Business Management

BIBLIOGRAPHY

Management is a term that is used to describe a particular kind of behavior within an organization. Specifically, the term describes the behavior of those responsible for the decisions that determine the allocation of the physical and human resources within an organization. It is increasingly recognized that the management function is built upon the social sciences and provides them with interesting problems. Management bears the same relationship to the social sciences that medicine does to such fields as chemistry, physiology, and anatomy.

The central core of the management function, which has made this area of great interest to social scientists, is decision-making behavior. Since this behavior governs the allocation of the resources of a firm, economists in particular have been attracted to the study of management. There is an obvious relationship between the theory of the firm and the field of management. In the theory of the firm under perfect competition, the economist has abstracted significantly from the problems of management and has substituted a simple decision rule for determining price and output. In markets that deviate from the perfectly competitive, the internal structure of the firm and the role of the manager as a decision maker become important. Market forces may no longer dominate the decision but may become only one set of variables in a process that must involve a number of other variables (Cyert & March 1963).

Recognition of the importance of management to the theory of the firm has led to an increase in field studies concentrating on decision making. Concurrently, there has been an increase in interest on the part of social scientists in particular decisions within certain areas of management (Simon 1960). Economists, for example, have become interested in the financial decisions of the firm, and psychologists have become interested in certain marketing decisions. This interaction has been extremely fruitful for the field of management. [SeeAdministration, article onadministrative behavior; Investment, article onthe investment decision.]

General management. Traditionally, social scientists have viewed the managerial function in simplified terms. Economics has generally posited a single owner whose function it is to make decisions on price and output by using highly rigid decision rules. If one examines the general management function, however, one discovers a much wider and richer range of behavior. To understand this behavior it is necessary to examine briefly the nature of the business firm.

The business firm in the American economy does not have the autocratic organizational structure attributed to it in popular writing. The management cannot exercise disciplinary power over the members of the organization in the manner of a military organization. Rather, the general management of the business firm should be viewed as a coalition of members, each of whom brings to the coalition a set of preferences that represent his model for the firm’s behavior. In the process of making decisions for the firm as a whole, coalition members will have their preferences modified, ignored, or incorporated as goals (constraints) for the decisions the coalition makes.

Membership in the coalition is an operational definition of general management. In most large organizations this membership would include the president of the firm and the vice-presidents. However, in very large organizations this membership might include only a subset of vice-presidents, and in smaller organizations others, such as plant managers, might be included.

The general functions of the coalition, or general management, fall into the two broad categories of decision making and decision implementation.

Decision making. The decision making of the coalition will be concentrated in areas involving the allocation of the resources of the firm to broad categories of activities. These decisions may involve changing or modifying an old activity; for example, investing in new equipment for an established plant. The decision may involve the elimination of an old activity; for example, the elimination of a particular product line because it does not meet the profitability constraints determined by the coalition. Finally, the decision may involve allocating resources to a new activity; for example, acquiring another firm through purchase or merger.

In all these classes of decisions it is clear that the firm’s goals must be defined by the coalition. A business firm does not have a stated list of goals that governs all decisions; rather, the process of decision making includes the process of determining goals. A continuous bargaining–learning process takes place among the members of the coalition. The goals of the organization are not a weighted function of the individual members’ preferences. In general, the coalition continues to exist by utilizing some preferences of members as goals (constraints) and by making policy side-payments to others. The preferences that are used as goals define the criteria which a proposed solution or alternative must meet. The determination of the goals of the organization for a particular decision is also a function of the alternatives discovered by the search activity of the organization.

The preferences of coalition members may be in direct conflict and, therefore, some preferences of some members will have to be ignored. In such cases, the firm may make side-payments to keep those members within the coalition. Side-payments may take many forms. For example, at the next budget period the individual whose preferences have been ignored may get a relatively large increase in his department’s budget. The side-payment might take the form of an expansion in the size of his department to give him more power, or he might be put on additional committees and given more voice in the management. In short, he will usually be given inducements to remain within the coalition in compensation for having his preferences excluded in the decision.

Decision implementation. Implementation is the procedure by which general management accomplishes its goals. The procedure can be viewed as a process of programming the firm (in the sense of computer programming). These programs are known as standard operating procedures and can be classified into four major types.

(a) Task performance rules. To keep a firm operating smoothly, over time and with changing personnel, it is necessary to specify the methods for accomplishing the tasks assigned to individuals and subgroups within the organization. When the task is a recurring one, the task performance rules represent the results of past learning. The rules represent the firm’s attempt to educate new employees in the firm’s methods.

(b) Records and reports. A firm’s records and reports are its written history. Current records and reports contain most of the quantitative data that are the basis for making decisions and for controlling the behavior of individuals and subgroups within the organization.

(c) Information-handling rules. These rules define the formal communication system within the firm. They cover three kinds of information: (1) Information about the environment relevant to the firm. (2) Information about the firm for internal use. (3) Information about the firm for external use. The information-handling rules specify the distribution pattern of the information as well as the security measures on information leaving the firm.

(d) Plans and planning rules. We do not include within this category strategic, long-run planning for the firm. We include activities, such as budgeting, which involve repetitive planning that lends stability to the organization’s activities. Such planning results in schedules for behavior over a period of time and puts constraints on acceptable alternative behaviors. General management tends to continue existing decisions on resource allocation from year to year, except in cases where achievement is unsatisfactory.

We have defined management in broad terms, but it is necessary to look more closely at some of the substantive areas of management to gain a better understanding of the field. A convenient way of analyzing management is by functional fields. Although there is no hard and fast classification system, we shall examine finance, marketing, and production. These three describe important segments of the management function and will serve to illustrate the interrelations of the management field with the social sciences.

Finance. In general, the field of finance is concerned with the problems and decision-making processes involved in the allocation among competing uses of the scarce financial resources of the firm. This concept of the field is in contrast to the approach which dominated the finance field until the last ten to fifteen years (Solomon 1963) and which emphasized description of the institutional aspects of financial markets and the various financial instruments available to a corporation. The problem focus was almost entirely one of determining the kinds of securities that might be used in particular financing situations.

The modern approach, on the other hand, investigates such questions as the following: (1) What are the financial constraints that determine the rate of growth and the ultimate size of the firm? (2) What is the optimum portfolio of assets and liabilities for the firm? (3) What considerations are involved in obtaining external funds and what is the optimum method of obtaining them? Such problems are characterized by a concern for choosing among alternative uses and sources of funds.

The distinguishing feature of the finance problem is the emphasis on maximizing the return to invested funds. From the finance point of view, the importance for production or marketing of an investment is not taken into account. It is up to other members of the firm to show that an investment should be made when the return does not meet the financial standards.

Cash management. While the problems described above are, in one sense, the crux of financial decision making, the short-run problems of cash management are also significant. Cash management involves forecasting the amount of cash that will be available for expenditures at particular points in time. This kind of forecasting is closely related to accounting and is one of the ties between finance and accounting. The first step in planning cash receipts is to forecast cash sales and the expected collections from credit sales. In addition, one has to look at other sources of cash, such as interest and dividends, sales of assets, and tax refunds. In a similar fashion it is necessary to set out anticipated expenditures for such things as raw materials, labor, travel, and miscellaneous supplies. Expected receipts and disbursements are then matched, usually on a monthly basis for six months or a year in advance, so that the firm knows its planned cash balance for each month.

Working-capital management. A similar planning problem exists in the management of working capital. The expected amount of working capital at various points in time must be projected. Working capital is defined as the difference between current assets, which include cash, marketable securities, accounts receivable, and inventories, and current liabilities, which include accounts payable, notes payable, and other debts that must be paid in a short period of time.

Managing shortterm credit is another important aspect of working-capital management, as is the planning of inventories. In recent years, much work has been done on the problem of determining an optimal inventory level (Holt et al. 1960). This involves an analysis of the costs of holding inventory, which include insurance, taxes, interest, and warehousing costs. Against these must be weighed the cost of lost sales which come about when a customer wants an item that is not in stock. [SeeInventories.]

Cost of capital. Another major concern of finance is the evaluation of investment alternatives. The general approach used in choosing among alternatives is to determine the present worth of each alternative (Solomon 1963). To find the present value of the investment in question, its net earnings for each year are computed and discounted to the present according to the following formula:

Here K is the discount rate, E_i the net earning in year i, and PW is the present worth. The discounted value for any year, E_i/(l + K)ⁱ is the amount that has to be invested now at rate K in order to equal E_i in year i. For example, where i is equal to 1, let K equal .25 and E_i equal one dollar. Then PW= $1.00/1.25 = $.80.

There are obvious problems in this analysis, when uncertainty is taken into account, because both E and K must be estimated. The more difficult concept is K; it is currently the source of controversy. The prevailing view is that the proper K to be used in a calculation such as the one above is the rate which measures the cost to the firm of obtaining new capital.

But the cost of capital is difficult to measure because capital is raised in a wide variety of ways, ranging from bank borrowing to issuing stock. It is, therefore, difficult to determine a precise cost. This difficulty is compounded because one is interested in the cost of raising additional capital; in an uncertain world it is difficult to forecast this cost for some unknown time in the future when a firm may want to raise capital. Much work in finance is concerned with determining the cost of particular kinds of capital, such as equity capital, debt, and retained earnings.

One of the cost-of-capital controversies concerns the use of borrowed capital, which is said to give “leverage” to the owners of the firm. Modigliani and Miller (1958) have contended that under the assumptions of certainty, perfect markets, and maximizing behavior on the part of investors, the amount of leverage bears no significant relationship to the market value of a company. This would mean that the financial structure does not need to be examined in order to determine the cost of capital. The argument about this position has not been settled, and it has reached something of an impasse because of the difficulties of doing empirical work to test the hypothesis precisely.

The total plan. Finally, there is the problem of integrating financial planning with the over-all objectives of the firm. This involves the integration of plans from all parts of the firm and bears specifically on decisions involving the outflow of cash, the desired level of liquidity, and additional financing. It requires a more elaborate analysis than is used to deal with the cash account alone. Sophisticated mathematical techniques are being applied to this problem, and new developments in capital budgeting give promise of producing a relevant analytical framework (Weingartner 1963; Beranek 1963).

Marketing . Marketing is concerned with all of the variables affecting the sale of the product to the customer, whether the customer is a household or a firm. This range of concerns is broken up into the following broad categories:

(1) Understanding consumer behavior.

(2) Responsibility for variations in product quality and design.

(3) Price determination.

(4) Selection of distribution channels.

(5) Choice of advertising media and the level of advertising.

Consumer behavior. In economics, one way of summarizing consumer behavior is through the use of a demand curve, which relates the amount of a product a consumer will buy to its price [seeDemand and supply]. The curve is based on the assumption that income, the prices of related products, and consumer tastes are all fixed. To make sound marketing decisions, however, it is necessary to investigate the process by which consumers decide what to buy.

Work on this problem has taken essentially two paths. The first attempts to observe and survey consumers and to discover their goals. It relies heavily on sociological and psychological theory. The type and source of the buyer’s information have been investigated in the context of the whole communication problem. For example, Katona and Mueller found that 50 per cent of the consumers in their sample received information about durable products from friends (Mueller 1954, p. 45). This line of research is attractive and shows promise. The major difficulty to date lies in the integration of the results into broader decision models; that is, in transforming explanatory propositions into normative operational propositions on which a firm can act.

Another approach in the analysis of consumer brand choice utilizes the concept of consumer learning (Kuehn 1962, pp. 390–392).

Product decision. Decisions must be made about the addition of a new product or the elimination of an old one. Also existing products may be modified. Increasing expenditures for research and development have made decisions about products more important. One line of attack attempts to determine the characteristics that buyers are seeking in new products and the way in which buyer decisions about new products are made. Unfortunately, there are few studies in this area, and they are not directly applicable to marketing problems. Most of them are diffusion studies on the use of innovations, done by sociologists and anthropologists. Marketing students are seeking help from these studies in the development of the proper strategy for introducing new products.

There are a number of other interesting problems in this area, of which we will mention two. The first involves testing the marketability of new products before they are added to the company’s product line. Here two basic approaches have been used. One attempts through questionnaire and interview data to determine consumer reaction to the new product through comparisons with other products on the market. The difficulties with this approach stem from the problem of eliciting accurate answers from the consumer. The consumer is asked in an artificial setting to describe his potential behavior in a real situation. The measurement of the reliability of response in such situations is a fruitful area of research for psychologists. The other approach primarily utilizes statistical analysis. The product is test marketed and predictions of the success of the product are made from the analysis of such phenomena as repeat purchases. The market areas are usually picked with the aid of sampling theory.

The second problem is that of deciding the amount of funds that should be invested in research for new product development. This problem is clearly not the sole concern of the marketing group; however, marketing considerations must play an important role in the solution. Currently, this decision is made by some rule of thumb, such as allocating a fixed percentage of sales to research and development. To improve such decisions, more knowledge is needed about the desired frequency of new product introduction. Answers to this will probably be obtained through an application of behavioral science and mathematical techniques.

Pricing. One of the most important problems for the marketing manager is to determine the price to charge for a product or the items in a product line (a set of related products, each differing from the other primarily in quality—for example, men’s suits in a department store). There are no firm rules that will guarantee proper pricing. The best that can be done, given the current state of knowledge, is to indicate some variables that should be examined and to review some current practices.

Some of these variables are considered in economic analysis. It is clear, for example, that the prices of competitive products must be taken into account and that potential competitors exert a downward pressure on price. The latter force is more important in markets where there are only a few sellers and where new competitors may enter freely. The characteristics of the demand must be investigated, particularly its price elasticity (the percentage change in quantity demanded divided by the percentage change in price). If price is lowered by a given percentage, will quantity demanded increase relatively more or less than price? [SeeElasticity.] If quantity increases relatively more, it may be profitable to lower the price. In this case, of course, cost considerations become important.

Since the marketing manager must come to a decision, he uses some practical techniques that give him specific, but imperfect, information. Experimental methods have been used in which different prices are set in a number of similar markets to determine the influence of prices on sales. Interviewing has been used for the same purpose as has the analysis of sales data in situations where prices have been changed. All of these techniques give useful but not decisive information.

Distribution channels. Producers must determine the route by which their product reaches the consumer. A variety of ways are possible, of which the simplest is that in which the consumer buys directly from the manufacturer at his plant. The most complicated distribution channel might include four different middlemen—sales agent, wholesaler, jobber, and retailer. The marketing manager generally decides upon the best channel for the product on the basis of a qualitative analysis that examines the characteristics of the product and of the various possible channels. He considers such factors as the need for demonstration of the product, the amount of repair and maintenance, and the number and variety of the items that must be shown to the customer. In other words, he must decide how to make the product easily accessible to the customer under conditions in which the selling effort can be effective. [SeeInternal trade.]

Promotion. Promotion generally covers the entire selling effort, and promotion expenses include all expenditures specifically aimed at increasing sales. Promotion problems can be summarized by the following set of questions:

(1) What is the optimum level of funds to allocate to promotion?

(2) How much should be allocated to advertising and how much to other forms of promotion?

(3) How should advertising expenditures be allocated among various media?

In addition, there are problems in measuring the effectiveness of advertising and other promotional devices. As yet, no completely satisfactory techniques have been developed for solving these problems. [SeeAdvertising, article oneconomic aspects.]

In this whole area, however, the use of mathematical and statistical techniques is increasing rapidly. Until about 1950 there was no indication that advertising problems were amenable to quantitative analysis. Currently, many attempts at such analysis are being made, and the outlook for improving management decisions is hopeful.

Production. Production is concerned with the operations by which inputs of men and materials are converted into goods and services through the use of machines and other fixed equipment. Recent definitions of production include all of the physical operations of the firm. In addition, a systems concept is developing which relates previously disparate parts of the firm. Thus, a production or operations system would include the following range of problems (Buffa 1963, pp. 26–28):

(1) Forecasting sales.

(2) Converting these forecasts into plans for a relatively stable production rate, inventory level, and work force.

(3) Specific plans for the mix of items in the inventory and development of a control system to insure against “running out” of items.

(4) Detailed scheduling of transportation facilities, machines, and men.

(5) Development of control systems to insure the quality of the product and the viability of the whole production process.

Within this framework a number of decisions have to be made:

(1) The product must be designed and production costs must be estimated as they may in turn affect the design.

(2) The processes to be used must be determined and equipment selected. Decisions to replace equipment must also be made.

(3) The layout of the production facility must be designed. Capacities must be determined and the flows of materials and men within the system organized.

(4) Provision must be made for maintenance of the system.

These problems and decisions constitute only a brief overview of the production problem. In economic theory it is assumed that surviving firms in the long run use the optimum production function and operate at the lowest average cost curve possible for the given plant. It is the broad goal of production management to achieve this state; it studies the techniques and develops the methods for attaining the position that is assumed in economic theory.

Production, like other functional areas of management, relies heavily on still other disciplines. Production management since about 1946 has in particular utilized psychology, mathematics, statistics, and computer technology.

Psychology is used in problems of machine design, job design, and general work environment. Much work has been done by psychologists in designing and positioning the dials and meters used by workers. The object is to design the information and control panels so as to minimize errors and the time required to do the job. Work schedules have been examined and redesigned to minimize fatigue. The effect on productivity of noise, temperature, and lighting in the work environment has also been investigated.

Use of linear programming. Perhaps the most important impact on the production area has come as a result of the application of a particular mathematical technique, linear programming. By means of linear programming a linear function subject to certain inequality restrictions can be minimized or maximized. A number of problems can thus be solved mathematically that in the past were handled on a judgmental basis:

(1) Mix problems. Frequently, in making a product such as gasoline, alternative inputs can be used to meet specific product requirements. With linear programming the minimum cost combination can be found.

(2) Production scheduling. Production can be scheduled over time to minimize storage costs and to obtain a relatively stable work force.

(3) Shipping problems. Frequently products must be shipped from several locations (warehouses) to other points (customers). Linear programming can help to achieve minimum transportation costs [seeProgramming].

In the inventory problem, classical mathematical and statistical methods have been used. The general approach is to start with a probability distribution for sales in a given period. Taking into account such variables as sales, losses incurred if the producer is out of inventory, losses on items left in inventory, interest, and warehousing costs, a solution for the desired inventory level can be determined. Significant work has been done in this area, especially the development of the linear decision rule [seeInventories; see also Holt et al. 1960].

Use of computers. Computers are becoming increasingly important in production in two primary uses. The first is in simulating a process in order to determine a policy. For example, job-shop simulators are used to determine the results of various scheduling rules. In a job shop, where each job has different characteristics and goes through different operations, there is no “best” rule for scheduling the various jobs when there is competition for the facilities. One approach is to program the computer to simulate the shop and then, using different scheduling rules, schedule a series of jobs that is similar to an actual series. The simulation can help to evaluate the results of following any of the rules or some set of them. An analogous procedure has been followed for determining the optimal maintenance force. [SeeSimulation.]

Computers have also been used as decisionmaking devices. Programs have been written for assembly-line balancing (designing successive operations so as to minimize waiting time) as well as warehouse location problems (Tonge 1961; Kuehn & Hamburger 1963). These applications fall in the category of heuristic programming and have been used for problems in which a mathematical optimum cannot be found. The programs utilize decision rules suggested by an analysis of previous human attempts to solve the problem. By a systematic use of the rules and greater processing ability the computer is able to improve on the unaided human solution.

Education for management. We have described briefly three areas in which much of the work of management is done. Other areas such as personnel and accounting (particularly controllership) could have been mentioned. The trend in education for management, however, has been to reduce the emphasis on specialized training and to stress training for general management.

Courses valuable for business management fall into two categories: the disciplines on which management is based and management courses as such. In the first category we include psychology, economics, mathematics, and statistics.

Psychology is important in human relations and in organization theory. The student of human relations is given an adequate background in psychology, especially individual psychology. He is then taught to use this background in understanding human behavior. The aim is to establish the attitude that problems of human relations should be approached scientifically.

Organization theory also builds on psychology. It seeks to give the student an understanding of human behavior in the context of organizations as well as a better understanding of the administrative process. In particular, the student learns the importance of organizational structure in the implementation of decisions and in the changing and designing of organizations.

Economics courses are oriented toward giving the future manager an understanding of the economic environment in which he will operate. He needs to become familiar with the operation of the economy as a whole—with the determinants of the level of gross national product, employment, and the price level and with the relation of these aggregates to actions of the government and the banking system. He must also study economics to understand the role of the firm in the functioning of the economy.

In mathematics the student should, at a minimum, know elementary calculus and matrix algebra. More importantly, he must be able to relate the mathematics to management problems. He need not be able to develop new theorems or invent new mathematics. An analogous statement can be made for statistics. It is important that future managers have a working knowledge of both disciplines, as well as the ability to know when to call in an expert and how to use him.

The student of management must understand the role of the computer in management decision making and in the development of information systems within the firm. This knowledge should be developed through course work in which some programming language is taught and where the computer is used by the student.

The three functional areas of business management described above must also be covered. In addition to required work in each, there should be an opportunity for the student to go somewhat deeper into at least one of the areas. It is important, however, that this depth be limited, since the student is training for general management and not a specialty. Accounting must be covered, with an emphasis on the managerial uses of accounting—the use of accounting data for decision making and control.

There is also need for a course in the techniques of management science, the most important of which is linear programming. This course should build directly on the mathematics course, and the techniques learned should be used in the functional courses.

We have tried to sketch briefly the basic ingredients of an education oriented toward general management. We have not tried to describe a curriculum in detail but rather to mention some of the principal courses that any curriculum should cover. In general, there are three guiding principles for the construction of a curriculum in management. The first is that the disciplines underlying the practice of management must be present. Courses in the social sciences and mathematics and statistics give the student the basic knowledge and techniques he will need. The second principle is that the emphasis should be on breadth rather than on specialization. The specialization can generally be learned as necessary on the job, but breadth is acquired more efficiently in the classroom. The third principle is that the management curriculum must anticipate changes in management practices and not reflect only past management practices (Cyert & Dill 1964, p. 223). The faculty should know current management practices as well as have the objectivity to stand off and speculate on new techniques. The student, after all, will not ordinarily reach a top management position until fifteen or twenty years after his graduation (Bach 1958, p. 351).

Richard M. Cyert

BIBLIOGRAPHY

Bach, G. L. 1958 Some Observations on the Business School of Tomorrow. Management Science 4:351−364.

Beranek, William 1963 Analysis for Financial Decisions. Homewood, Ill.: Irwin.

Bowman, Edward H.; and Fetter, Robert B. (1957) 1961 Analysis for Production Management. Rev. ed. Homewood, Ill.: Irwin.

Buffa, Elwood 1963 Models for Production and Operations Management. New York: Wiley.

CyerT, Richard M.; and Dill, William R. 1964 The Future of Business Education. Journal of Business 37:221−237.

Cyert, Richard M.; and March, James G. 1963 A Behavioral Theory of the Firm. Englewood Cliffs, N.J.: Prentice-Hall.

Friedman, Lawrence 1961 Game Theory in the Allocation of Advertising Expenditures. Pages 230−244 in Mathematical Models and Methods in Marketing. Edited by Frank M. Bass et al. Homewood, Ill.: Irwin.

Holt, Charles C. et al. 1960 Planning Production, Inventories, and Work Force. Englewood Cliffs, N.J.: Prentice-Hall.

Howard, John A. (1957) 1963 Marketing Management. Rev. ed. Homewood, