

Learning Objectives
LO 6-1 Define management and explain its role in the achievement of organizational objectives.
LO 6-2 Describe the major functions of management.
LO 6-3 Distinguish among three levels of management and the concerns of managers at each level.
LO 6-4 Specify the skills managers need in order to be successful.
LO 6-5 Summarize the systematic approach to decision making used by many business managers.
LO 6-6 Recommend a new strategy to revive a struggling business.
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3

After reading this chapter you will be able to:
Define management and explain its role in the achievement of organizational objectives.
Describe the major functions of management.
Distinguish among three levels of management and the concerns of managers at each level.
Specify the skills managers need in order to be successful.
Summarize the systematic approach to decision making used by many business managers.
Recommend a new strategy to revive a struggling business.

3

Management and Managers
Management
A process designed to achieve an organization’s objectives by using its resources effectively and efficiently in a changing environment
Effectively means having the intended result
Efficiently means accomplishing the objectives with a minimum of resources
Managers
Those individuals in organizations who make decisions about the use of resources and who are concerned with planning, organizing, staffing, directing and controlling the organization’s activities to reach its objectives
4
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Management is a process designed to achieve an organization’s objectives by using its resources effectively and efficiently in a changing environment. Effectively means having the intended results; efficiently means accomplishing the objectives with a minimum of resources.
Managers make decisions about the use of the organization’s resources and are concerned with planning, organizing, staffing, directing and controlling activities to reach the organization’s objectives. The decision to introduce
new products in order to reach objectives is often a key management duty. Management is universal. It takes place not only in business, but also in government, the military, labor unions, hospitals, schools, and religious groups—any organization requiring the coordination of resources.
4

The Importance of Management
Every organization must acquire resources to effectively pursue objectives and coordinate use to turn out final goods and services
Employees
Important in helping a firm attain its objectives
Recruit, train, compensate, and provide benefits to foster loyalty
Acquiring Supplies
Ensuring that products are made available to customers
In global markets firms enlist hundreds of diverse suppliers
Financial resources
To pay for essential activities
Owners, shareholders, banks, and other financial institutions
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Every organization must acquire resources (people, raw materials and equipment, money, and information) to effectively pursue its objectives and coordinate their use to turn out a final good or service.
Employees are one of the most important resources in helping a business attain its objectives. Successful companies recruit, train, compensate, and provide benefits (such as shares of stock and health insurance) to foster employee loyalty.
Acquiring suppliers is another important part of managing resources and ensuring that products are made available to customers. As firms reach global markets, companies such as Walmart, Corning, and Charles Schwab enlist hundreds of diverse suppliers that provide goods and services to support operations. A good supplier maximizes efficiencies and provides creative solutions to help the company reduce expenses and reach its objectives.
Finally, the manager needs adequate financial resources to pay for essential activities. Primary funding comes from owners and shareholders, as well as banks and other financial institutions.
All these resources and activities must be coordinated and controlled if the company is to earn a profit. Organizations must also have adequate supplies of resources of all types, and managers must carefully coordinate their use if they are to achieve the organization’s objectives.
5

Management Functions
Planning
Planning activities to achieve the organization’s objectives
Organizing
Organizing resources and activities to achieve the organization’s objectives
Staffing
Staffing the organization with qualified people
Directing
Directing employees’ activities toward achievement of objectives
Controlling
Controlling the organization’s activities to keep it on course
6
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To harmonize the use of resources so the business can develop, produce and sell products, managers engage in a series of activities:
Planning: Activities to achieve the organization’s objectives
Organizing: Resources and activities to achieve the organization’s objectives
Staffing: The organization with qualified people
Directing: Employees’ activities toward achievement of objectives
Controlling: The organization’s activities to keep it on course
Although this book discusses each of the five functions separately, they are interrelated; managers may perform two or more of them at the same time.
6

Planning
Planning is the process of determining the organization’s objectives and deciding how to accomplish them; the first function of management
Mission is the statement of an organization’s fundamental purpose and basic philosophy
Objectives are measurable statements on common issues such as profit, competitive advantage, efficiency and growth
Goals are the results the company wants to achieve
Plans specify what should be done, by whom, where, when and how
7
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Planning, the process of determining the organization’s objectives and deciding how to accomplish them, is the first function of management. Planning is a crucial activity, for it designs the map that lays the groundwork for the other functions. It involves forecasting events and determining the best course of action from a set of options or choices. The plan itself specifies what should be done, by whom, where, when, and how. But before an organization can plan a course of action, it must first determine what it wants to achieve.
A mission or mission statement, is an organization’s fundamental purpose and basic philosophy. It seeks to answer the question: “What business are we in?” A well-developed mission statement,
no matter what the industry or size of business, will answer five basic questions:
1. Who are we?
2. Who are our customers?
3. What is our operating philosophy (basic beliefs, values, ethics, etc.)?
4. What are our core competencies and competitive advantages?
5. What are our responsibilities with respect to being a good steward of
environmental, financial, and human resources?
A goal is the result that a firm wishes to achieve. A company almost always has multiple goals, which illustrates the complex nature of business. A goal has three key components: an attribute sought, such as profits, customer satisfaction, or product quality; a target to be achieved, such as the volume of sales or extent of management training to be achieved; and a time frame, which is the time period in which the goal is to be achieved.
Objectives, the ends or results desired by an organization, derive from the organization’s mission. A business’s objectives may be elaborate or simple. Common objectives relate to profit, competitive advantage, efficiency, and growth.
The principal difference between goals and objectives is that objectives are generally stated in such a way that they are measurable.
Plans specify what should be done, by whom, where, when and how. There are three general types of plans for meeting objectives—strategic, tactical, and operational.
7

Strategic Plans
Those plans that establish long-range objectives and overall strategy or course of action by which a firm fulfills its mission
Generally cover periods ranging from one year or longer
Plans to add products
Purchase companies
Sell unprofitable segments of the business
Issue stock
Move into international markets
8
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There are three general types of plans for meeting objectives—strategic, tactical, and operational. A firm’s highest managers develop its strategic plans, which establish the long-range objectives and overall strategy or course of action by which the firm fulfills its mission. Strategic plans generally cover periods ranging from one year or longer. They include plans to add products, purchase companies, sell unprofitable segments of the business, issue stock, and move into international markets.
Strategic plans must take into account the organization’s capabilities and resources, the changing business environment, and organizational objectives. Plans should be market-driven, matching customers’ desire for value with operational capabilities, processes, and human resources.
Apollo Global Management and Metropoulos made the strategic plan to purchase the Hostess snack business after the firm declared bankruptcy
8

Tactical Plans
Short-range plans (one year or less) designed to implement the activities and objectives specified in the strategic plan
Keep the firm on course established in the strategic plan
An ever-changing market requires firms to develop short-run or tactical plan to deal with the changing environment
9
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Tactical plans are short range and designed to implement the activities and objectives specified in the strategic plan. These plans, which usually cover a period of one year or less, help keep the organization on the course established in the strategic plan. Because tactical plans allow the organization to react to changes in the environment while continuing to focus on the company’s overall strategy, management must periodically review and update them. Declining performance or failure to meet objectives set out in tactical plans may be one reason for revising them.
9

Operational Plans
Very short-term plans that specify actions individuals, work groups, or departments need to accomplish in order to achieve the tactical plan and ultimately the strategic plan
Apply to details in executing activities quickly
10
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Operational plans are very short term and specify what actions specific individuals, work groups, or departments need to accomplish in order to achieve the tactical plan and ultimately the strategic plan. They apply to details in executing activities in one month, week, or even day.
10

Retail Store Example (1 of 2)
A retailing store with a five-year strategic plan to invest $5 billion in 500 new retail stores may develop 5 tactical plans (each covering 1 year) specifying:
How much to spend to set up each new store
Where to locate
When to open each new store
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A retailing organization with a five-year strategic plan to invest $5 billion in 500 new retail stores may develop five tactical plans (each covering one year) specifying how much to spend to set up each new store, where to locate, and when to open each new store.
11

Retail Store Example (2 of 2)
Tactical plans are designed to execute the overall strategic plan
They are easier to adjust or abandon if changes in the environment or the company’s performance so warrant
Operational plans may specify the schedule for:
opening 1 new store
Hiring and training new employees
Obtaining merchandise
Opening for actual business
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Tactical plans are designed to execute the overall strategic plan. Because of their short-term nature, they are easier to adjust or abandon if changes in the environment or the company’s performance so warrant.
Returning to our retail store example, operational plans may specify the schedule for opening one new store, hiring and training new employees, obtaining merchandise, and opening for actual business.
12

Crisis Management or
Contingency Planning
An element in planning that deals with potential disasters such as product tampering, oil spills, fire, earthquake, computer virus
~51% of companies have outdated disaster recovery and business continuity plans
Herbalife does businesses in 90 countries, and contingency plans must often be made for fluctuating exchange rates
13
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Another element of planning is crisis management or contingency planning, which deals with potential disasters such as product tampering, oil spills, fire, earthquake, computer viruses, or even a reputation crisis due to unethical or illegal conduct by one or more employees. Unfortunately, many businesses do not have updated contingency plans to handle the types of crises that their companies might encounter. Approximately 51 percent of companies have outdated disaster recovery and business continuity plans. Businesses that have correct and well-thought-out contingency plans tend to respond more effectively when problems occur than do businesses who lack such planning.
13

