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Section 1.1 ObjectivesSECTION 1.1In Section 1.1, you will learn how a business organization is structured legally and how it organizes itself to fulfill its mission and vision. You will also learn how business goals are developed and how a business organization can achieve them.?Section 1.1 FeaturesDiscuss how a business organization is defined and structuredDescribe the phases in an organization's lifecycle and apply them to?business cyclesRecognize the various legal structures available to business organizationsExplain organizational strategies and goalsExamine the various ways businesses can organize themselves through organizational structures?Discuss the impact of organizational behavior, culture, change, development, and transformationDifferentiate the factors affecting organizational performanceDistinguish the various forms of organizational innovation?SECTION 1.1Business Organization DefinedBusiness organizations are defined as economic entities and legal enterprises with a mission and vision to create goods and services to benefit society. This mission is accomplished when two or more individuals (owners or investors) join together and combine their resources and coordinate their efforts to achieve their defined common purpose and make money in doing so. ?Often, there is serious debate whether business organizations simply exist to make money and to increase wealth for their owners or investors. In fact, business organizations (companies or firms) benefit society in several ways, such as?Creating goods and providing services to meet the needs and wants of customers and clients with efficient and effective utilization of resources Offering employment opportunities to citizens Paying the required taxes to federal, state, county, and local government authorities Complying with government’s laws, rules, and regulations Donating money to charitable institutions and civic organizations Classification of OrganizationsSECTION 1.1Organizations can be classified according to their intended purposes. Five categories exist, although some large and complex organizations have overlapping categories. These categories include for-profit, non-profit, mutual-benefit, commonweal, and porous organizations. ? For-Profit OrganizationsFor-profit organizations focus on creating products and services to meet customer needs and wants. They include business organizations that must make a profit to survive. The purpose is to satisfy the demand for products and services, earn profits, and create job opportunities.Examples include General Motors, Exxon Mobil, and Verizon Wireless Company.Non-Profit OrganizationsNon-profit organizations focus on service, not profits. Specific service is the goal as long as the organization is solvent. There's pressure to operate efficiently in light of the limited funds available. They serve a specific segment of society.Examples include some educational (Teach for America; Khan Academy), religious (The Salvation Army; Jewish Federations of North America), and charitable (United Way; Habitat for Humanity; YMCA) institutions.Mutual-Benefit Organizations?Mutual-benefit organizations focus on serving the needs of the members, be it a labor union or other association. Individuals join together to press for their own self-interests, and there is pressure to operate effectively and efficiently to survive.Examples include professional associations such as American Medical Association (AMA) for doctors and American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) for labor monweal Organizations?Commonweal organizations focus on offering standardized public services without attempting to earn a profit. They serve all segments of society.Examples include local fire and police departments and public schools. These?commonweal organizations?have a unique mission of serving and educating all citizens with a common purpose to protect, preserve,and educate.Porous OrganizationsPorous organizations focus on global service and humanitarian efforts. They're fluid structures consisting of virtual teams of volunteer members from public and private sectors. They work together globally to address educational needs and major disasters (for example, hunger, poverty, diseases) and other crisis situations worldwide.Examples include Red Cross, UNICEF, and World Vision.An Organization’s Lifecycle Business organizations have a lifecycle during their evolution from the beginning to the end of their commercial life. The business organization’s lifecycle consists of four phases: creation, development, growth, and decline. ?The correct sequence of these phases is shown below: Creation Phase ?Legal and organizational structures ?Development Phase ?Organizational strategies, organizational culture, organizational behavior, organizational change, organizational development, and organizational performance ?Growth Phase ?Organizational success, organizational transformation, and organizational innovation ?Decline Phase ?Organizational politics and organizational failureEvery owner or manager has serious intentions to create a new organization, develop it, grow it, and sustain it forever. Unfortunately, some organizations may not be able to continue forever due to decline in revenues and profits and poor management of the company. In this case, organizations eventually cease to operate. Business CyclesJust as a company’s operations fluctuate over time, countries also experience fluctuations in their economies.?A country’s economic business cycle indicates fluctuations in the rate of growth that its economy experiences over a period of several years.?Many factors affect a country’s business cycle such as global economics, a country’s economics, innovation levels, and changes in employment, inflation, and interest rates.?A company’s growth rate can be compared to the growth of the overall country’s economy with the following descriptions: INCLUDEPICTURE "" \* MERGEFORMATINET INCLUDEPICTURE "" \* MERGEFORMATINET Legal StructuresLegal structures indicate how a new business is created. Prior to organizing and operating a new business, owners or managers need to register their business legally by submitting appropriate documents to government offices and by paying appropriate fees. Legal structures are external structures based on the requirements of local, county, state, and federal governments, including tax authorities. ?These legal structures become the basis for establishing business structures (for example, proprietorships, partnerships, and corporations), which in turn guide the internal organizational structures. These organizational structures include divisions, departments, regions, and markets. INCLUDEPICTURE "" \* MERGEFORMATINET INCLUDEPICTURE "" \* MERGEFORMATINET A new business can be registered or organized in one of four legal forms: Sole proprietorships Partnerships Corporations Limited liability company Sole ProprietorshipsA sole proprietor is someone who owns an unincorporated business by himself or herself. Starting a proprietorship is fairly easy—just begin business operations. However, in most cases, even the smallest business must be licensed by the municipality (city, county, or state) in which it operates. ? Note that most new businesses start as proprietorships and then convert to a partnership or corporation when their growth no longer makes being a proprietorship an advantage. The proprietorship has three advantages or benefits: It’s easily and inexpensively formed. It’s subject to few government regulations. It’s taxed like an individual, not a corporation. The proprietorship has four disadvantages or limitations: The proprietor has unlimited personal liability for business debts, which can result in losses that exceed the money he has invested in the company. The life of a business organized as a proprietorship is limited to the life of the individual who created it. Transferring ownership is somewhat difficult—disposing of the business is similar to selling a house in that the proprietor has to seek out and negotiate with a potential buyer. It is difficult for a proprietorship to obtain large sums of capital because the firm’s financial strength generally is based on the financial strength of the sole owner. Example: A licensed carpenter or plumber can begin operations by registering his or her?business as a sole proprietor.? INCLUDEPICTURE "" \* MERGEFORMATINET INCLUDEPICTURE "" \* MERGEFORMATINET PartnershipsA partnership is the relationship between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the business. ? A partnership must file an annual information return to report the income, deductions, gains, losses, and other matters from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her personal tax return. ? Several types of partnerships are available, including general partnership, limited partnership, limited liability partnership, and limited liability limited partnership, all with different implications in terms of ownership transferability, financial liability, control, continuity, and taxes. ? ? A partnership is like a proprietorship, except there are two or more owners. Partnerships can operate under different degrees of formality, ranging from informal, oral understandings to formal agreements filed with the secretary of the state in which the partnership does business. Most legal experts would recommend a written partnership agreement. ?There are advantages and disadvantages to operating or coordinating a partnership. The advantages of a partnership are the same as for a proprietorship. Formation is easy and relatively inexpensive. It’s subject to few government regulations. It’s taxed like an individual, not a corporation.The disadvantages are also similar to those associated with proprietorships.1. There is unlimited liability. 2. There is limited life of the organization. 3. There is difficulty of transferring ownership. 4. There is difficulty of raising large amounts of capital. Example: Two local Certified Public Accountants (CPAs) start their new business as a partnership to prepare tax returns for individuals and small businesses.Corporations Corporations are economic and legal entities that come in different forms to meet various needs of investors, owners, and founders. ?A C-corporation is a separate taxpaying entity. It can be formed under state laws or the District of Columbia. A corporation may qualify as a C-corporation without regard to any limit on the number of shareholders, whether foreign or domestic. It's liable for income taxes, estimated taxes, employment taxes, and excise taxes.Example: General Electric, General Motors, AT&T, and John Deere are examples of C-corporations. An?S-corporation can elect to be taxed as a proprietorship, a partnership, or a corporation. A small business can make an election to be treated as an S-corporation. The S-corporation can retain limited liability protection benefit and keep other benefits of a corporation such as unlimited life and easy transferability of ownership interest.Example: A small architectural firm with three owners elects to be treated as an S-corporation so that the firm’s profit and losses flow to their personal income taxes. A B-corporation (official name is benefit corporation) can be created with multiple purposes of serving the general public-benefit and providing specific public-benefits in social and environmental areas. ?Example: Patagonia, Warby Parker, and Etsy are examples of B- corporations because management decisions are made considering both shareholders (owners and investors) and other stakeholders such as customers and suppliers. A limited liability company (LLC) is a legal structure allowed by individual state statutes. An LLC cannot be a corporation in its true meaning. Owners of an LLC are called members. Most states do not restrict ownership, and members may include individuals, partnerships, corporations, other LLCs, and foreign entities.Example: ?Three doctors who are specialists in orthopedic surgery?formed an LLC to provide sports medicine to local athletes. They choose LLC to limit their liability in malpractice insurance premiums and claim payouts resulting from lawsuits. Organizational StrategiesOrganizational strategies identify general approaches a business should take in order to achieve its stated mission, vision, goals, and objectives. Strategy sets the direction for the entire organization to follow. Mission/vision and goals/objectives lead an organization where it wants to go, and strategies define how it will get there.Mission and vision are the documented reasons for an organization to exist. The mission reflects management’s values and beliefs. Both the mission and vision describe the overall aims of an organization. ? ? Specifically, vision is a statement that explains what a company wants to become and what it hopes to achieve. It is an attractive, ideal future that is credible and believable, yet not easily and readily attainable. Both mission and vision documents are developed simultaneously. ? Example: The mission and vision of KPX Company, a consumer product manufacturing company, is to become the largest global company to produce a safe, clean, and eco-friendly dishwashing liquid product brand. Goals are developed from mission and vision. A goal is a future statement of general, broad-based, and long-term target, aim, and intent. It is the point toward which management directs its efforts and resources. It is a desired future state that the organization attempts to reach. Goals can be classified as strategic goals, tactical goals, operational goals, and stretch goals.?Goals can be quantitative and qualitative in nature. ?? Example: The goal of the KPX Company?is to reformulate the dishwashing liquid brand to comply with environmental requirements in two years. Objectives are developed from goals. An objective is a future statement of specific, narrow-based, and short-term target, aim, and intent. It's the expected result or product of a project, usually defined in terms of scope, schedule, and cost. It's the quantitative statement of future expectations and an indication of when the expectations should be achieved. Objectives flow from goals and specify what needs to be accomplished. Both goals and objectives are developed simultaneously as the latter is derived from the former. ? Example: The objectives of the KPX Company are to locate eco-friendly suppliers of high-quality ingredients within six to nine months and work?with them. Strategies are developed from goals and objectives which, in turn, form the basis for developing plans and actions, and producing results. Strategies identify general approaches a business should take in order to achieve its mission/vision and goals/objectives. ?? Example 1: The long-term strategy of KPX Company is to increase its market share in the eco-friendly dishwashing liquid product market from its current 1% to 4% in four years. ? Example 2: The intermediate-term strategy of KPX Company is to increase its market share in the eco-friendly dishwashing liquid product market from its current 1% to 3% in two years. ? Example 3: The short-term strategy of KPX Company is to increase its market share in the eco-friendly dishwashing liquid product market from its current 1% to 2% in one year. Plans are blueprints specifying the resources, schedules, and actions needed to achieve goals. Planning types include strategic plans, tactical plans, operational plans, stretch plans, and contingency plans. Plans are derived from strategies. Plans are turned into actions which, in turn, are turned into results. ?Example 1: The staffing plan for the KPX Company is to recruit qualified employees with previous experience in producing eco-friendly dishwashing liquid products. ? Example 2: The equipment plan for the KPX Company is to upgrade and retool the factory equipment to fit to the technology of making the eco-friendly dishwashing liquid products. ?Example 3: The capacity plan for the KPX Company is to analyze whether it can produce an ingredient internally or purchase it from a supplier. ? Actions are systematic and structured steps, tasks, or activities required to achieve the defined plans. Actions are the solid proof that a plan is fully implemented or executed into required operations. Actions produce results that management is expecting. ?Example 1: Hire qualified employees in the green dish-washing liquid products using a combination of innovative recruiting methods such as web-based advertisements, social media networks, job recruiting firms, job camps, and job apps. ?Example 2: Upgrade the old factory equipment and procure new tools in order to retool and redesign the existing factory layout. ? Example 3: Rent new machines to increase short- term capacity. Replace all old machines with all new machines in the long-run. Types of StrategiesA corporation’s strategies can be divided into multiple levels so that managers can develop appropriate strategies.Corporate-level strategy asks “What business are we in?” This question is similar to the mission statement’s question. Senior managers and executives develop this long-term strategy.?Example 1: The corporate-level strategy for Gap, Inc. establishes the overall strategy. For example, it could be to provide a wide range of apparel choices for the entire family through a variety of brands and products. Business-unit level strategy asks “How do we compete?” This question is linked to the corporate-level strategy. A company can be divided into business units. These units can be major divisions of a company, and the division heads and general managers develop this intermediate-term strategy.??Example 2: Because Gap, Inc. contains brands such as Gap, Old Navy, and Banana Republic, each of these brands can be called a business unit. Each business unit then has its own strategy that is linked to the corporate-level strategy. This sets the stage for developing business-unit level strategy. Functional-level strategy asks “How do we support our chosen strategy?” This question is linked to both business unit-level and corporate-level strategies. A business is divided into marketing function, operations function, and other functions. For example, marketing function’s executives develop this intermediate-term strategy.?Example 3: The Old Navy business unit is divided into marketing function, operations function, and other functions. This sets the stage for developing functional-level strategy. Department-level strategy asks “How do we mobilize our resources to support the chosen strategy?” This question is linked to both functional-level and business unit-level strategy. For example, the marketing function is divided into sales, advertising, and customer service departments. Managers of these departments develop this short-term strategy.?Example 4: The marketing function of the Old Navy business unit is further divided into sales, advertising, and customer service departments. This sets the stage for developing department-level strategy. GoalsStrategic goals are the starting point for all the other goals and include general, very broad, and high-level measurable results expected of the entire organization. They do not focus on individual divisions, departments, and business units of a company. Strategic goals focus on how to increase market share, how to enter into new markets, how best to position products and services, how to outsmart competitors, how to increase revenues and profits, and how to decrease costs. Strategic plans define how to achieve the strategic goals. ? Example: An example of a strategic goal is to enter the Northeast region market with five new products in three years. Tactical goals include both specific, broad, and medium-level measurable results in terms of clear outcomes expected of individual divisions, departments, and business units that support the strategic goals. Tactical goals focus on how to get maximum performance from employees, suppliers, vendors, and contractors. Tactical plans define how to achieve the tactical goals. ? Example: An example of a tactical goal is to reduce suppliers’ errors by 8% in two years. Operational goals include very specific, very detailed (narrow), and low-level measurable results expected of individual employees and work groups. Operational goals focus on how to get maximum utilization of resources. Operational plans define how to achieve the operational goals. ? Example: An example of an operational goal is to eliminate waste in the production department by 5% within six monthsStretch goals means expanding normal (ordinary) goals to abnormal (extraordinary) goals and requiring a radical way of thinking to achieve major and noteworthy improvements. As if normal goals are not ambitious enough, stretch goals are highly ambitious. Stretch goals are normal goals stretched out and are difficult and challenging to achieve, not impossible to achieve. Stretch plans define how to achieve the stretch goals. ? Example: An example of a stretch goal is to Increase sales by 20% in the upcoming year when the normal increase is 10%. Organizational Design and StructuresAs legal structures dictate business structures which, in turn, dictate the organizational structures, organizational strategies also dictate organizational structures. For example, if a business is legally organized as a large corporation, its organizational structure can be complex, with several business functions and departments and many more employees than a simple proprietorship or partnership. ?? Organizational design comes first. It's the process of assessing, evaluating, and matching an organization’s internal strategy with external demands (product demands and competitive forces) to determine the right organizational structure. INCLUDEPICTURE "" \* MERGEFORMATINET INCLUDEPICTURE "" \* MERGEFORMATINET Organizational structure?determines how an organization will?be designed and positioned internally. Organizational structure is a formal framework used to assign responsibilities to employees, to exact accountability from employees, and to delegate decision-making authority and power to employees. ? Organizational structure is the division of internal work activities and business functions to ensure that division of labor and unity of command principles exist. These structures are internal structures mainly designed by internal management of an organization based on its specific operating needs. ? Developing job descriptions and drawing organization charts are the first action steps. Job descriptions document essential functions performed and tasks, duties, and responsibilities required of the job. Organization charts present hierarchical levels in the management pyramid, showing who reports to whom in the organization. ?Organizational structure for a corporation means organizing the company into three major areas: organizing by decision-making centers, organizing by functions, and organizing by departments. Organizing by Decision-Making CentersA decision-making center is defined as a place within an organization where decisions are made and the people who make such decisions. ?Two methods of organizing by decision-making centers include centralized and decentralized. The extent of an organization’s centralization or decentralization is determined by the span of control, the number of levels in the hierarchy, and the degree of coordination and specialization required. In centralized decision-making, all decisions are made at higher levels of management at headquarters (home office). Authority is kept at the top management level and not delegated to lower levels of the organization (that is, front-line employees). Centralization is typically used in organizations that emphasize coordination of decisions that must be applied uniformly to a set of known or common problems Example of Centralized Decision-Making ?Takata Corporation is one of the world’s leading suppliers of advanced automotive safety systems and products for over 70 years. In 2015, it faced a major crisis situation in the United States?due to massive product recalls from installing defective air bags in millions of cars and vans. ?Consequently, some car drivers died and some were injured due to abrupt release of air bags. To handle this situation, senior management at the company’s headquarters used centralized decision-making in order to plan, coordinate, and communicate to car makers, car owners, media, and the government and to solve the air bag problem. This problem may not have been solved by a decentralized decision-making center since there were so many important pieces to manage at the same time. In decentralized decision-making, all decisions are made at lower levels of management. Authority is delegated to lower levels of the organization (that is, front-line employees). Companies that allow managers a great deal of autonomy are described as utilizing decentralized management. Decentralization can lead to sub-optimization of power and resources due to lack of knowledge in company policies and procedures.Examples of Decentralized Decision-Making ?Example 1: ?When a cashier at the checkout station in a retail store makes local decisions to satisfy customers at the time of the transaction, the employee is implementing a decentralized management approach. ? Example 2: ?When an assembly worker in an auto manufacturing plant makes local decisions to improve the quality of products he's assembling, the employee is implementing a decentralized management approach. Organizing by FunctionsMost businesses are organized according to functions such as marketing, operations, manufacturing, human resources, and accounting/finance. These functions, in turn, are classified as line functions or staff functions. ?The managers of a line function have the major role and responsibility of meeting the organization’s primary goals of producing goods, providing services, and marketing such goods and services. Line functions are the areas of a company that generate revenue. Line functions can vary company by company.?The managers of a staff function have the supporting role and responsibility of working with the managers of a line function. Staff functions support line functions so that the line functions can generate revenue for the company. Support functions can also vary company by company.?A human resource manager in the human resource function supports a marketing manager in recruiting marketing staff. A budget manager in the accounting/finance function supports an operations manager in developing a production or service budget. In other words, staff managers act as advisors or coordinators to line managers. ?Example 1: In an apparel company, designers and marketers perform line functions because they are driving the business. ?Example 2: In a public accounting firm, accountants perform line functions, and the IT staff may be performing staff functions because they support the accountants. ?Example 3: In a technology firm, IT staff perform line functions, and accounting and finance staff may be performing staff functions because they support the IT staff. For additional reading on line and staff functions, please visit: by DepartmentsA business function can contain few or several departments, and each department can contain many employees. For example, the marketing function can be divided into sales, advertising, and customer service departments. Each of these departments will have internal customers (employees within the department) and external customers (employees in other departments of the company and people outside the company such as customers, suppliers, vendors, and contractors). ? Unfortunately, most departments today are still operating as a silo department, which may not work well in modern businesses. The time has come to change the silo department structure to something better such as a borderless department or, even better, to an agile department. ?Most departments start out as silos and?transform themselves when they face greater competition. They will need to transform their silo departments into borderless departments as an intermediate step and finally transform into agile departments.?For further reading on agile departments, please read:?. (Note: click "Continue to site" to proceed to the article.)?Example: Microsoft Corporation has gone through numerous reorganizations to create agile departments. Since 2002, Microsoft has reorganized itself at least 8 times to transform from silos. Additional information can be found here: silo department uses a rigid, vertical hierarchy of management with tightly bounded structures with solid walls built around it. It has a tall organizational structure with a narrow span of control. It's not at all responsive to customers' requests, queries, problems, and issues. These employees are not empowered at all and receive little/no training in optimum customer service and organizational excellence. ? A borderless department uses a flexible, horizontal hierarchy of management with loosely bounded structures with built-in soft walls around it. It has a flat organizational structure. It is very responsive to customers' requests, queries, problems, and issues. These employees are reasonably empowered and receive frequent training in optimum customer service and organizational excellence. ? An agile department uses a flexible organizational structure with diagonal communication channels and few or no walls built around it. It has a flat organizational structure and provides a rapid response to customers' requests, queries, problems, and issues. These employees are fully empowered and receive continuous training in optimum customer service and organizational excellence. Organizational CultureOrganizational culture (OC) is a set of shared values and norms guiding both employees’ and managers’ behavior. OC refers to a system of shared?values held by employees that distinguishes their organization from other organizations. OC provides direction to employees and helps them understand how things are done in the organization. A strong culture provides stability to an organization. At the same time, it can become a major barrier to change. Every organization has a culture that?influences employees’ attitudes and behaviors. Culture has two sides: functional culture and dysfunctional culture. Functional culture includes boundary-defining roles, a sense of identity and commitment, stability of the social system through standards, and a control mechanism to guide and shape the attitudes and behaviors of employees. Dysfunctional cultures include barriers to change, to diversity, and to growth. INCLUDEPICTURE "" \* MERGEFORMATINET INCLUDEPICTURE "" \* MERGEFORMATINET Culture is shared among employees through widened span of control, flattened organization structures, introduction of teams, reduced formalization, and empowered employees to ensure that every employee is pointed in the same direction to achieve organization’s common goals and objectives. Culture affects ethics. A good culture encourages ethical behavior (for example. honesty, integrity, and equity). A bad culture encourages unethical behavior (for example, bribes, corruption, and collusion). Organizational BehaviorOrganizational culture drives organizational behavior (OB), which studies what employees do in an organization and how their behavior affects the organization’s performance. ? OB emphasizes behavior as related to jobs/positions; work assignments and tasks; employee absenteeism, turnover, productivity, and performance; and management. These, in turn, are translated into core topics such as motivation, leadership, communication (written and oral), groups/teams, learning and listening, attitudes, perceptions, change and conflict management, work design, and work-related stress. ? OB uses dependent variables and independent variables to understand employee behavior, where the independent variable impacts the dependent variable. ?A dependent variable, which is the focus of OB, is the key factor to explain or predict a behavior and that is affected by an independent variable. An independent variable is the presumed cause of some changes in the dependent variable. ? Examples of dependent variables include productivity, absenteeism, turnover, deviant workplace behavior, organizational citizenship behavior, and job satisfaction. Examples of independent variables include personality and emotions, values and attitudes, job ability and skills, perception, motivation, individual learning and decision-making outcomes, and employee age and genderOrganizational Change and DevelopmentOrganizational change ?means moving an organization from its current condition to a new condition. For this change to happen, it may require greater flexibility, capability, and adaptability. Organizational change is the first and foremost requirement for an organization to develop, perform, succeed, transform, or innovate. Organizational change, in turn, depends on organizational culture and organizational behavior. Also, organizational development depends on organizational change, meaning when there is no change, there is no development. INCLUDEPICTURE "" \* MERGEFORMATINET INCLUDEPICTURE "" \* MERGEFORMATINET Organizations must change to survive in a competitive environment because the status quo, or keeping an "acceptable standard,"?doesn't work anymore.?Successful change?requires everyone in the organization believing in and accepting the change. Ideally, managers need to be architects or agents of change rather than the victims of change. ?Organizational development (OD) focuses on employees’ behavior and their interactions and interrelationships between them. OD takes organizational strategy into account and becomes an input to organizational change. OD is a systematic approach to planned change programs intended to help employees and organizations function more effectively. INCLUDEPICTURE "" \* MERGEFORMATINET INCLUDEPICTURE "" \* MERGEFORMATINET Case Study: Aldi grocery stores employ fewer full-time personnel than the other comparable national chains. As a result, each employee takes on more job duties and responsibilities in the store. Aldi management’s goal is to provide comprehensive training and developmental (T&D) programs for each employee in all areas of the store functions so they can wear multiple hats?as needed. ?These T&D programs make each employee knowledgeable and resourceful in the operations of other functions within the store. This reflects a forward-thinking mindset on the part of Aldi management as well as on the part of employees. This requires employees to be open-minded in learning new things and not afraid of changes coming from learning new things. Employees in this program exhibited their positive attitude towards change. This is a good example showing how a positive change can lead to a positive development. Organizational TransformationOrganizational change is the first requirement for an organization to transform. Organizational change can be a major barrier to achieving organizational transformation. Organizational change, in turn, necessitates a major change in organizational culture and organizational behavior. Both employees and managers resist the transformation process due to unknown outcomes and fear of loss of jobs. ?There are five red flags indicating that an organization needs to transform:(1) when a company’s revenues and profits are decreasing, (2) when a company’s expenses are increasing, (3) when competition is getting intense,(4) when customers are dropping out or switching to other companies, and(5) when managers and employees are not fully motivated to work. When an organization’s strategy does not work, management has the option to transform the organization, moving the organization from the current state (a bad state A) which is not working at all into a future state (a good state B) that may work. ?The transformation process may include re-planning, redesigning, and restructuring some or all parts of an organization. Executive management and the board of directors should strive to keep their failing organization alive and well positioned for the future. Because the leaders are stewards, they should “lead by example” and “set the tone at the top.” Organizational transformation process requires transformational leaders to make the process a success. At this time, management has only one choice: transform or die. ? INCLUDEPICTURE "" \* MERGEFORMATINET INCLUDEPICTURE "" \* MERGEFORMATINET Organizational PerformanceOrganizational performance is the ability of an organization to achieve its stated goals and objectives by utilizing resources (inputs) to produce goods and services (outputs) in an effective, efficient, economical, and productive manner. Performance is the ultimate goal and responsibility of all employees.Effectiveness is a measure of or the degree to which an organization achieves its stated goals or objectives. It tells how well a job is performed. It indicates whether something is effective or ineffective.? Example: A certain training program was deemed effective because 80% of trainees became full-time employees in one year after completing the training program. Efficiency is the use of minimal resources (manpower, money, materials, and machinery) to produce an actual volume of output in a given time period. Efficiency is often expressed as a percentage or ratio.? Example: An actual output produced in one hour is 5.0 tons when the standard output expected is 4.5 tons in one hour. This equals to 111% efficiency ((5 ÷ 4.5) x 100 = 111%). Economy?means paying the least amount and getting the same quality (benefit) as paying the highest cost.?Example: A food restaurant acquired 100 pounds of high-quality wheat flour at a cost of $0.50 per pound compared to a market price of $0.75 per pound.Productivity is a quantitative measure of outputs (goods and services) produced relative to a specific amount of inputs (resources) used. It indicates whether employees and technology are productive or non-productive. Productivity is the measure of efficiency in producing goods and services.? Example: This month, producing an output of ten tons of iron ore mineral took two hours of labor. This is an improvement over last month where it took 3 hours of labor. Organizational InnovationOrganizational innovation is defined as the process of improving, adapting, or developing a product, system, or service to deliver better results. Its scope also includes developing brand new products and services. ?Traditional innovation starts with scientists from research and development (R&D) labs. This type of ad-hoc and random innovation is based on the scientists' work without the involvement of customers, leading to low success rates. Customer involvement in product design is nonexistent because scientists and management think they know what customers really want and need. The products initiated from a company’s R&D lab can be labeled as “me too” products, often copying competitors. These products can fail because customers do not need them.? Traditional Innovation = R & D Lab?→ Customers Incremental innovation is modifying or tweaking current products and services and labeling them “New and Improved.” Most companies approach this type of innovation with the assumption that some innovation is better than no innovation. However, customers do not value this type of innovation. The success rate for this type of innovation is medium because customer involvement is little or none due to company management’s thinking that they know what customers really want and need. Incrementally innovated products come from a company’s R&D lab. ?? Incremental Innovation = R & D Lab?→ Customers Reverse innovation starts with customers in mind. The goal is to learn what customers want but can't get from existing products. The success rate of reverse innovation is higher than traditional and incremental innovation due to high customer involvement. Reverse innovation products come from the customer innovation lab, and they will often succeed because customers requested them.?Focus groups can provide meaningful insights to reverse innovation. ? ??Reverse Innovation = Customers?→ R & D Lab Breakthrough innovation may use disruptive technologies and radical methods to develop brand new products that customers didn't expect.? Breakthrough innovations are very rare because innovators need to challenge the status quo, which is not easy to do. ? The success rate for breakthrough innovation is very high due to instant acceptance by customers. ?Breakthrough Innovation = Breakthrough Lab?→ Customers Organizational Failure?and PoliticsOrganizational failure or decline results from many factors such as management complacency, management incompetency (usually the primary culprit), failed organization transformation approaches, lack of innovative attempts,?unsteady economic growth, resource shortages, heavy competition, and weak demand for products and services. The decline typically involves a reduction in the size or scope of the organization. The decline is compounded by lack of effectiveness, efficiency, and productivity (that is, the lack of the organization’s performance). ?Eventually, all of these factors lead to loss of sales revenues, increase in expenses, decrease in profits, and decrease in stock prices. If an organization can't succeed, stabilize, sustain, or survive, then it will simply fail, die, and disappear. ?Extreme and unnecessary playing of organizational politics (OP) can slowly lead to an organization’s failure or decline. Many employees feel that “freedom from office politics” is important to their job satisfaction. ?Example: Positive impacts resulting from OP include gaining visibility for ideas, improving coordination and communication, developing teams and working groups, advancing one’s career, and increasing a sense of team spirit and camaraderie. ? Example: Negative impacts resulting from OP include distraction from organizational goals, misuse of resources, and organizational conflict due to dysfunctional behavior of employees and managers alike. SECTION 1.2IntroductionIn Section 1.2, you'll learn how business strategy is developed through the strategic management process. You'll also learn how economics at the company level as well as a country level impact a business.?Section 1.2 FeaturesList the major steps involved in the strategic management processExamine the types of grand strategies available to organizationsDifferentiate between competitive strategy, competitive forces, and competitive analysisDiscuss the components of microeconomicsDiscuss the components of macroeconomicsBusiness Strategy DefinedBusiness strategy is the means by which a company achieves its goals. ?A company’s mission, vision, goals, and objective establish its business strategies. The mission/vision and goals/objectives lead an organization where it wants to go, and strategies define how it will get there. Strategy shows a big- picture of a company and explains how senior management works on developing and executing the big-picture strategy. INCLUDEPICTURE "" \* MERGEFORMATINET Strategic Management ProcessThe strategic management process is a set of decisions and actions used to formulate and implement strategies that provide a competitively superior fit between the organization and its environment to achieve organizational goals. This process presents a series of steps to take from strategy to execution. ? Managers and executives frequently ask questions such as What changes and trends are occurring in the competitive environment? Who are our customers? What products or services should we offer? How can we offer those products and services most efficiently? Answers to these questions help managers and executives make choices about how to position their organization in the environment with respect to rival companies. Superior organizational performance is not a matter of luck—it's determined by the choices that managers and executives make. Senior executives use the strategic management process to define an overall direction for the organization, which becomes the firm’s grand strategy.Strategy is not a static, analytical process; it requires vision, intuition, and employee participation. Many organizations are abandoning central planning departments, and strategy is becoming an everyday part of the job for workers at all levels. The strategic management process is defined as a series of the following steps or activities:? INCLUDEPICTURE "" \* MERGEFORMATINET Strategic PlanningStrategic planning shows a roadmap in achieving the stated goals and objectives. It defines both inputs to (resources) and outputs from (outcomes)?the planning process. ?Strategic planning involves assessing the internal strengths and weaknesses and external opportunities and threats and integrating the results into goals and strategy. ? Internal strengths are positive internal characteristics that the organization can exploit to achieve its strategic performance goals. Internal weaknesses are internal characteristics that might inhibit or restrict the organization’s performance. The information typically sought pertains to specific functions such as marketing, finance, production, and research and development (R&D). Basing on their understanding of these areas, managers can determine their strengths or weaknesses compared to other companies'.External opportunities are characteristics of the external environment that have the potential to help the organization achieve or exceed its strategic goals. It reviews technological developments, the economy, legal/political and international events, and socio-cultural changes.External threats are characteristics of the external environment that may prevent the organization from achieving its strategic goals. They study the behavior of competitors, customers, suppliers, workers, labor unions, and hackers.Strategic Implementation & ControlStrategic implementation provides a blueprint of how to bring the strategic plans to a reality. Strategic control includes monitoring and tracking activities to ensure that strategic plans are completed as intended. ?Strategic implementation is how strategy is put into action. Some people argue that strategy implementation is the most difficult and important part of strategic management. No matter how creative the formulated strategy is, the organization will not benefit if it is incorrectly implemented or executed. Managers may use persuasion, new equipment, changes in organization structure, or a reward system to ensure that employees and resources are used to make formulated strategy a reality.?In summary, strategy implementation is essential for effective strategic management. Managers implement strategy through the tools of leadership, structural design, information and control systems, and human resources. Without effective implementation, even the most creative strategy will fail.?Example: Time schedules, resource requirements, cost estimations, and implementation teams are the essential elements of a successful implementation process.Strategic control helps keep strategic plans on track. ?The goal of a control system is to detect and correct problems in order to keep plans on target. This means negative results should prompt corrective action both at the steps immediately before and after the problem identification. Some examples of corrective actions include updating assumptions, reformulating plans, rewriting policies and procedures, making personnel changes, modifying budget allocations, and improving IT systems. ?Example: A control system (such as?reward systems, pay incentives, budgets, IT system, rules, policies, and procedures) should be proactive instead of reactive.Grand StrategyGrowth can be promoted internally by investing in expansion or externally by acquiring additional business divisions.?Example: Apple recently unveiled a new music streaming service and expects this new service to be a part of its future growth. Stability means that the organization wants to remain the same size or grow slowly and in a controlled fashion.?Example: It would be reasonable to estimate that Apple’s iPod is entering into a stable strategy, given that it has been in the market for over 10 years. Retrenchment means that the organization goes through a period of forced decline by either shrinking current business units or selling off or liquidating entire businesses.?Example: Gap recently announced that it will be closing 25% of its stores in the US. In today’s global operations, senior executives try to formulate coherent strategies to provide synergy among worldwide operations for the purpose of fulfilling common goals.?Example: Coca-Cola and McDonald’s operate in almost every country. Competitive StrategiesThe essence of formulating a competitive strategy is relating a company to its environment—that is, the industry or industries in which it operates and competes. ?The major components of competitive strategy include the following:Understanding competitive forces Identifying competitive strategies Performing competitor analysis in a specific industry INCLUDEPICTURE "" \* MERGEFORMATINET Competitive ForcesHarvard Business School professor Michael Porter is the leading authority on Competitive Strategy. He developed the Five Forces Model to analyze competitive forces in an industry:Threat of new entrants New entrants to an industry bring new capacity, the desire to gain market share, and often substantial resources. With new entrants providing new competition, prices can be low, cost can be high, and profits can be low. The relationship between threat of new entrants and barriers to entry is as follows:?If barriers to entry are high, then the threat of entry is low. If barriers to entry are low, then the threat of entry is high. Example 1: A major fast food restaurant is doing well in a heavy customer traffic area. Now a second fast food restaurant builds a new facility to take market share away. The second restaurant becomes a new entrant here and may drive prices down to entice customers to visit. ?Example 2: When Amazon started in the 1990s, it was the new entrant in selling books. At that time, there were high barriers to entry to sell books online. Rivalry among existing firms Rivalry tactics include price competition, advertising battles, new product introduction, and increased customer service or product/service warranties. ?Competitors are mutually dependent in terms of action and reaction, moves and countermoves, or offensive and defensive tactics. Intense rivalry is the result of a number of factors, such as the quantity of competitors, slow industry growth, high fixed costs or storage costs, lack of differentiation or switching costs, capacity increases in large increments, diverse competitors, high strategic stakes, and high exit barriers. ? Example: Walmart and Target are two major general merchandise retailers that sell more or less the same products to the same customers. They can be safely considered to be rivals. Pressure from substitute products or servicesIn a broad sense, all firms in an industry are competitors with industries producing substitute products.?Example 1: Regular milk and almond milk are examples of substitute products, and consumers may prefer to buy one over the other based on personal preference. However, if almond milk becomes very expensive, then consumers may stay with regular milk or find other types of milk to buy.?Example 2: Taking a public transportation (bus or train) or private transportation (personal car) is an example of substitute services for a person's work commute.Bargaining power of buyersBuyers compete with the industry by forcing down prices, bargaining for higher quality and larger quantities or for better services, and playing suppliers against each other. Buyers acquire full information about product demand, prices, and costs. Informed buyers become empowered buyers. ? Example: Walmart, a major buyer, is known to bargain and receive lower prices from its suppliers due to its large size and huge purchasing power. Wal-Mart seems to be a price maker or leader in the general merchandise businessBargaining power of suppliers Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods or services. The conditions making suppliers powerful tend to mirror those making buyers powerful. ? Example: The Proctor & Gamble Company (Tide detergent), Kraft Foods (macaroni & cheese), and Heinz Corporation (ketchup and mustard) are examples of major consumer product manufacturers supplying to retail stores in that they can control prices, quality, and quantity factors to their advantage. All five competitive forces jointly determine the intensity of industry competition and petitive Advantage and ScopeCompetitive strategy is taking offensive or defensive actions to create a defendable position in an industry and to cope with the five competitive forces to achieve a superior return on investment. It is more important than ever for companies to distinguish themselves through careful strategic positioning in the marketplace. INCLUDEPICTURE "" \* MERGEFORMATINET Before developing a competitive strategy, managers must evaluate competitive advantage and competitive scope.? Competitive advantage. Managers can determine whether to compete through lower cost or through the ability to offer unique or distinctive products and services that can command a premium price. ? Competitive scope. Managers can determine whether the organization will compete on a broad scope (competing in many customer segments) or a narrow scope (competing in a selected customer segment or group of segments). These choices determine the selection of strategies. ? Porter studied a number of businesses and introduced a framework describing three generic competitive strategies to outperform other firms in an industry:?The differentiation strategy involves an attempt to distinguish the firm’s products or services from others in the industry. An organization may use advertising, distinctive product features, exceptional service, or new technology to achieve a product that is perceived as unique. ? This strategy usually targets customers who are not particularly concerned with price, so it can be quite profitable. ? A differentiation strategy can reduce rivalry with competitors and fight off the threat of substitute products because customers are loyal to the company’s brand. However, companies must remember that successful differentiation strategies require a number of costly activities, such as product research and design and extensive advertising. ? Example: Using differentiation, Chanel, a perfume and luxury company, serves its loyal customers with unique, high-quality products. With a low-cost leadership strategy, the organization aggressively seeks efficient facilities, pursues cost reductions, and uses tight cost controls to produce products more efficiently than competitors. A low-cost position means that the company can undercut competitors’ prices and still offer comparable quality and earn a reasonable profit. Being a low-cost producer provides a successful strategy to defend against the five competitive forces. ? The low-cost leadership strategy tries to increase market share by emphasizing low cost compared to competitors. This strategy is concerned primarily with stability rather than taking risks or seeking new opportunities for innovation and growth. ? Example: Walmart is known for its low-cost leadership with its "everyday low prices" theme. With the focus strategy, the organization concentrates on a specific regional market or one type of product or customer. The company will use either a differentiation or low-cost approach, but only for a narrow target market. ? Example 1: Schnucks is a supermarket chain that only operates in St. Louis and a few additional midwestern cities. ?Example 2: sells every type of product to almost every type of customer: individuals and businesses. Toys R Us, on the other hand, sells only toys to consumersCompetitive AnalysisThe scope and nature of competitive analysis includes an honest and sincere comparison of a company with its major competitor(s). Companies can 'see' what customers 'see' when they compare themselves with competitors. This allows companies to further develop a clearer strategy.?The following steps will help in this matter. ?Assess a company’s strengths, weaknesses, opportunities, and threats (SWOT) analysis Assess a competitor’s strengths, weaknesses, opportunities, and threats (SWOT) analysisCompare one company’s SWOT results with that of its competitor’s SWOT resultsPerform a fit-gap analysis to determine what fits (fit) and what does not fit (gap)Develop action plans and implement them to close the identified gapsBusiness Policy DefinedBusiness goals and objectives (ends) are derived from a company’s mission and vision statements. Business strategy (means) is designed to achieve such goals and objectives. Business policy is a part of strategy execution and implementation in that the policy supports the strategy. ?Business policies are explicit statements of management’s intentions to support a business strategy. ?? Business policies can be established either at high level (for instance,?ethical behavior and pollution control) or low level (for instance,?a policy requiring or not requiring a receipt for customer product returns; a policy of requiring signed contracts prior to acquisition of assets or start of projects; and a policy on employee compensation, benefits, and training). ? Similar to business strategy, business policy can be both proactive (intended and deliberate as in the case of hiring employees with diverse backgrounds) and reactive (adaptive as in the case of handling a major issue or crisis such as a nationwide product recall). ?The following shows the linkages between business policy, strategy, ethics, and social responsibility and the linkages between policies, rules, procedures, standards, and guidelines.? INCLUDEPICTURE "" \* MERGEFORMATINET On The Job: Examples of Business PoliciesBusiness policies affect practically every job at every company. Below are examples of business policies, rules, procedures, standards, and guidelines so that you can recognize them on your job. Read and reflect to see which examples you may have encountered. ?Example 1: An example of an ethical behavior policy is that no employee is allowed to take or give gifts to any customer, supplier,?or contractor for doing business except for receiving small, nominal gifts not more than $25. ? Example 2: An example of a pollution control policy is that no manufacturing division is allowed to dump its toxic substances (waste) discharged from factories into drinking water, lakes, ponds, or oceans. All factories are required to comply with the U.S. Environmental Protection Agency’s (EPA’s) rules and standards. ? Example 3: A retailer’s policy in the area of customer product returns states that customers can return their purchased products for cash, credit, exchange, or a store credit within 15 days from the date of purchase only after showing a valid sales receipt, provided that the product is in working condition. A competing retailer may accept returns within 30 days from the date of purchase without showing a valid sales receipt.? Example 4: An example of a rule is that employees should not take more than 45 minutes for lunch, except with supervisory permission.?? Example 5: An example of a standard is to allow two hours to open a new customer’s auto claim case file. Allow one hour to complete an already opened and being worked on auto claim case file (that is, a work-in-process case). ? Example 6: An example of a guideline is to allow a 5% discount when a customer wants to purchase a one-half case of six bottles and a 10% discount on a full case of 12 bottles. No discount is allowed on three bottles or on individual bottles. Basic Microeconomic Principles and ConceptsEconomics is the study of choices between scarce resources. Several basic economic principles and cost concepts are available that focus on how to acquire and utilize the scarce resources of a company. The following are the major principles and cost concepts that guide both business organizations and consumers. ? Total revenues are a summation of revenues from all sources, that is, from the sale of goods and providing services to customers and clients.? Marginal revenue is the change in total revenue from selling one more unit of output.?Marginal revenue equals marginal cost at the profit-maximizing level of output both in the short-run and the long-run. ? Incremental revenues represent a change in the total revenues resulting from current, additional activity that did not exist before. Costs at a firm’s level are of two types: economic costs and accounting costs.? Economic cost is the total cost of inputs used in the production of goods and services. ? Accounting cost is the explicit costs of production or service, which means the actual money paid. ? ?Opportunity cost is the cost of a foregone choice when selecting some other choice. Simply, it's the amount of sacrifice to get something, or a tradeoff between two choices. Profits are maximized when revenues are maximized and costs are minimized and where revenues exceed the costs. Profits are of two types: economic profits and accounting profits.?? Economic profit is total revenue minus total economic cost. Total revenue is the total money received from selling goods or rendering services. ? Accounting profit is total revenue minus total accounting cost, which is different from the economic profit because accounting profits do not consider opportunity costs. Short-run is a limited period of time (such as one year) where some resources are fixed (such as?capital invested in a factory) and some resources are variable (such as?materials cost).?? Short-run marginal cost is the change in short-run total cost resulting from a?one-unit increase in output produced. ?? Long-run is an extended period of time (generally, two years and up) where all resources and costs are variable. ?? Long-run marginal cost is the change in long-run total cost resulting from a one-unit increase in output produced. Demand?and SupplyTo understand how demand and supply forces work, it's important to understand the market in which they operate. A market is a mechanism that brings together buyers and sellers of particular goods and services. ? A buyer is a demander or consumer. A seller is a supplier or provider. ? Three economic concepts supporting the demand and supply forces include the law of demand, the law of supply, and market equilibrium. ? The law of demand states that a negative relationship exists between price and quantity demanded. This means demand will go down when the price goes up. The market demand curve shows the law of demand for all consumers and customers combined. ? ????Example: Consumers drive their automobiles fewer miles and purchase less gas (less ????demand) when gas prices go up. ? The law of supply states that a positive relationship exists between price and quantity supplied. This means, when the price goes up, the quantity supplied goes up. The market supply curve shows the law of supply for all supplier and manufacturing companies combined. ? ????Example: ?Suppliers flood retail stores with their products when prices are going up. ? Market equilibrium is a situation in which the quantity demanded equals the quantity supplied at the existing market price. INCLUDEPICTURE "" \* MERGEFORMATINET Economic Implications of CompetitionCompetition is the major mechanism of control in a free market system because it forces businesses and suppliers to make appropriate decisions to changes in consumer wants and needs. Use of scarce resources in an economical and efficient manner is good for all (buyers, sellers, resource suppliers, resource users, competition, and government). ?Markets differ in the number of firms that compete against one another for customers, a principle called market structure. Examples of market structure include monopoly, oligopoly, perfect (pure) competition, monopolistic, and imperfect (non-pure) competition. ? The key difference between the perfect competition and the other types of market structures is that perfectly competitive firms are price takers, while firms in these other market structures are price makers or price leaders. Benefits of competition include ?Responsive in meeting the consumers’ needs and wants through creating products and providing sources Providing employment to qualified and skilled individualsAdopting the most efficient manufacturing and service production techniques and innovative methodsCompanies that are low-cost and use the most efficient operations will survive and sustain. Companies that are high-cost with inefficient operations will eventually go bankrupt or disappear.Balances the dichotomy of self-interest (profits) and public-interest (social services)Perfect CompetitionPerfect competition has a market with many large sellers and many buyers of a homogeneous (standardized) product. It has no barriers to market entry, and both buyers and sellers take the market price as given. In perfect competition, marginal revenue (MR) is constant and equal to marginal cost (MC) and product price (P), where MR = MC = P. ? In perfect competition, no company has a significant impact on the market and it doesn't matter what the size of the firm is. ? In Perfect Competition Market StructuresThere are many sellers There are many buyers Cost, price, and product quality information is known to all buyers and sellers The products are homogenous (similar) There are no barriers to market entry Both buyers and sellers are price takers Non-price competition methods (for example, advertisement) are not needed ? Example 1: Wal-Mart Corporation and Target Corporation in the general merchandise sector and Staples, Office Depot, and OfficeMax in the office supplies sector are the best examples of a perfect competition. ? Example 2: When a consumer purchases Colgate or Crest brand toothpaste from Wal-Mart or Target, the consumer is getting the same quality toothpaste, perhaps with a different price. INCLUDEPICTURE "" \* MERGEFORMATINET Monopolistic and Imperfect CompetitionMonopolistic competition is a type of imperfect competition in that many firms sell their products that are differentiated from one another through branding or quality. Monopolistic competition is imperfect because both buyers and sellers do not have perfect information.A monopolistic competition is described as a market with many sellers and buyers of a slightly different product with no barriers to market entry. The fundamental difference between perfect competition and monopolistic competition is based on the existence of product differentiation. Cost, price, and product quality information is known to all buyers and sellers.A large firm operating in a monopolistic competition may be able to influence prices. A large number of rivals is a characteristic of perfect competition and monopolistic competition (a blend of monopoly and competition). No mutual interdependence exists between sellers.In Monopolistic Competition Market StructuresThere are no barriers to market entry There are many sellers and buyers,?and each seller sells a slightly differentiated product Example: Gas stations, restaurants, grocery stores, and coffee shops are examples of monopolistic competition. Two examples of imperfect competition include monopsony and oligopsony. It's called imperfect competition because the normal economic laws and principles applicable to the traditional demand and supply competition don't apply to the imperfect competition.A monopsony is a market in which there is only one buyer of a good, service, or resource. It also results from lack of geographical and occupational mobility of managers, employees, and resources.Example 1: The U.S. Treasury Department buying unique paper and supplies to print paper money is an example of a monopsony market.Example 2: A sole mining employer in a mining town is an example of a monopsony market because the employer buys all the available resources from that town.An oligopsony is a market in which only a few buyers exist.Example: A few rich buyers purchasing expensive and luxury cars (such as?Rolls Royce, Aston Martin, and Porsche), luxury jewelry and clothes (Tiffany and Chanel),?large yachts, and antique paintings is an example of an oligopsony market.Monopoly?and OligopolyA monopoly is a firm with significant and durable market power, meaning that the firm may have the long-term ability to raise prices or exclude competitors. An oligopoly is a market with few firms (sellers) where the actions of one firm can influence the actions of the other firms. ?Absolute, natural, or pure monopoly exists when a single firm is the sole producer of a unique product or service. This means the firm is the market and is a price maker. It's also?applied to a situation when the number of sellers is very few, and these sellers have greater influence over the total supply and full control over prices and resources.In a monopoly market structureA single firm serves the entire market There are no direct competitors Barriers to entry are very large There are large economies of scale or government policy that limits the number of firms due to antitrust laws Marginal revenue equals marginal cost (MR= MC) and the prices are set at a level where price exceeds marginal revenue (P>MR) Example 1: The US Post Office has a monopoly on stamps.Example 2: Utility firms such as gas and electric companies and professional sports organizations are examples of?monopolies.Oligopoly competition is characterized by the presence of a few firms dominating the market with homogeneous or differentiated products or services. The reasons oligopolies exist are the economies of scale, large barriers to entry into the industry, and growth from mergers and acquisitions.In an oligopoly market structureThe market consists of a few firms Companies sell?a standardized or differentiated product Entry is difficult due to huge capital requirements to build the infrastructure? There's limited control over product prices, and collusion is possible?Companies use?non-price competitive methods to influence sales (such as advertisement, promotions, rebates, and discounts) Example 1: General Motors, Ford, and Chrysler are oligopolies in the auto industry since there are just a few American manufacturers.Example 2: Other companies in the oligopoly industry include aluminum companies and public accounting firms.Basic Macroeconomic Principles and ConceptsGovernments use fiscal policy to combat economic downturns and recessions and monetary policy to control the money supply, unemployment, inflation, and interest rates in a country. Key economic indicators and business cycle indicators signal major changes taking place or expected to take place in the economy.Fiscal policy includes changes in government tax levels and spending levels that affect the levels of gross domestic product (GDP). Two scenarios can occur from a change in fiscal policy:? Expansionary (relaxed) fiscal policy means an increase in government spending and a decrease in taxes. ?Contractionary (tight) fiscal policy means a decrease in government spending and an increase in ernments use monetary policy as a tool to balance the supply and demand of money. The US Federal Reserve Bank (Fed) is the Central Bank for the United States?that influences money supply, unemployment, interest rates, inflation, and deflation in the US economy.Key economic indicators includeGross Domestic Product (GDP), Gross National Product (GNP), Consumer Price Index (CPI), and?Producer Price Index (PPI). Business cycle indicators are used in economic forecasting of a country and primarily consist of?Leading indicators Lagging indicators ?Leading indicators change in advance of other variables. ? Lagging indicators change after the other variables change. UnemploymentUnemployment is defined as the percentage of the workforce that isn't gainfully employed and is measured in terms of a rate, as below: INCLUDEPICTURE "" \* MERGEFORMATINET Unemployment results when either private sector spending or public sector spending?does not measure up to expectations. It also occurs when the GDP is not growing. ? There are six variations of employment or unemployment:Cyclical unemployment is unemployment that results from fluctuations in real GDP during the recession and depression phases of the business cycle. ?Seasonal unemployment occurs due to seasonal factors, such as holidays versus non-holidays, farm workers versus construction workers, and winter versus summer. ?Structural unemployment occurs when there is a mismatch of employees’ skills with the employers’ job requirements. Structural changes prevent certain people from obtaining jobs because of their geographical location, race, age, inadequate education, or lack of training. ?Frictional unemployment will always exist in a dynamic economy. It's short-run unemployment that's caused by people voluntarily changing jobs or by frictions that result from lack of knowledge about job opportunities and lack of labor mobility.Natural unemployment is the level of unemployment at which there is no cyclical unemployment. It consists of only frictional and structural unemployment. Natural unemployment is between 5% and 6%. ? Natural Unemployment = Frictional Unemployment + Structural Unemployment ?Full employment means that (1) all people sixteen years of age or older are employed or are actively seeking employment or (2) that cyclical unemployment is zero. In other words, full employment is the level of unemployment that occurs when the unemployment rate is at the natural rate of between 5% and 6%. ???????? Full Employment = 100% Minus Natural Unemployment Example: If natural unemployment is 5%, then full employment is 95%.?Interest RatesAn interest rate is the price paid for the use of money or capital (that is,?it's the cost of money). Interest rates determine investment in a country through capital expenditures, such as building new factories, offices, retail stores, and warehouses. ? ?Consumers and businesses need to know the prime interest rate, which is used as the basis for other interest rates used for loans and credit cards. The prime interest rate is generally the lowest of all interest rates since it's the rate individual banks are charged.?? When there is inflation, two types of interest rates take on importance: nominal interest rate and real interest rate. ?Nominal interest rate is the interest rate quoted or stated in the market (the going rate).? Real interest rate is the actual rate earned by a lender after taking inflation into account. The real interest rate determines the investment spending levels in the economy, not the nominal interest rate. INCLUDEPICTURE "" \* MERGEFORMATINET Example: You go to a bank to borrow money to purchase a house. That bank, in turn, borrows money theoretically from the Fed at the prime interest rate (a rate that the Fed charges to individual banks). ? Before the loan application is approved, your banker will tell you about the stated, quoted, nominal (face) interest rate prevailing in the market at that point in time. The quoted interest rate is much higher than the prime interest rate. ? After your loan application was approved and before closing the loan, your banker will tell you what the annual percentage rate (APR) is on your loan, which represents the true cost of your loan. The APR includes interest charges, loan application fees, appraiser’s fees, credit-checking fees, insurance, and other fees. You will quickly notice that the APR is higher than the quoted interest rate. Inflation?and DeflationInflation is a rise in the general level of prices as indicated by the consumer price index (CPI) and producer price index (PPI). When prices rise, purchasing power, the ability to buy goods and services, declines. If prices double, purchasing power is reduced to one-half of its previous level. Thus, inflation reduces the purchasing power of money. Inflation does not mean that the prices of all goods and services rise.?Some prices rise, others fall, and some do not change at all, but on the average, prices do rise. The basic cause of inflation is spending in excess of what an economy can produce. ?Deflation, which is the opposite?of inflation, is an overall decrease in prices of goods and services. Deflation occurs when the inflation rate falls below zero percent (resulting in?a negative inflation rate) and it increases the real value of money and debt (the?opposite?of inflation). With deflation, individuals and businesses buy more goods and services with the same amount of money (therefore, a dollar goes further). Note that too long of a duration of inflation or deflation is not good for a country because they inhibit a nation’s economic growth. INCLUDEPICTURE "" \* MERGEFORMATINET GDP?and GNP, CPI and PPIGross domestic product (GDP) is the total market value of final goods and services produced by a country in a given year. GDP measures a country’s outputs and productivity levels. If GDP declines for six months in a row, a recession is officially declared. ?To view US GDP since 2011, please visit: ?????Consumer price index (CPI)?measures the changes in prices and is used to calculate cost-of-living index and cost-of-living adjustments, which are used to adjust employee paychecks for inflation and to adjust Social Security checks to the elderly.?To view historical changes in US CPI, please visit: national product (GNP) is GDP plus total income earned worldwide by US firms and its residents. GNP is all inclusive and better than GDP. ?? ?To view US GNP since 2011, please visit: ????Producer price index?(PPI)?measures the price of a basket of commodities at the point of their first commercial sale by producers or manufacturers to consumers.??To view historical changes in US PPI, please visit:? and Lagging IndicatorsBoth leading and lagging indicators are designed to signal peaks and valleys in the business cycle. Each indicator contains positive and negative contributing factors to the change in the business cycle. ? ?Leading indicators change in advance of other variables. These are the least likely to be accurate. However, they are the most useful for business planning because they provide information for action. For example, a rising consumer price index (CPI) may be a leading indicator to higher inflation.? Examples of leading indicators includeNew building permits issued Index of stock prices of 500 common stocks Institute of Supply Management (ISM) issues a purchasing managers’ index (PMI) for purchasing of materials going into manufacturing production Index of consumer expectations for business conditions Consumer price index (CPI) Index of new orders Lagging indicators change after the other variables change. These are more accurate, but the information isn't as useful for decision-making. For example, unemployment may be a lagging indicator of a stock-market crash.?Examples of lagging indicators includeAverage duration of unemployment in weeks and months Inventories to sales ratio for manufacturing and trade business Change in labor cost per unit of output in manufacturing Average prime interest rates from the central bank Commercial and industrial loans volume A ratio of consumer installment credit outstanding to personal income SECTION 1.3IntroductionIn Section 1.3, you will learn the history of American management from various perspectives. You will also learn how management has evolved since the 19th?century into the 21st?century and its impact on how employers and employees are viewed.?Section 1.3 FeaturesDescribe the traditional and modern views of managementClassify the forces affecting organizationsExamine the evolution of management theories from the Scientific Perspective to the Human Relations Perspective?Distinguish between the pioneers in management development and examine their contributions to management developmentHistory of American ManagementRadical changes and revolutionary improvements are taking place right now in US business and society, primarily due to (1) information technology developments,(2) operational improvements in manufacturing and services industries, and(3) research from management scholars. Studying history is a way to achieve strategic thinking, to get a big-picture perspective, to improve managerial skills,and to focus on interpersonal skills (people skills). ? Let's compare and contrast these business changes and improvements in management before the 21st century (traditional management) and during the 21st century (modern management). ?The transition from tradition to modern management occurred due to four forces in the society and business markets: social forces, political forces, economic forces, and technology forces. These forces and their roles in traditional and modern management are described on the following pages. INCLUDEPICTURE "" \* MERGEFORMATINET Traditional ManagementCharacteristics of traditional management before the 21st century include:Management focuses on hierarchical levels of authority and power in terms of prescribed rules, policies, and procedures to create a rigid environment. In a way, this represents a management style of command-and-control order. More employees work in production economy and less in information economy. Employees are less empowered with little or no delegation of authority and power in making decisions. Employees did not work in teams and groups to solve common problems.Management is rigid with employees and bounded by the company rules, policies, and procedures.Management treats employees as other than partners and views them as other than co-workers.Management is saying more (telling things)?to employees and doing less (facilitating things)?with employees (i.e., more telling and less doing).Management is making highly pessimistic assumptions about employees’ human nature and behavior at work. Management has created a non-learning organization (efficiency is more important than effectiveness) that is rigid and non-adaptive to growth and learning, the result being that it cannot achieve its intended purposes. The overall work environment is more hostile and less friendly and trusting. Modern ManagementCharacteristics of modern management during the 21st century include:?Participative management in using consensus-based decisions with less focus on management’s hierarchical levels. Improving effectiveness is the focus here.More employees work in information economy and less in production economy. Employees are more educated and receive more training, resulting in more knowledgeable workers. Employees are more empowered and delegated with controlled decision-making authority and power. Employees work in teams and groups to solve common problems. Management is flexible with employees and not so much bounded by the company rules, policies, and procedures. Management treats employees as partners and views them as co-workers. Management is saying less (telling things)?to employees and doing more (facilitating things)?with employees (i.e., less telling and more doing). Management is making highly optimistic assumptions about employees’ human nature and behavior at work. Management has created a “learning organization” (effectiveness is more important than efficiency) that is flexible and adaptive to grow, learn, and achieve its purposes. The overall work environment is more friendly and trusting and less hostile. Traditional vs. Modern Management INCLUDEPICTURE "" \* MERGEFORMATINET Forces Affecting OrganizationsSocial, political, economic, and technological forces help organizations evolve over time. ? Social forces refer to aspects of a culture that guide and influence the relationships among people. Focus is placed on?the individual values, behaviors, cultures, and standards required for living in a society.?Because management’s primary job is to get things done through and with people (primarily employees), understanding management is the same thing as understanding employees because they constantly interact with each other in a work setting. Political forces refer to the influence of governmental agencies, lobbyists, legislative authorities like the US Congress, and labor unions on employees and business organizations.Economic forces refer to the availability, allocation, and utilization of scarce resources (money, manpower, materials, water, and energy) to individuals, institutions, and organizations. It deals with three economic principles: opportunity cost (the cost of a choice that is foregone), cost-benefit analysis (that is, costs should not exceed benefits), and equity principle (all should have an equal chance to access and use resources).Technological forces deal with how information technology is influencing individuals and organizations alike in terms of using the Internet economy ? (e-commerce, m-commerce, and e-auctions); how managers and employees are using social media for business awareness and gathering consumer behavior; how information is shared quickly and freely between internal employees and outside partners in the information economy;?and how digital technology is deployed at workplace to increase productivity, efficiency, and effectiveness (for example, use of digital phones and tablets, and other personal and mobile devices).History of Business OrganizationsVarious perspectives have evolved over the last 150 years in the United States?and Europe that describe the changing nature of business organizations. ? These organizational perspectives are presented in several sections labeled as classical perspectives, humanistic perspectives, and management sciences perspectives to represent the entire spectrum of history timelines. ? ?Classical Perspectives give companies fundamental new skills for establishing high productivity and effective treatment of employees. This perspective is further divided into scientific management, bureaucratic management, and administrative management.Management Sciences Perspectives address massive and complicated problems associated with large, modern, and complex global organizations. Disciplines such as mathematics, statistics, or other quantitative techniques support management’s decision-making and problem-solving processes. The perspective is further divided into operations research, operations management, and information technology.Humanistic Perspectives state that a job or position should be designed to meet higher-level needs of the organization by allowing workers to use their full potential; in a way, it centers on the human aspects of workers (employees). This perspective is further divided into sections: human resources viewpoints and behavioral sciences approaches.?Classical Perspectives:Scientific ManagementThe classical perspective emerged during the 19th and early 20th centuries. The factory system that began in the 1800s posed challenges that earlier organizations had not encountered. Problems arose in tooling the manufacturing plants, training employees, scheduling complex manufacturing operations, and dealing with increased labor strikes. ?These challenging situations created a need for salaried and professional managers, who developed and tested solutions to organize, coordinate, and control large numbers of employees and increased worker productivity. The classical perspective gave companies new skills for establishing high productivity and effective treatment of employees. ?Scientific management required managers to develop standard methods for doing each job, to select workers with the appropriate abilities, to train the selected workers in the standard methods, to support the workers and eliminate interruptions, and to provide wage incentives. ?Factory management blamed employees for not achieving the required labor productivity, when in fact the problem rested with management for their poor management practices. Here, labor is not the cause of productivity problems, management is. ?Pioneers in scientific management theory include the following management scholars and researchers: ?Frederick Winslow Taylor Henry Gantt Frank Gilbreth Scientific Management Pioneers:TaylorFrederick Winslow Taylor (1856–1915) was a mechanical engineer who focused on making organizations more efficient. He studied workers to understand how long each task takes in a manufacturing process. Then, he was able to make improvements to help the workers become more efficient. According to the Wall Street Journal, Taylor was one of the first management consultants. ?His book The Principles of Scientific Management describes a system of "initiative and incentive." Management has to provide incentives for better work. Employees need to have initiative to take advantage of the incentives outlined by management. ?Taylor believed that employees want to be productive, and management’s job is to create an environment that increases employee efficiency and productivity. Scientific Management Pioneers:Gantt ??Henry Gantt (1861–1919) was a colleague of Frederick Taylor. Gantt too was an engineer and management consultant.?He developed the Gantt Chart, which is a bar graph that measures planned and completed work along each stage of production by time elapsed. ?Used in the construction of large national infrastructure projects such as the Hoover Dam and the US highway system, the Gantt Chart is a fundamental tool in project management and provides a systematic way to organize work. ?Gantt’s book Organizing for Work provides his rationale for the Gantt charts: What's the amount of time needed to complete activities? What's the amount of the activity that should be completed in a given timeframe? INCLUDEPICTURE "" \* MERGEFORMATINET Scientific Management Pioneers:Gilbreth?Frank B. Gilbreth (1868–1924) pioneered time and motion studies and arrived at many of his management techniques independently of Taylor. He stressed efficiency and searched for the “one best way” to do work. Later, it was known as industrial engineering, with the concept of arranging work based on careful analysis of tasks for maximum productivity (time and motion studies). ? Although the scientific management approach has improved labor productivity in a factory, it created a social and psychological conflict between factory management and factory workers. The conflict?concerning workers is that management is exploiting them. Classical Perspectives:Bureaucratic ManagementMax Weber (1864–1920), a German theorist, introduced the concept of bureaucracy, which means strict rules and many policies and procedures (red?tape). Weber envisioned whole organizations that would be managed on an impersonal and rational basis. ?During the late 1800s, many European organizations were managed on a personal, family-like basis. Employees were loyal to a single individual owner rather than to the organization’s mission or to serve its customers, leading to dysfunctional consequences (for example, resources were used for personal gains). ? Weber believed that an organization based on rational authority would be more efficient and adaptable to change because business continuity is related to formal structure and positions rather than to a particular person, who may leave or die. ?To Weber, rationality in organizations meant employee selection and advancement is based on competence rather than on “whom you know.” The organization relies on rules and written records for continuity. The manager depends not on his or her personality for successfully giving orders, but on the legal power invested in the managerial position. Classical Perspectives:Administrative ManagementWhereas scientific management focuses on the productivity of the individual worker in the factory, administrative management focuses on the total organization. ? Pioneers in administrative management include the following management scholars and researchers: ?Henri Fayol Mary Parker Follett Chester Barnard James D. Mooney and Allan C. Riley Administrative Management Pioneers: Fayol??Henri Fayol (1841–1925) was a French mining engineer and one of the fathers of modern management. When he was 19, he started a mining company that grew to be France’s largest producer of iron and steel. Based on his experience managing 10,000 employees, he developed several management principles:?Unity of command principle means each subordinate receives orders from one—and only one—superior. Division of work principle means managerial and technical work can be specialized to produce better output with the same effort.Unity of direction principle means similar activities in an organization should be grouped together under one manager.Scalar chain principle is a chain of authority that?extends from the top to the bottom of the organization and should include every employee. INCLUDEPICTURE "" \* MERGEFORMATINET Administrative Management Pioneers: Follett??Mary Parker Follett (1868–1933) wrote about the importance of achieving common super-ordinate goals (higher goals) for reducing conflict in organizations arising from rapid changes in the world. ?She suggested ideas that were opposite to scientific management theories, including ?Employees are more important than engineering techniques. Managers and leaders should consider ethics and power and how to lead them in a way that encourages employees to give their best. ?Follett opened a new concept of empowerment, facilitating rather than controlling employees, and allowing employees to act alone depending on the authority of the situation. ? Administrative Management Pioneers: BarnardChester I. Barnard (1886–1961) started his career at AT&T in the 1900s and later became the president of the New Jersey Bell Telephone Company. ?He viewed organizations to be short-lived because he didn’t think?they could satisfy the motives of the individual employees. He viewed organizations to be an extension of human activity and therefore needed to be concerned about the individual employee. ?Barnard’s book The Functions of the Executive outlined the role of business executives: Develop a communication system?Motivate other colleagues to serve the organizationDevelop organizational goals and objectivesAdministrative Management Pioneers: Mooney?and Riley??James D. Mooney (1884–1957), a senior leader at General Motors, worked with Allan C. Riley (1869–1947) to develop the concept of fair play, defined as follows:?“The leader must be sensitive to the rights of the led and he must take measures to ensure that they are maintained for every individual throughout the organization. In other words, he must hug closely to the policy of ‘fair play’. To this end, the leaders must begin by playing fair with each other.”Humanistic Perspectives: Human Resources Viewpoints?Humanistic perspectives state that a job or position should be designed to meet higher-level needs of the organization by allowing workers to use their full potential; in a way it centers on the human aspects of workers. ? The scope and nature of humanistic perspectives include specific areas such as human resources viewpoints and behavioral sciences approaches, each with a different emphasis and purpose. ??? Human Resources Viewpoints The human resources viewpoint combines prescriptions for design of job tasks with theories of motivation. It says jobs should be designed so that tasks are not perceived as dehumanizing or demeaning but instead allow workers to use their full potential. ? Pioneers in human resources viewpoints include the following management scholars and researchers: ?Abraham Maslow Douglas McGregor William G. Ouchi Human Resources Pioneers:MaslowAbraham Maslow (1908–1970), a practicing psychologist, observed that his patients’ problems usually stemmed from an inability to satisfy their personal needs. Thus, he generalized his work and suggested a hierarchy of needs. ? ?Maslow’s hierarchy contains five levels, starting with physiological needs (basic needs of food, shelter, and clothes) and progressing to safety, belongingness, esteem, and self-actualization needs (ultimate needs of a person to indicate what a person can become in his or her life). INCLUDEPICTURE "" \* MERGEFORMATINET Human Resources Pioneers:McGregor and Ouchi??Douglas McGregor (1906–1964) formulated Theory X and Theory Y. Theory X managers take a negative view and assume that most employees don't like work and try to avoid it. Theory Y managers take a positive view and believe that employees want to work and will seek work satisfaction. ?William G. Ouchi coined a new term, Theory Z, to represent a Japanese style of management characterized by long-term employment, slow promotions, considerable job rotation, consensus-style decision-making, and concern for the employee as a whole. ??Resource: INCLUDEPICTURE "" \* MERGEFORMATINET Humanistic Perspectives:Behavioral Sciences Approaches ?Behavioral science approaches draw from sociology, psychology, anthropology, economics, and other disciplines to understand employee behavior and interactions in all organizational settings. ? One concept based in the behavioral sciences approach is organization development (OD), which improves an organization’s financial and operational health and effectiveness through its ability to cope with change, improve internal relationships, and increase problem-solving capabilities. ? ?Other concepts that grew out of the behavioral sciences approach include matrix organizations, self-managed teams, ideas about corporate culture, and management by wandering around (MBWA). In recent years, behavioral sciences and OD techniques have been applied to help managers build learning organizations. Management Sciences Perspectives ??The scope of management sciences perspectives includes specific areas such as operations research, operations management, and information technology, each with a different emphasis and purpose. ?? Operations Research Operations research consists of mathematical model building, linear programming, and other applications of quantitative techniques to solve managerial problems. ? Operations Management Operations management refers to the field of management that specializes in the physical production of goods or services. Operations management specialists use quantitative techniques to solve manufacturing or service problems. Some of the commonly used methods are forecasting, inventory control, linear programming, nonlinear programming, queuing theory, scheduling, simulation, and break-even analysis. ? Information Technology Information technology (IT) is the most critical area of the management science perspective. In addition to providing information to management for decision-making, IT helps managers to estimate costs, to plan and track production and service operations, to manage projects, to allocate resources, or to schedule employees’ work and machines on the plant floor. ................
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