Organizing
The structuring of resources and activities to accomplish objectives in an efficient and effective manner
Helps create synergy
Establishes lines of authority
Improves communication
Helps avoid duplication of resources
Improves competitiveness by speeding up decision making
14
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Rarely are individuals in an organization able to achieve common goals without some form of structure. Organizing is the structuring of resources and activities to accomplish objectives in an efficient and effective manner. Organizing is important for several reasons. It helps create synergy, whereby the effect of a whole system equals more than that of its parts. It also establishes lines of authority, improves communication, helps avoid duplication of resources, and can improve competitiveness by speeding up decision making. Organizing occurs continuously because change is inevitable.
14

Staffing
Hiring people to carry out the work of the organization
Managerial duties
Recruiting
Determining what skills are needed for specific jobs
Motivating and training employees
Determining pay and benefits
Preparing employees for higher-level jobs
15
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Once managers have determined what work is to be done and how it is to be organized, they must ensure that the organization has enough employees with appropriate skills to do the work. Hiring people to carry out the work of the organization is known as staffing. Beyond recruiting people for positions within the firm, managers must determine what skills are needed for specific jobs, how to motivate and train employees, how much to pay, what benefits to provide, and how to prepare employees for higher-level jobs in the firm at a later date.
15

Monster.com and Staffing
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Some companies choose to recruit people to hire through online job websites such as Monster.com
Monster.com is one of the world’s largest employment websites
Using websites like Monster.com falls under the staffing function of management
16

Some companies choose to recruit people to hire through online job websites such as Monster.com. Monster.com is one of the world’s largest employment websites. Using websites like Monster.com falls under the staffing function of management.
16

Downsizing
The elimination of a significant number of employees from an organization
Production, sales and technical positions can be outsourced to countries with lower labor costs
Downsizing helps companies reduce costs quickly
This involves loss of jobs and lowered morale for remaining employees
An effective manager will promote optimism and positive thinking while minimizing criticism and fault-finding
17
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Another aspect of staffing is downsizing, the elimination of significant numbers of employees from an organization, which has been a pervasive and much-talked-about trend. Staffing can be outsourced to companies that focus on hiring and managing employees. Many firms downsize by outsourcing production, sales, and technical positions to companies in other countries with lower labor costs. Downsizing has helped numerous firms reduce costs quickly and become more profitable (or become profitable after lengthy losses) in a short period of time.
Downsizing and outsourcing, however, have painful consequences. Obviously, the biggest casualty is those who lose their jobs, along with their incomes, insurance, and pensions. Some find new jobs quickly; others do not. Another victim is the morale of the remaining employees at downsized firms. After a downsizing situation, an effective manager will promote optimism and positive thinking and minimize criticism and fault-finding.
17

Directing
Motivating and leading employees to achieve organizational objectives
Telling employees what to do and when to do it using deadlines, then encourage them to do their work
Determining and administering rewards and recognition
Providing incentives but recognition and appreciation are often the best motivators
Ask workers to contribute ideas for reducing costs, making equipment more efficient, improving customer service, or even developing new products
18
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Once the organization has been staffed, management must direct the employees. Directing is motivating and leading employees to achieve organizational objectives. Good directing involves telling employees what to do and when to do it through the implementation of deadlines, and then encouraging them to do their work.
Managers may motivate employees by providing incentives—such as the promise of a raise or promotion—for them to do a good job. But most workers want more than money from their jobs: They need to know that their employer values their ideas and input. Smart managers, therefore, ask workers to contribute ideas for reducing costs, making equipment more efficient, improving customer service, or even developing new products.
18

Controlling
The process of evaluating and correcting activities to keep the organization on course
Measuring performance
Comparing performance with standards or objectives
Identifying deviations from the standards
Investigating the causes of deviations
Taking corrective action when necessary
19
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Planning, organizing, staffing, and directing are all important to the success of an organization, whether its objective is earning a profit or something else. But what happens when a firm fails to reach its goals despite a strong planning effort? Controlling is the process of evaluating and correcting activities to keep the organization on course.
Control involves five activities:
Measuring performance
Comparing present performance with standards or objectives
Identifying deviations from the standards
Investigating the causes of deviations
Taking corrective action when necessary.
Controlling and planning are closely linked. Planning establishes goals and standards. By monitoring performance and comparing it with standards, managers can determine whether performance is on target. When performance is substandard, management must determine why and take appropriate actions to get the firm back on course. In short, the control function helps managers assess the success of their plans.
19

Levels of Management
As the pyramid shape implies, there are generally more middle managers than top managers, and still more first-line managers
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Many organizations have multiple levels of management—top management, middle management, and first-line, or supervisory management. These levels form a pyramid, as shown in this slides figure. As the pyramid shape implies, there are generally more middle managers than top managers, and still more first-line managers. Very small organizations may have only one manager (typically, the owner), who assumes the responsibilities of all three levels. Large businesses have many managers at each level to coordinate the use of the organization’s resources.
20

Time Spent on Management Functions
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Managers at all three levels of management perform all five management functions but the time spent on each function varies. This slide displays the importance of management functions to managers in each level.
For Top Managers, the most important management function is planning. Middle Managers most consuming function is organizing; while First-Line Managers spend most of their time controlling.

21

Top Management
The president and other top executives of a business, such as the chief executive officer (CEO), chief financial officer (CFO), and chief operations officer (COO), who have overall responsibility for the organization
In publically-owned corporations, CEO’s boss is board of directors
Compensation committees work directors and CEOs to keep pay in line with performance
Workforce diversity is good for workers and for the bottom line
22
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In businesses, top managers include the president and other top executives, such as the chief executive officer (CEO), chief financial officer (CFO), and chief operations officer (COO), who have overall responsibility for the organization. With technological advances accelerating and privacy concerns increasing, some companies are adding a new top management position—chief privacy officer (CPO).
Top-level managers spend most of their time planning. They make the organization’s strategic decisions, decisions that focus on an overall scheme or key idea for using resources to take advantage of opportunities.
Compensation committees are increasingly working with boards of directors and CEOs to attempt to keep pay in line with performance in order to benefit stockholders and key stakeholders. Successful management translates
into happy stockholders who are willing to compensate their top executives fairly and in line with performance.
Workforce diversity is an important issue in today’s corporations. Effective managers at enlightened corporations have found that diversity is good for workers and for the bottom line. Putting together different kinds of people to solve problems often results in better solutions.
DID YOU KNOW? Only 4.6 percent of Fortune 500 CEOs are women.
22

Facebook’s Top Management
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Mark Zuckerberg, CEO and founder of Facebook, manages the overall strategic direction of the company
Plays a key role in representing the company to stakeholders
In 2012, announced he would take an annual salary of just $1
Sheryl Sandberg, Facebook’s chief operating officer, is responsible for the daily operation of the company
COO reports to CEO and is often considered to be number two in command
23

Mark Zuckerberg, CEO and founder of Facebook, manages the overall strategic direction of the company and plays a key role in representing the company to stakeholders. Sheryl Sandberg, Facebook’s chief operating officer, is responsible for the daily operation of the company. The COO reports to the CEO and is often considered to be number two in command. In public corporations, even chief executive officers have a boss—the firm’s board of directors.
In 2012 it was announced Mark Zuckerberg would go from his current salary of $600,000 to an annual salary of just $1.
23

The Highest Paid CEOs
CEO Company Compensation
Larry Ellison Oracle $78.4 million
Robert Iger Walt Disney Productions $34.3 million
Kenneth I. Chenault American Express $24.4 million
Randall L. Stephenson Apple $20.6 million
Muhtar Kent Coca-Cola $20.4 million
James P. Gorman Morgan Stanley $18 million
Meg Whitman Hewlett-Packard $17.6 million
Virginia Rometty IBM $13.97 million
Jeff Bezos Amazon $1.68 million
Warren Buffett Berkshire Hathaway $485,606

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Given the importance and range of top managements’ decisions, top managers generally have many years of varied experience and command top salaries. In addition to salaries, top managers’ compensation packages typically include bonuses, long-term incentive awards, stock, and stock options. The table on this slide lists the compensation packages of different CEOs. Top management may also get perks and special treatment that is criticized by stakeholders.

24

Five Rules of Successful
Diversity Recruiting
Get everyone involved
Showcase your diversity
Work with diversity groups within your community
Spend money
Sell, sell, sell – and measure your return on investment
A diverse workforce is better at making decisions regarding issues related to consumer diversity
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Managers from companies devoted to workforce diversity devised five rules that make diversity recruiting work:
Get everyone involved: Educate all employees on the tangible benefits of diversity recruiting to garner support and enthusiasm for those initiatives.
Showcase your diversity: Prospective employees are not likely to become excited about joining your company just because you say that your company is diversity-friendly; they need to see it.
Work with diversity groups within your community: By supporting community-based diversity organizations, your company will generate the priceless word-of-mouth publicity that will lead qualified diversity candidates to your company.
Spend money: If you are serious about diversity recruiting, you will need to spend some money getting your message out to the right places.
Sell, sell, sell—and measure your return on investment: Employers need to sell their company to prospective diversity employees and present them with a convincing case as to why their company is a good fi t for the diversity candidate.
A diverse workforce is better at making decisions regarding issues related to consumer diversity. Reaching fast-growing demographic groups such as Hispanics, African Americans, Asian Americans, and others will be beneficial to large companies as they begin to target these markets.
25

Middle Managers
Those members of an organization responsible for the tactical planning that implements the general guidelines established by top management
Have more focused responsibilities and spend more time organizing than other managers
In business, plant managers, division mangers and department mangers make up middle management
The ranks of middle managers have been shrinking as more companies downsize to be more productive
26
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Rather than making strategic decisions about the whole organization, middle managers are responsible for tactical planning that will implement the general guidelines established by top management. Thus, their responsibility is more narrowly focused than that of top managers. Middle managers are involved in the specific operations of the organization and spend more time organizing than other managers. In business, plant managers, division managers, and department managers make up middle management. The ranks of middle managers have been shrinking as more and more companies downsize to be more productive.
26

First-Line Managers
Those who supervise both workers and the daily operations of an organization
Responsible for implementing plans established by middle management and directing workers’ daily performance
Spend most of their time directing and controlling
Commonly called foreman, supervisor and office service manager
27
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Most people get their first managerial experience as first-line managers, those who supervise workers and the daily operations of the organization. They are responsible for implementing the plans established by middle management and directing workers’ daily performance on the job. They spend most of their time directing and controlling. Common titles for first-line managers are foreman, supervisor, and office service manager.
27

Areas of Management (1 of 2)
Financial Manager
Focus on obtaining the money needed for the successful operation of the organization and using that money in accordance with organizational goals
Production and Operations Manager
Develop and administer the activities involved in transforming resources into goods, services, and ideas ready for the marketplace
Human Resources Manager
Handle the staffing function and deals with employees in a formalized manner
28
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At each level of management, managers specialize in the areas of: finance, production and operations, human resources, marketing and administration.
While larger firms will most likely have all of these managers, in smaller firms these important tasks may fall onto the owner
28

Areas of Management (2 of 2)
Marketing Manager
Responsible for planning, pricing, and promoting products and making them available to customers through distribution
Information Technology (IT) Manager
Responsible for implementing, maintaining, and controlling technology applications in business, such as computer networks
Administrative Manager
Manage an entire business or a major segment of a business; do not specialize in a particular function
29
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At each level of management, managers specialize in the areas of: finance, production and operations, human resources, marketing and administration.
While larger firms will most likely have all of these managers, in smaller firms these important tasks may fall onto the owner
29

Managing Automation and Robots in the Workplace
As digital technology and automation came to the forefront in business operations, many thought the managerial function would no longer be necessary—however, the opposite has proven to be true
Technical and leadership skills valued more highly among today’s managers as their former roles of overseeing employees on a production line have declined
These duties are now delegated to employees who oversee the operations of the machines on the production lines
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As digital technology and automation came to the forefront in business operations, many thought the managerial function would no longer be necessary. However, the opposite has proven to be true. Managers are still necessary, but their activities have changed. Technical and leadership skills are valued more highly among today’s managers as their former roles of overseeing employees on a production line have declined. These duties are now delegated to the employees who oversee the operations of the machines on the production lines.
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Managerial Roles
Decisional
Entrepreneur
Disturbance handler
Resource allocator
Negotiator
Informational
Monitor
Disseminator
Spokesperson
Interpersonal
Figurehead
Leader
Liaison
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Type of Role Specific Role Examples of Role Activities
Decisional Entrepreneur Commit organizational resources to develop innovative goods and services; decide to expand internationally to obtain new customers for the organization’s products.
Disturbance handler Move quickly to take corrective action to deal with unexpected problems facing the organization from the external environment, such as a crisis like an oil spill, or from the internal environment, such as producing faulty goods or services.
Resource allocator Allocate organizational resources among different functions and departments of the organization; set budgets and salaries of middle and first-level managers.
Negotiator Work with suppliers, distributors, and labor unions to reach agreements about the quality and price of input, technical, and human resources; work with other organizations to establish agreements to pool resources to work on joint projects.
Informational Monitor Evaluate the performance of managers in different functions and take corrective action to improve their performance; watch for changes occurring in the external and internal environment that may affect the organization in the future.
Disseminator Inform employees about changes taking place in the external and internal environment that will affect them and the organization; communicate to employees the organization’s vision and purpose.
Spokesperson Launch a national advertising campaign to promote new goods and services; give a speech to inform the local community about the organization’s future intentions.
Interpersonal Figurehead Outline future organizational goals to employees at company meetings; open a new corporate headquarters building; state the organization’s ethical guidelines and the principles of behavior employees are to follow in their dealings with customers and suppliers.
Leader Provide an example for employees to follow; give direct commands and orders to subordinates; make decisions concerning the use of human and technical resources; mobilize employee support for specific organizational goals.
Liaison Coordinate the work of managers in different departments; establish alliances between different organizations to share resources to produce new goods and services.
31

Technical Expertise
Technical Expertise
Specialized knowledge and training needed to perform jobs related to particular areas of management
Needed most by first-line managers and least critical to top-level managers
32
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Technical expertise is the specialized knowledge and training needed to perform jobs that are related to particular areas of management. This knowledge is needed most by first-line managers and least critical to top-level managers.
32

Conceptual Skills
Conceptual Skills
Ability to think in abstract terms and see how parts fit together to form the whole
Needed most by top level managers
Evaluate where the company will be in the future
33
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Conceptual skills are the ability to think in abstract terms and to see how parts fit together to form the whole. These skills are need most by top level managers. Top management must be able to evaluate continually where the company will be in the future.
33

Financial Manager
Financial managers are responsible for obtaining the necessary funding for organizations to succeed, both in the short term and in the long term
This financial manager of a city hedge fund analyzes data from financial charts
34
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This financial manager of a city hedge fund analyzes data from financial charts. Financial managers are responsible for obtaining the necessary funding for organizations to succeed, both in the short term and in the long term.
34

Analytical Skills
Analytical Skills
Ability to identify relevant issues, recognize their importance, understand relationships between them and perceive underlying causes of a situation
Most important to the success of top level managers
Resolving ethical issues often requires analytical skills
35
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Analytical skills are the ability to identify relevant issues, recognize their importance, understand the relationships between them and perceive the underlying causes of a situation. Analytical skills are most important to the success of top level managers. Resolving ethical issues often requires analytical skills.
35

Human Relations Skills
Human Relations Skills
Ability to deal with people, both inside and outside the organization
Those who can relate, communicate well, understand the needs, and show a true appreciation for others are more successful
Important in organizations that provide services, such as hospitals, airlines and banks
36
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Human relation skills are the ability to deal with people, both inside and outside the organization. These skills are especially important in organizations that provide services, such as hospitals, airlines and banks. Those who can relate to others, communicate well with others, understand the needs of others, and show a true appreciation for others are generally more successful than managers who lack such skills.
36

Seven Tips for Successful Leadership
Leadership is the ability to influence employees to work toward organizational goals
Build effective and responsive interpersonal relationships
Communicate effectively – in person, print, e-mail, etc.
Build the team and enable employees to collaborate effectively
Understand the financial aspects of the business
Know how to create an environment in which people experience positive morale and recognition
Lead by example
Help people grow and develop
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Leadership is the ability to influence employees to work toward organizational goals.
Seven helpful tips for successful leadership:
Build effective and responsive interpersonal relationships.
Communicate effectively—in person, print, e-mail, etc.
Build the team and enable employees to collaborate effectively.
Understand the financial aspects of the business.
Know how to create an environment in which people experience positive morale and recognition.
Lead by example.
Help people grow and develop.
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Leadership Styles
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Autocratic Leaders
Make all the decisions then tell employees what must be done and how to do it
Democratic Leaders
Involve employees in decisions
Free-rein Leaders
Let employees work without much interference; setting performance standards and letting employees find their own way to meet them
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Managers often can be classified into three types based on their leadership style. Autocratic leaders make all the decisions and then tell employees what must be done and how to do it. They generally use their authority and economic rewards to get employees to comply with their directions. Martha Stewart is an example of an autocratic leader. She built up her media empire by paying close attention to every detail.
Democratic leaders involve their employees in decisions. The manager presents a situation and encourages his or her subordinates to express opinions and contribute ideas. The manager then considers the employees’ points of view and makes the decision. Herb Kelleher, co-founder of Southwest Airlines, had a democratic leadership style. Under his leadership, employees were encouraged to discuss concerns and provide input.
Free-rein leaders let their employees work without much interference. The manager sets performance standards and allows employees to find their own ways to meet them. For this style to be effective, employees must know what the standards are, and they must be motivated to attain them. The free-rein style of leadership can be a powerful motivator because it demonstrates a great deal of trust and confidence in the employee. Warren Buffett, CEO of Berkshire Hathaway, exhibits free-rein leadership among the managers who run the company’s various businesses.
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Authentic Leadership
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Authentic Leaders
Different from the other three leadership styles because it is not exclusive
Both democratic and free-rein leaders could qualify as authentic leaders
Passionate about goals and mission of company, display corporate values in the workplace, form long-term relationships with stakeholders
Kim Jordan of New Belgium Brewing is an authentic leader
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Another type of leadership style that has been gaining in popularity is authentic leadership. Authentic leadership is a bit different from the other three leadership styles because it is not exclusive. Both democratic and free-rein leaders could qualify as authentic leaders depending upon how they conduct themselves among stakeholders. Authentic leaders are passionate about the goals and mission of the company, display corporate values in the workplace, and form long-term relationships with stakeholders. Kim Jordan of New Belgium Brewing is an authentic leader. As co-founder of the company, she helped develop the firm’s core values and has ensured that everything New Belgium does aligns with these values.
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Howard Schultz’s Leadership
Howard Schultz, CEO of Starbucks, has great human relations skills and leadership abilities, as demonstrated by his ability to relate to others
Under his leadership, Starbucks decided to offer health insurance to its part-time workers
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Howard Schultz, CEO of Starbucks, has great human relations skills and leadership abilities, as demonstrated by his ability to relate to others. Under his leadership, Starbucks decided to offer health insurance to its part-time workers.
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Employee Empowerment
When employees are provided with the ability to take on responsibilities and make decisions about their jobs
Participative corporate culture is beneficial – employees feel they are taking an active role in the firm’s success
Leaders must adopt systems that support employee’s ability to provide input and feedback on the company
Manager should be trained to empower employees to make decisions even in challenging situations
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Employee Empowerment occurs when employees are provided with the ability to take on responsibilities and make decisions about their jobs. Employee empowerment does not mean that managers are not needed. Companies that have a participative corporate culture have been found to be beneficial because employees feel like they are taking an active role in the firm’s success. Leaders who wish to empower employees must adopt systems that support an employee’s ability to provide input and feedback on company decisions. Employees must be encouraged to actively participate in decision making. Managers should also be trained in ways to empower employees to make decisions while also guiding employees to challenging situations in which the right decision might not be so clear.
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Leadership in Teams
Today, decisions made by teams are becoming the norm
Effective way for encouraging employee empowerment
Decision making in teams is collective
Most effective teams are when all employees are encouraged to contribute their ideas and recommendations
Outspoken employees dominate the team and engage in groupthink, in which team members go with the majority rather than what they think is the right decision
Training employees how to listen to one another and provide relevant feedback helps prevent
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A section on leadership would not be complete without a discussion of leadership in teams. In today’s business world, decisions made by teams are becoming the norm. Teamwork has often been an effective way for encouraging employee empowerment. Although decision making in teams is collective, the most effective teams are those in which all employees are encouraged to contribute their ideas and recommendations. Teams often result in innovative ideas or decisions that would not have been reached by only one or two people.
However, truly empowering employees in team decision making can be difficult. It is quite common for more outspoken employees to dominate the team and engage in groupthink, in which team members go with the majority rather than what they think is the right decision. Training employees how to listen to one another and provide relevant feedback can help to prevent these common challenges. Another way is to rotate the team leader so that no one person
can assume dominancy.
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Steps in the Decision Making Process
Recognize and define the decision situation
Develop options
Analyze options
Select the best option
Implement the decision
Monitor the consequences
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Managers make many different kinds of decisions. Decision making is important in all management functions and at all levels, whether the decisions are strategic, tactical or operational.
A systematic approach using the following six steps usually leads to more effective decision making:
Recognizing and defining the decision situation
Developing options to resolve the situation
Analyzing the options
Selecting the best option
Implementing the decision
Monitoring the consequences of the decision

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Recognizing and Defining the
Decision Situation
The first step in decision making is recognizing and defining the situation
Situations may be positive or negative
Situations calling for small-scale decisions occur without warning
Large-scale decisions generally occur after some warning signs
Once a situation is recognized, management must define it
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The first step in decision making is recognizing and defining the situation. The situation may be negative—for example, huge losses on a particular product—or positive—for example, an opportunity to increase sales. Situations calling for small-scale decisions often occur without warning. Situations requiring large-scale decisions, however, generally occur after some warning signs. Effective managers pay attention to such signals.
Once a situation has been recognized, management must define it. Losses reveal a problem—for example, a failing product. One manager may define the situation as a product quality problem; another may define it as a change in consumer preference. These two viewpoints may lead to vastly different solutions.
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Developing Options and Analyzing Options
The second step in the decision making process is developing options
A list of possible courses of action should include both standard and creative plans
The third step in the decision making process is analyzing options
Management must look at practicality and appropriateness of each option
Consider whether proposed option adequately addresses the situation
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Once the decision situation has been recognized and defined, the next step is to develop a list of possible courses of action. The best lists include both standard and creative plans. As a general rule, more time and expertise are devoted to the development stage of decision making when the decision is of major importance. When the decision is of less importance, less time and expertise will be spent on this stage.
After developing a list of possible courses of action, management should analyze the practicality and appropriateness of each option. An option may be deemed impractical because of a lack of financial resources, legal restrictions, ethical and social responsibility considerations, authority constraints, technological constraints, economic limitations, or simply a lack of information and expertise. When assessing appropriateness, the decision maker should consider whether the proposed option adequately addresses the situation. When analyzing the consequences of an option, managers should consider its impact on the situation and on the organization as a whole.
Technology can help managers maintain an agenda, analyze option, and make decisions
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Selecting the Best Option, Implementing the Decision
The fourth step in the decision making process is selecting the best option
Often a subjective procedure
The fifth step in the decision making process is implementing the decision
This step can be fairly simple, or very complex, depending on the nature of the decision
Prepare for unexpected consequences
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When all courses of action have been analyzed, management must select the best one. Selection is often a subjective procedure because many situations do not lend themselves to quantitative analysis. Of course, it is not always necessary to select only one option and reject all others; it may be possible to select and use a combination of several options.
To deal with the situation at hand, the selected option or options must be put into action. Implementation can be fairly simple or very complex, depending on the nature of the decision. Additionally, they should anticipate resistance from people within the organization. (People tend to resist change because they fear the unknown.) Finally, management should be ready to deal with the unexpected consequences.
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Monitoring the Consequences
The sixth step in the decision making process is monitoring the consequences
Has the implementation of the decision accomplished the desired result?
Is yes, then the decision was sound
If no, then more analysis is warranted
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After managers have implemented the decision, they must determine whether it has accomplished the desired result. Without proper monitoring, the consequences of decisions may not be known quickly enough to make efficient changes. If the desired result is achieved, management can reasonably conclude that it made a good choice. If the desired result is not achieved, management may discover that the situation was incorrectly defined from the beginning. That may require starting the decision-making process all over again.
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Factors that Affect Decision Making
The use of intuition is usually a result of years of experience in a specific situation or environment
Stress and emotion can also influence decisions negatively
How the problem or situation is framed will determine the final decision, whether it is negative or positive
Finally, confidence and risk propensity are delicate factors in decision making
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It is just as important for managers to make decisions as it is for them to understand the factors that affect decision making. The use of intuition is usually a result of years of experience in a specific situation or environment. The manager will recognize patterns or similarities between the current situation and previous ones and use that information to make decisions. Stress and emotion can also influence decisions negatively. Defensiveness, overreaction, and obsession are indicators that stress and emotion are being factored into the decision making process. How the problem or situation is framed will determine the final decision, whether it is negative or positive. Managers need to ensure that they are seeing the situation objectively. Sometimes bad decisions are reinforced by escalation of commitment, where the manager is committed to a certain activity and yet continues to fail. The more failure occurs, the stronger the commitment becomes. Finally, confidence and risk propensity are delicate factors in decision making. Both attributes must be kept in balance if decisions are to be reasonable and effective.
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Management in Practice
Management not a cut-and-dried process; there is no mathematical formula for managing a firm and achieving goals
Management expert, John P. Kotter says manager’s functions can be boiled down to two basic activities
Figuring out what to do despite uncertainty, great diversity, and an enormous amount of potentially relevant information
Getting things done through a large and diverse set of people despite having little direct control over most of them
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Management is not a cut-and-dried process. There is no mathematical formula for managing an organization and achieving organizational goals, although many managers passionately wish for one! Managers plan, organize, staff, direct, and control, but management expert John P. Kotter says even these functions can be boiled down to two basic activities:
Figuring out what to do despite uncertainty, great diversity, and an enormous amount of potentially relevant information, and
Getting things done through a large and diverse set of people despite having little direct control over most of them.
Managers spend as much as 75 percent of their time working with others—not only with subordinates but with bosses, people outside their hierarchy at work, and people outside the organization itself. In these interactions, they discuss anything and everything remotely connected with their business.
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Agendas and Networking
Agenda
Calendar containing specific and vague items that cover short-term goals and long-term objectives
Helps manager determine what must be done
Technology tools can help manage agendas
Networking
Building of relationships and sharing of information with colleagues who can help managers achieve the items on their agendas
Provide information and advice on diverse topics
Social media sites have increased ability to network
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Managers spend a lot of time establishing and updating an agenda of goals and plans for carrying out their responsibilities. An agenda contains both specific and vague items, covering short-term goals and long-term objectives. Like a calendar, an agenda helps the manager figure out what must be done and how to get it done to meet the objectives set by the organization. Technology tools such as smartphones can help managers manage their agendas, contacts, communications, and time.
Managers also spend a lot of time networking—building relationships and sharing information with colleagues who can help them achieve the items on their agendas. Networks are not limited to immediate subordinates and bosses; they include other people in the company as well as customers, suppliers, and friends. These contacts provide managers with information and advice on diverse topics. Social media sites have increased the ability of both managers and subordinates to network. Internal social networks such as Yammer allow employees to connect with one another, while social networks such as Facebook or Twitter enable managers to connect with customers.

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Challenges of the Business World
Rapidly changing technology
Increased scrutiny of individual and corporate ethics and social responsibility
Impact of social media
Changing nature of workforce
New laws and regulations
Increased global competition
Declining education standards
Making the best use of time
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Finally, managers spend a great deal of time confronting the complex and difficult challenges of the business world today. Some of these challenges relate to
Rapidly changing technology (especially in production and information processing)
Increased scrutiny of individual and corporate ethics and social responsibility
The impact of social media
The changing nature of the workforce
New laws and regulations
Increased global competition and more challenging foreign markets
Declining educational standards (which may limit the skills and knowledge of the future labor and customer pool)
Time itself—that is, making the best use of it
51

LinkedIn
Websites like LinkedIn are helping managers and employees network with one another to achieve their professional goals
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Websites like LinkedIn are helping managers and employees network with one another to achieve their professional goals.
It is only through creativity and imagination that managers can make effective decisions that benefit their organizations.
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Solve the Dilemma (1 of 3)
Making Infinity Computers Competitive
Infinity Computers Inc. produces notebook computers, they sell through direct mail companies under the Infinity name and in some retail computer stores under their private brand name
Products are not significantly different from competitors’
Do not have extra product-enhancing features
Very price competitive
Strength from the company’s CEO/president George Anderson and the highly motivated, loyal staff
Weakness from having too many employees and too great a reliance on one product
53
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This Solve the Dilemma is taken from Chapter 6, page 199:
Infinity Computers Inc. produces notebook computers, which it sells through direct mail catalog companies under the Infinity name and in some retail computer stores under their private brand names. Infinity’s products are not significantly different from competitors’, nor do they have extra product- enhancing features, although they are very price competitive. The strength of the company has been its CEO and president, George Anderson, and a highly motivated, loyal workforce. The firm’s weakness is having too many employees and too great a reliance on one product. The firm switched to computers with the Intel Core i5 processors after it saw a decline in its netbook computer sales.
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Solve the Dilemma (2 of 3)
Making Infinity Computers Competitive
Shelly has several options
Maintain current production levels and raises prices
Expand the facility and staff while maintaining the current price
Contract the production of the pies to a national chain, giving Shelly a percentage of profits with minimal involvement
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Recognizing that the strategies that initially made the firm successful are no longer working effectively, Anderson wants to reorganize the company to make it more responsive and competitive and to cut costs. The threat of new technological developments and current competitive conditions could eliminate Infinity.
54

Solve the Dilemma (3 of 3)
Making Infinity Computers Competitive
Discussion Questions
Evaluate Infinity’s current situation and analyze its strengths and weaknesses.
Evaluate the opportunities for Infinity, including using its current strategy, and propose alternative strategies.
Suggest a plan for infinity to complete successfully over the next 10 years
55
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Discussion Questions
1. Evaluate Infinity’s current situation and analyze its strengths and weaknesses.
2. Evaluate the opportunities for Infinity, including using its current strategy, and propose alternative strategies.
3. Suggest a plan for Infinity to compete successfully over the next 10 years.
55

Discussion
Name the five functions of management and briefly describe each function.
What skills do managers need? Give examples of how managers use these skills to do their jobs.
Identify the three levels of management. What is the focus of managers at each level?
Explain the steps in the decision-making process.
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Name the five functions of management and briefly describe each function.
 
The five functions of management include planning, organizing, staffing, directing, and controlling. Planning is the process of selecting a course of action to achieve organizational objectives. Organizing consists of structuring all resources and activities to accomplish objectives in an efficient and effective manner. Staffing is hiring people to carry out the work of the organization. Directing is motivating and leading employees to achieve organizational objectives. Controlling is evaluating and correcting activities to keep the organization on course.
What skills do managers need? Give examples of how managers use these skills to do their jobs.
 
Skills needed by managers include leadership, technical expertise, conceptual skills, analytical skills, and human relations skills. Leadership is the ability to influence and motivate employees to work toward the achievement of organizational goals. Technical expertise is the specialized knowledge needed to perform a job, such as managing an auto production line. Conceptual skills are the ability to think in abstract terms so that a manager can fit parts together to form a whole perspective of a business operation. Analytical skills are the ability to identify relevant issues and recognize their importance, understand the relationships between them, and perceive their underlying causes. Human relations skills involve dealing with people both inside and outside the organization.
Identify the three levels of management. What is the focus of managers at each level?
The three levels of management include top management, middle management, and first‑line management. Top management includes the president and other top executives who have overall responsibility for the organization. Middle management includes plant managers, division managers, and other managers who have a narrower focus under top managers. First-line management includes all the managers who supervise workers. These managers are involved in the everyday operations of the organization.
Explain the steps in the decision-making process.
 
Decision making is a six-step process that occurs at all management levels. The first step involves recognizing and defining the situation. Step two involves developing possible courses of action, both standard and creative ones. Step three involves analyzing the feasibility, appropriateness, and consequences of each option. Step four involves selecting the best option from the list of options. The decision is implemented in step five. Step six requires the monitoring of the decision’s consequences. These steps in decision making should be viewed only as a broad framework to help people in their approaches to decision making.

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Part 3
Chapter 7

Managing for Quality and Competitiveness

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We continue part 3 of your textbook, Managing for Quality and Competitiveness, with chapter 7, Organization, Teamwork, and Communication.
1

CHAPTER 6
The Nature of Management
CHAPTER 7
Organization, Teamwork, and Communication
CHAPTER 8
Managing Service and Manufacturing Operations
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2

In chapter 7, we take a look at organization, teamwork, and communication as it relates to business management. An organization’s structure determines how well it makes decisions and responds to problems, and it influences employees’ attitudes toward their work. Because a business’s structure can so profoundly affect its success, this chapter will examine organizational structure in detail. First, we discuss how an organization’s culture affects its operations. Then we consider the development of structure, including how tasks and responsibilities are organized through specialization and departmentalization. Next, we explore some of the forms organizational structure may take. Finally, we consider communications within business.
2

Learning Objectives
LO 7-1 Define organizational structure and relate how organizational structures develop.
LO 7-2 Describe how specialization and departmentalization help an organization achieve its goals.
LO 7-3 Determine how organizations assign responsibility for tasks and delegate authority.
LO 7-4 Compare and contrast some common forms of organizational structure.
LO 7-5 Distinguish between groups and teams and identify the types of groups that exist in organizations.
LO 7-6 Describe how communication occurs in organizations.
LO 7-7 Analyze a business’s use of teams.
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3

After reading this chapter, you will be able to:
Define organizational structure, and relate how organizational structures develop.
Describe how specialization and departmentalization help an organization achieve its goals.
Determine how organizations assign responsibility for tasks and delegate authority.
Compare and contrast some common forms of organizational structure.
Distinguish between groups and teams, and identify the types of groups that exist in organizations.
Describe how communication occurs in organizations.
Analyze a business’s use of teams.
3

Organizational Culture
A firm’s shared values, beliefs, traditions, philosophies, rules, and role models for behavior
Formally
Mission statement
Code of ethics
Methods & Manuals
Ceremonies
Informally
Dress code & work habits
Discussions with co-workers
Extracurricular activities and stories
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One of the most important aspects of organizing a business is determining its organizational culture, a firm’s shared values, beliefs, traditions, philosophies, rules, and role models for behavior. Also called corporate culture, an organizational culture exists in every organization, regardless of size, organizational type, product, or profit objective.
A firm’s culture may be expressed formally through its mission statement, codes of ethics, memos, manuals, and ceremonies, but it is more commonly expressed informally. Examples of informal expressions of culture include dress codes (or the lack thereof), work habits, extracurricular activities, and stories. Employees often learn the accepted standards through discussions with co-workers.
4

Attitudes and Behaviors Associated with Corporate Culture (1 of 2)
Ensures that organizational members:
Share values
Observe common rules
Share problem-solving approaches
5
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Organizational culture helps ensure that all members of a company share values and suggests rules for how to behave and deal with problems within the organization.
5

Attitudes and Behaviors Associated with Corporate Culture (2 of 2)
Employees who view their culture negatively Employees who view their culture positively
Committed toward organization 17% 86%
Satisfied with organization 13% 87%
Likely to recommend their organization to others 13% 88%
Intend to leave the organization 63% 10%
Alignment with leadership 8% 59%

6
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The table confirms that executives in this study believe that corporate culture has a significant impact on organizational performance and the ability to retain good employees. The key to success in any organization is satisfying stakeholders, especially customers. Establishing a positive organizational culture sets the tone for all other decisions, including building an efficient organizational structure.
Source: Survey conducted by Critical Metrics LLC CR Magazine 3, June 2012, www.thecro.com/content/quantifying-corporate-culture
6

TOMS Shoes
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TOMS Shoes’ organizational culture is determined by the founder’s desire to provide as many shoes as possible to children in developing countries
The for-profit component of the company manages overall operations
Its nonprofit component, Friends of TOMS, is responsible for volunteer activities and shoe donations
7

TOMS Shoes’ organizational culture is determined by the founder’s desire to provide as many shoes as possible to children in developing countries (where shoeless children walk for miles to get water, food, and medical care). Blake Mycoskie gives hundreds of thousands of shoes to children around the world each year, creating a strong organizational culture of giving back and corporate social responsibility. His company operates with a program that for every shoe purchased, a shoe will be donated to children in need. His company operates with a program that for every shoe purchased, a shoe will be donated to children in need. The organizational structure at TOMS Shoes consists of two parts. The for-profit component of the company manages overall operations. Its nonprofit component, Friends of TOMS, is responsible for volunteer activities and shoe donations.

7

Organizational Structure
The arrangement or relationship of positions within an organization
Getting people to work together efficiently and coordinating the skills of diverse individuals require careful planning
An organization’s structure develops when:
Managers assign work tasks to specific individuals or work groups
Coordinate the diverse activities required to reach the firm’s objectives
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Structure is the arrangement or relationship of positions within an organization. Rarely is an organization, or any group of individuals working together, able to achieve common objectives without some form of structure, whether that structure is explicitly defined or only implied. Getting people to work together efficiently and coordinating the skills of diverse individuals require careful planning. Developing appropriate organizational structures is therefore a major challenge for managers in both large and small organizations.
An organization’s structure develops when managers assign work tasks and activities to specific individuals or work groups and coordinate the diverse activities required to reach the firm’s objectives
8

Organizational Chart
A visual display of the organizational structure, lines of authority (chain of command), staff relationships, permanent committee arrangements, and lines of communication
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The figure on the next slide (figure 7.1 in text), shows these stages of growth with three organizational charts (visual displays of organizational structure, chain of command, and other relationships).
9

The Evolution of a Clothing Store
Phases 1, 2, and 3
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The best way to begin to understand how organizational structure develops is to consider the evolution of a new business such as a clothing store. At first, the business is a sole proprietorship in which the owner does everything—buys, prices, and displays the merchandise; does the accounting and tax records; and assists customers. As the business grows, the owner hires a salesperson and perhaps a merchandise buyer to help run the store. As the business continues to grow, the owner hires more salespeople. The growth and success of the business now require the owner to be away from the store frequently, meeting with suppliers, engaging in public relations, and attending trade shows. Thus, the owner must designate someone to manage the salespeople and maintain the accounting, payroll, and tax functions. If the owner decides to expand by opening more stores, still more managers will be needed. The figure above (figure 7.1 in text), shows these stages of growth with three organizational charts (visual displays of organizational structure, chain of command, and other relationships).
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Specialization
The division of labor into small, specific tasks and the assignment of employees to do a single task
Reasons to specialize
Efficiency
Workers do not waste time shifting from one job to another
Ease of training
Activities too numerous for one person
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After identifying all activities that must be accomplished, managers then break these activities down into specific tasks that can be handled by individual employees. This division of labor into small, specific tasks and the assignment of employees to do a single task is called specialization. The rationale for specialization is efficiency. People can perform more efficiently if they master just one task rather than all tasks. Specialization means workers do not waste time shifting from one job to another, and training is easier. Specialization also occurs when the activities that must be performed within an organization are too numerous for one person to handle.
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Over-Specialization
Negative consequences
Employees become bored
Job dissatisfaction
Poor quality work
Increased injuries
Increased employee turnover
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Overspecialization can have negative consequences. Employees may become bored and dissatisfied with their jobs, and the result of their unhappiness is likely to be poor quality work, more injuries, and high employee turnover. In extreme cases, employees in crowded specialized electronic plants are unable to form working relationships with one another.
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Job Specialization
Common in automobile manufacturing
Divide work into smaller specialized tasks
Employees can perform their work more quickly and efficiently
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Job specialization is common in automobile manufacturing. By dividing work into smaller specialized tasks, employees can perform their work more quickly and efficiently.
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Departmentalization
The grouping of jobs into working units usually called departments, units, groups, or divisions
Most companies use more than one departmentalization plan to enhance productivity
Functional departmentalization
Product departmentalization
Geographical departmentalization
Customer departmentalization
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After assigning specialized tasks to individuals, managers next organize workers doing similar jobs into groups to make them easier to manage. Departmentalization is the grouping of jobs into working units usually called departments, units, groups, or divisions. As we shall see, departments are commonly organized by function, product, geographic region, or customer. Most companies use more than one departmentalization plan to enhance productivity. For instance, many consumer goods manufacturers have departments for specific product lines (beverages, frozen dinners, canned goods, and so on) as well as departments dealing with legal, purchasing, finance, human resources, and other business functions.
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Functional Departmentalization
The grouping of jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources
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Functional departmentalization groups jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources. This approach is common in small organizations. A weakness of functional departmentalization is that, because it tends to emphasize departmental units rather than the organization as a whole, decision making that involves more than one department may be slow, and it requires greater coordination.
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Product Departmentalization
The organization of jobs in relation to the products of the firm
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Product departmentalization , as you might guess, organizes jobs around the products of the firm. Functional activities—production, finance, marketing, and others—are located within each product division. Consequently, organizing by products duplicates functions and resources and emphasizes the product rather than achievement of the organization’s overall objectives. However, it simplifies decision making and helps coordinate all activities related to a product or product group.
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Geographical Departmentalization
The grouping of jobs according to geographic location, such as state, region, country, or continent
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Geographical departmentalization groups jobs according to geographic location, such as a state, region, country, or continent. Multinational corporations often use a geographical approach because of vast differences between different regions. However, organizing by region requires a large administrative staff and control system to coordinate operations, and tasks are duplicated among the different regions.
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Customer Departmentalization
The arrangement of jobs around the needs of various types of customers
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Customer departmentalization arranges jobs around the needs of various types of customers. Customer departmentalization, like geographical departmentalization, does not focus on the organization as a whole and therefore requires a large administrative staff to coordinate the operations of the various groups.
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PepsiCo Inc. is organized into business units
PepsiCo Americas Foods: which includes brands such as Frito-Lay North America, Quaker Foods North America, and all of its Latin American food and snack businesses
PepsiCo Americas Beverages: which includes the Mountain Dew, Lipton, and Tropicana brands
PepsiCo Europe: which includes regional brands like Wimm-Bill-Dann and Marbo as well as all beverage, food, and snack businesses in Europe and South Africa
PepsiCo Asia, Middle East and Africa: which includes all beverage, food, and snack businesses in these regions
What type(s) of departmentalization does PepsiCo use for organizing its corporations?
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PepsiCo Inc. is organized into business units:
PepsiCo Americas Foods, which includes brands such as Frito-Lay North America, Quaker Foods North America, and all of its Latin American food and snack businesses;
PepsiCo Americas Beverages, which includes the Mountain Dew, Lipton, and Tropicana brands;
PepsiCo Europe, which includes regional brands like Wimm-Bill-Dann and Marbo as well as all beverage, food, and snack businesses in Europe and South Africa; and
PepsiCo Asia, Middle East and Africa, which includes all beverage, food, and snack businesses in these regions.

What type(s) of departmentalization does PepsiCo use for organizing its corporations?
PepsiCo has actually adopted a combination of two types of departmentalization. While it clearly separates foods from beverages in the Americas, the company chooses to divide its segments into geographic regions—a type of geographic departmentalization.
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Delegation of Authority
Giving employees not only tasks, but also the power to make commitments, use resources, and take whatever actions are necessary to carry out those tasks
As a business grows, so do the number and complexity of decisions that must be made
No one manager can handle them all
Delegation of authority frees a manager to concentrate on larger issues such as planning or dealing with problems and opportunities
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Delegation of authority means not only giving tasks to employees but also empowering them to make commitments, use resources, and take whatever actions are necessary to carry out those tasks. As a business grows, so do the number and complexity of decisions that must be made; no one manager can handle them all. Delegation of authority frees a manager to concentrate on larger issues, such as planning or dealing with problems and opportunities.
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Responsibility and Accountability
Responsibility
The obligation, placed on employees through delegation, to perform assigned tasks satisfactorily and be held accountable for the proper execution of work
Accountability
The principle that employees who accept an assignment and the authority to carry it out are answerable to a superior for the outcome
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Delegation also gives a responsibility, or obligation, to employees to carry out assigned tasks satisfactorily and holds them accountable for the proper execution of their assigned work. The principle of accountability means that employees who accept an assignment and the authority to carry it out are answerable to a superior for the outcome. The act of delegating authority to a subordinate does not relieve the superior of accountability for the delegated
job.
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Degree of Centralization (1 of 2)
Centralized organizations
A structure in which authority is concentrated at the top, and very little decision-making authority is delegated to lower levels
Overcentralization can cause serious problems for a company
May take longer for the organization as a whole to implement decisions and to respond to changes and problems on a regional scale
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The extent to which authority is delegated throughout an organization determines its degree of centralization.
In a centralized organization, authority is concentrated at the top, and very little decision-making authority is delegated to lower levels. Although decision-making authority in centralized organizations rests with top levels of management, a vast amount of responsibility for carrying out daily and routine procedures is delegated to even the lowest levels of the organization. Overcentralization can cause serious problems for a company, in part because it may take longer for the organization as a whole to implement decisions and to respond to changes and problems on a regional scale.
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Degree of Centralization (2 of 2)
Decentralized organizations
An organization in which decision-making authority is delegated as far down the chain of command as possible
Delegating authority to lower levels of managers may increase the organization’s productivity
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A decentralized organization is one in which decision-making authority is delegated as far down the chain of command as possible. Decentralization is characteristic of organizations that operate in complex, unpredictable environments. Delegating authority to lower levels of managers may increase the organization’s productivity. Decentralization requires that lower-level managers have strong decision- making skills.
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Span of Management
The number of subordinates who report to a particular manager
A wide span of management exists when a manager directly supervises a very large number of employees
A narrow span of management exists when a manager directly supervises only a few subordinates
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How many subordinates should a manager manage? There is no simple answer. Span of management refers to the number of subordinates who report to a particular manager. A wide span of management exists when a manager directly supervises a very large number of employees. A narrow span of management exists when a manager directly supervises only a few subordinates. The figure on this slide demonstrates the differences between a wide span and narrow span of management.
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Organizational Layers
The levels of management in an organization
Complements the concept of span of management
A company with many layers of managers is considered tall; in a tall organization, the span of management is narrow
Organizations with few layers are flat and have wide spans of management
Many of the firms that have decentralized also flattened their structures and widened their spans of management
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Complementing the concept of span of management is organizational layers, the levels of management in an organization. A company with many layers of managers is considered tall; in a tall organization, the span of management is narrow. Because each manager supervises only a few subordinates, many layers of management are necessary to carry out the operations of the business.
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Learning Organization
Opens communication between departments in order to increase the level of learning among employees
Manager invests in employees through extensive training and minimal restrictions so creativity is emphasized
Employees are encouraged to experiment with the ideas that have the most value for customers
Managers encourage a healthy level of risk taking and learning from mistakes
Failure is valued as a learning experience
Success seen as a fleeting experience
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A learning organization is one that opens communication between departments in order to increase the level of learning among employees within the organization. The manager creating and sustaining this kind of organization invests in employees through extensive training and minimal restrictions so that creativity is emphasized. Through the knowledge that is created and captured, employees are encouraged to experiment with the ideas that have the most value for customers. Managers encourage a healthy level of risk taking and learning from mistakes. Failure is valued as a learning experience and success, while celebrated, is seen as a fleeting experience that should not be the focus of the future because there is not much to learn from success.
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Forms of Organizational Structures
Line structure
Line-and-staff structure
Multidivisional structure
Matrix structure
Managers must consider how to structure their authority relationships
What structure the organization will have
How it will appear on the organizational chart
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Along with assigning tasks and the responsibility for carrying them out, managers must consider how to structure their authority relationships—that is, what structure the organization itself will have and how it will appear on the organizational chart. Common forms of organization include line structure, line-and-staff structure, multidivisional structure, and matrix structure.
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Line Structure
The simplest organizational structure in which direct lines of authority extend from the top manager to the lowest level of the organization
Has a clear chain of command, which enables managers to make decisions quickly
Structure requires that managers possess a wide range of knowledge and skills
Most common in small businesses
28
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The simplest organizational structure, line structure, has direct lines of authority that extend from the top manager to employees at the lowest level of the organization. This structure has a clear chain of command, which enables managers to make decisions quickly. A mid-level manager facing a decision must consult only one person, his or her immediate supervisor. However, this structure requires that managers possess a wide range of knowledge and skills. They are responsible for a variety of activities and must be knowledgeable about them all. Line structures are most common in small businesses.
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Line-and-Staff Structure (1 of 2)
A structure having a traditional line relationship between superiors and subordinates and also specialized managers – called staff managers – who are available to assist line managers
Focus on their area of expertise in the operation of the business
Staff managers provide advice and support to line departments on specialized matters
May experience problems with overstaffing and ambiguous lines of communication
Employees may become frustrated with lack of authority
29
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The line-and-staff structure has a traditional line relationship between superiors and subordinates, and specialized managers—called staff managers—are available to assist line managers. Line managers can focus on their area of expertise in the operation of the business, while staff managers provide advice and support to line departments on specialized matters such as finance, engineering, human resources, and the law.
However, line-and-staff organizations may experience problems with overstaffing and ambiguous lines of communication. Additionally, employees may become frustrated because they lack the authority to carry out certain decisions.
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7-30
Line-and-Staff Structure (2 of 2)
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The figure on this slide demonstrates the line-and-staff structure
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Multidivisional Structure
A structure that organizes departments into larger groups called divisions
Occurs as organizations grow larger and more diversified
Divisions can be formed on the same bases as departments (customer, product, and/or geography)
Delegation of authority and divisionalized work
Inevitably creates work duplication
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As companies grow and diversify, traditional line structures become difficult to coordinate, making communication difficult and decision making slow. When the weaknesses of the structure—the “turf wars,” miscommunication, and working at cross-purposes—exceed the benefits, growing firms tend to restructure, often into the divisionalized form. A multidivisional structure organizes departments into larger groups called divisions. Just as departments might be formed on the basis of geography, customer, product, or a combination of these, so too divisions can be formed based on any of these methods of organizing. Multidivisional structures permit delegation of decision-making authority, allowing divisional and department managers to specialize.
However, the divisional structure inevitably creates work duplication, which makes it more difficult to realize the economies of scale that result from grouping functions together.
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Matrix Structure (1 of 2)
A structure that sets up teams from different departments, thereby creating two or more intersecting lines of authority; also called a project-management structure
Flexibility
Enhanced cooperation
Creativity
Respond quickly to changes in the environment
Generally expensive and quite complex
Employees may be confused as to whose authority has priority (project manager’s or immediate supervisor’s)
32
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Another structure that attempts to address issues that arise with growth, diversification, productivity, and competitiveness, is the matrix. A matrix structure, also called a project management structure, sets up teams from different departments, thereby creating two or more intersecting lines of authority.

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7-33
Matrix Structure (2 of 2)
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This figure displays a matrix structure.

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Groups and Teams
All teams are groups but not all groups are teams
A GROUP is two or more individuals who communicate with one another, share a common identity, and have a common goal
A TEAM is a small group whose members have complementary skills; have a common purpose, goals, and approach; and hold themselves mutually accountable
Virtual teams are employees in different locations who rely on technological tools to accomplish their goals
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Regardless of how they are organized, most of the essential work of business occurs in individual work groups and teams, so we’ll take a closer look at them now. Although some experts do not make a distinction between groups and teams, in recent years there has been a gradual shift toward an emphasis on teams and managing them to enhance individual and organizational success. Traditionally, a group has been defined as two or more individuals who communicate with one another, share a common identity, and have a common goal. A team is a small group whose members have complementary skills; have a common purpose, goals, and approach; and hold themselves mutually accountable. All teams are groups, but not all groups are teams.
The type of groups an organization establishes depends on the tasks it needs to accomplish and the situation it faces. Some specific kinds of groups and teams include committees, task forces, project teams, product-development teams, quality-assurance teams, and self-directed work teams. All of these can be virtual teams—employees in different locations who rely on e-mail, audio conferencing, fax, Internet, videoconferencing, or other technological tools to accomplish their goals. Virtual teams are becoming a part of everyday business, with the number of employees working remotely from their employer increasing more than 80 percent in the last several years.
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Differences Between Groups and Teams
WORKING GROUP TEAM
Has strong, clearly focused leader Has shared leadership roles
Has individual accountability Has individual and group accountability
Has the same purpose as the broader organizational mission Has a specific purpose that the team itself delivers
Creates individual work products Creates collective work products
Runs efficient meetings Encourages open-ended discussion and active problem-solving meetings
Measures effectiveness indirectly by its effects on others (e.g., financial performance of the business) Measures performance directly by assessing collective work products
Discusses, decides, and delegates Discusses, decides, and does real work together

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The table above (table 7.2 in text) points out some important differences between them.
Working Group Team
1. Has strong, clearly focused leader 1. Has shared leadership roles
2. Has individual accountability 2. Has individual and group accountability
3. Has the same purpose as the broader organizational mission 3. Has a specific purpose that the team itself delivers
4. Creates individual work products 4. Creates collective work products
5. Runs efficient meetings 5. Encourages open-ended discussion and active problem-solving meetings
6. Measures its effectiveness indirectly by its effects on others 6. Measures performance directly by assessing collective work products
(e.g., financial performance of the business)
7. Discusses, decides, and delegates 7. Discusses, decides, and does real work together
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Committees and Task Forces
Committees
A permanent, formal group that performs a specific task
Task Forces
A temporary group of employees responsible for bringing about a particular change
Come from all departments and levels of organization
Membership based on expertise rather than position
Occasionally, may be formed from individuals outside a company
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Organizations make use of specialized groups two of which are presented on this slide: committees and the task force. A committee is usually a permanent, formal group that does some specific task. For example, many firms have a compensation or finance committee to examine the effectiveness of these areas of operation as well as the need for possible changes.
A task force is a temporary group of employees responsible for bringing about a particular change. They typically come from across all departments and levels of an organization. Task force membership is usually based on expertise rather than organizational position. Occasionally, a task force may be formed from individuals outside a company.
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Teams (1 of 2)
Project Teams
Groups similar to task forces which normally run their operation and have total control of a specific work project
Product-Development Teams
A specific type of project team formed to devise, design, and implement a new product
37
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In the United States, the use of teams in organizations has become fairly widespread. Teams are typically formed because they have been found to increase productivity, quality, and competitiveness. Teams are beneficial because they pool members’ knowledge and skills and make greater use of them than individuals working alone. It is important to point out that effective teams are usually small in number, no more than five members. Organizations employ different types of teams depending upon what they wish to accomplish. The more common types of teams are listed on this slide and the following slide: project teams, product development teams, quality assurance teams that are often called quality circles, and the highest form of team functioning called the self-directed work teams referred to as SDWT.
Project teams are groups similar to task forces which normally run their operation and have total control of a specific work project.
Product-development teams are a specific type of project team formed to devise, design, and implement a new product.
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Teams (2 of 2)
Quality-Assurance Teams (or Quality Circles)
Small groups of workers brought together from throughout the organization to solve specific quality, productivity, or service problems
Self-Directed Work Teams (SDWT)
A group of employees responsible for an entire work process or segment that delivers a product to an internal or external customer
38
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Quality-assurance teams (or quality circles) are small groups of workers brought together from throughout the organization to solve specific quality, productivity, or service problems.
Self-directed work teams (SDWT) are a group of employees responsible for an entire work process or segment that delivers a product to an internal or external customer.
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Meetings and Teams
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DID YOU KNOW?
A survey of managers and executives found that they feel 28 percent of meetings are a waste of time and that information could be communicated more effectively using other methods
At Google, small teams work on research and engineering projects that often last 6-12 months
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Did you know? :A survey of managers and executives found that they feel 28 percent of meetings are a waste of time and that information could be communicated more effectively using other methods.

At Google, small teams work on research and engineering projects that often last 6-12 months
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The Flow of Communication in an Organizational Hierarchy
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The figure on this slide displays the flow of communication in an organizational hierarchy. Communication within an organization can flow in a variety of directions and from a number of sources, each using both oral and written forms of communication. The success of communication systems within the organization has a tremendous effect on the overall success of the firm. Alternatives to face-to-face communications—such as meetings—are growing, thanks to technology such as voice-mail, e-mail, social media, and online newsletters. Many companies use internal networks called intranets to share information with employees. Intranets increase communication across different departments and levels of management and help with the flow of everyday business activities.
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Yammer and the Intranet
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Many companies use internal networks called intranets to share information with
Intranets increase communication across different departments and levels of management and help with the flow of everyday business activities
Yammer is a social network that companies can use to connect employees with one another
41

Many companies use internal networks called intranets to share information with employees. Intranets increase communication across different departments and levels of management and help with the flow of everyday business activities. Companies can even integrate aspects of social media into their intranets, allowing employees to post comments and pictures, participate in polls, and create group calendars.
Yammer is a social network that companies can use to connect employees with one another.
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Upward Communication
Flows from lower to higher levels of the organization
Includes information such as progress reports, suggestions for improvement, inquiries, and grievances
42
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Formal channels of communication are intentionally defined and designed by the organization. They represent the flow of communication within the formal organizational structure, as shown on organizational charts. Traditionally, formal communication patterns were classified as vertical and horizontal, but with the increased use of teams and matrix structures, formal communication may occur in a number of patterns.
Upward communication flows from lower to higher levels of the organization and includes information such as progress reports, suggestions for improvement, inquiries, and grievances.
42

Downward Communication
Refers to the traditional flow of information from upper organizational levels to lower levels
Typically involves directions, assignment of tasks and responsibilities, performance feedback, and certain details about the organization’s strategies and goals
43
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Downward communication refers to the traditional flow of information from upper organizational levels to lower levels. This type of communication typically involves directions, the assignment of tasks and responsibilities, performance feedback, and certain details about the organization’s strategies and goals.
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Horizontal Communication
Involves the exchange of information among colleagues and peers on the same organizational level, such as across or within departments
Information informs, supports, and coordinates activities both within the department and with other departments
44
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Horizontal communication involves the exchange of information among colleagues and peers on the same organizational level, such as across or within departments. Horizontal information informs, supports, and coordinates activities both within the department and with other departments. At times, the business will formally require horizontal communication among particular organizational members, as is the case with task forces or project teams.
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Diagonal Communication
When individuals from different units and organizational levels communicate
With firms downsizing and increasing the use of work teams, workers are being required to communicate with others in different departments and on different levels to solve problems and coordinate work
45
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With more and more companies downsizing and increasing the use of self-man aged work teams, many workers are being required to communicate with others in different departments and on different levels to solve problems and coordinate work. When these individuals from different units and organizational levels communicate, it is diagonal communication.
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Informal Communication Channels
Grapevine
An informal channel of communication, separate from management’s formal, official communication channels
Friendships and nonwork social relationships comprise the informal organization of a firm
Managers can utilize informal communications as a sounding device
Information from grapevine could improve decision making
Use grapevine to their advantage by floating ideas, soliciting feedback, and reacting accordingly
46
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While formal communications are important for organizational efficiency, informal communication has a profound impact on the effectiveness of the organization. Communication occurs between friends who may be in different departments and on different levels in the organization. The most significant information communication occurs through the grapevine that is separate form management’s formal, official communication channels. Information passed along the grapevine may relate to the job or it may be gossip and rumor. The accuracy of grapevine information can be of great concern to managers.
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Non-Verbal Communication
Non-verbal communication is embedded in most forms of communication; send messages out through hand movements, head nodding, tone of voice or written word
These indirect forms of communication can be more informative than the direct message being transmitted
It is important to be aware of one’s own non-verbal communication style in order to ensure sending the intended message
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Non-verbal communication is embedded in most forms of communication and send messages out through hand movements, head nodding, and tone of voice or written word. These indirect forms of communication can be more informative than the direct message being transmitted. It is important to be aware of one’s own non-verbal communication style in order to ensure sending the intended message.
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Improving Communication Effectiveness
Encourage employees to provide feedback
Managers should always encourage feedback, including concerns and challenges about issues
Helps identify strengths and weaknesses
Strong feedback mechanisms help empower employees
Avoid interruptions
Develop strong and effective communication channels through training
Important for companies to communicate e-mail policies throughout the organization
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Without effective communication, the activities and overall productivity of projects, groups, teams, and individuals will be diminished. Communication is an important area for a firm to address at all levels of management.
One of the major issues of effective communication is in obtaining feedback. If feedback is not provided, then communication will be ineffective and can drag down overall performance. Managers should always encourage feedback, including concerns and challenges about issues. This will allow the organization to identify strengths and weaknesses and make adjustments when needed. Strong feedback mechanisms help to empower employees as they feel that their voices are being heard.
Interruptions can be a serious threat to effective communication. Various activities can interrupt the message. For example, interjecting a remark can create discontinuance in the communication process or disrupt the uniformity of the message.
Strong and effective communication channels are a requirement for companies to distribute information to different levels of the company. Businesses have several channels for communication, including face-to-face, e-mail, phone, and written communication (for example, memos). Each channel has advantages and disadvantages, and some are more appropriate to use than others. It is important that employees use e-mail correctly. It is quite easy to send the wrong email to the wrong person, and messages sent over e-mail can be misinterpreted. It is therefore important for companies to communicate their e-mail policies throughout the organization.
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Solve the Dilemma (1 of 3)
Quest Star in Transition
Quest Star (QS), manufactures quality stereo loudspeakers, wants to improve ability to compete against Japanese firms
QS Intracommunication Leadership Initiative (ILI) has flattened the layers of management
Uses teams and peer pressure to accomplish the plant’s goals instead of multiple management layers
Employees make all decisions within the boundaries of their responsibilities
Elect team representatives to coordinate with other teams
Teams are assigned tasks ranging from establishing policies to evaluating on-the-job safety
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

This Solve the Dilemma is taken from Chapter 7, page 228:
Quest Star (QS), which manufactures quality stereo loudspeakers, wants to improve its ability to compete against Japanese fi rms. Accordingly, the company has launched a comprehensive quality-improvement program for its Iowa plant. The QS Intracommunication Leadership Initiative (ILI) has flattened the layers of management. The program uses teams and peer pressure to accomplish the plant’s goals instead of multiple management layers with their limited opportunities for communication. Under the initiative, employees make all decisions within the boundaries of their responsibilities, and they elect team representatives to coordinate with other teams. Teams are also assigned tasks ranging from establishing policies to evaluating on-the-job safety.
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Solve the Dilemma (2 of 3)
Quest Star in Transition
Things to consider
Employees who are not self-motivated team players are having difficulty getting used to their peers’ authority within the system
Upper-level managers face stress and frustration because they must train workers to supervise themselves
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

However, employees who are not self-motivated team players are having difficulty getting used to their peers’ authority within this system. Upper-level managers face stress and frustration because they must train workers to supervise themselves.
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Solve the Dilemma (3 of 3)
Quest Star in Transition
Discussion Questions
What techniques or skills should an employee have to assume a leadership role within a work group?
If each work group has a team representative, what problems will be faced in supervising these representatives?
Evaluate the pros and cons of the system developed by QS.
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© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Discussion Questions
1. What techniques or skills should an employee have to assume a leadership role within a work group?
2. If each work group has a team representative, what problems will be faced in supervising these representatives?
3. Evaluate the pros and cons of the system developed by QS.
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Discussion
Identify four types of departmentalization and give an example of each type.
Discuss the different forms of organizational structure. What are the primary advantages and disadvantages of each form?
Distinguish between centralization and decentralization. Under what circumstances is each appropriate?
Define span of management. Why do some organizations have narrow spans and others wide spans?
© 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Identify four types of departmentalization and give an example of each type.
 
Departmentalization is grouping jobs into working units usually called departments, units, groups, or divisions. Functional departmentalization is the grouping of jobs that perform similar functional activities, such as finance, manufacturing, marketing, and human resources. Product departmentalization is grouping jobs around the products of a firm. Geographical departmentalization is grouping jobs by geographic location, such as country, region, or an even smaller area. Customer departmentalization is grouping jobs around the needs of various types of customers, which allows an organization to respond to the needs of each group of customers. (Examples of these departmentalization types will vary according to the examples given by students).
Discuss the different forms of organizational structure. What are the primary advantages and disadvantages of each form?
 
The process of delegation establishes a pattern of authority and accountability, often called bureaucracy, within the organization. Various forms of bureaucracy include line structure, line-and-staff structure, and matrix structure, as well as committees.
 
A line structure is based on direct lines of authority that extend from the top executive to employees at the lowest level of an organization. This structure provides a clear chain of command, but it also requires managers to possess a wide range of knowledge.
 
In the line-and-staff structure there is a line relationship between superiors and subordinates, and line departments are directly involved in the operation of the organization. Specialized managers, called staff managers, are available to assist line managers.
 
The matrix structure involves setting up teams from different departments and creating two or more intersecting lines of authority. The matrix structure improves cross-pollination of ideas but is generally temporary.
Distinguish between centralization and decentralization. Under what circumstances is each appropriate?
 
A centralized organization is one in which top‑level managers delegate very little authority to lower-level employees. A decentralized organization is one in which authority is delegated as far down the chain of command as possible. A centralized organization is appropriate when the decisions to be made are risky and when low-level managers are not highly skilled in decision making. Decentralization is appropriate when the organization operates in complex and unpredictable environments.
Define span of management. Why do some organizations have narrow spans and others wide spans?
 
Span of management is the number of subordinates who report to a particular manager. A wide span of management exists when a manager directly supervises a large number of employees. A narrow span of management exists when a manager directly supervises only a few subordinates. The nature of spans of management in a company depends on the physical distance between managers and subordinates, on the managers’ responsibilities other than supervision, and on the degree of interaction required between managers and subordinates. Other factors include the frequency of problems, the competence of subordinates, and the existence of specific operating procedures.

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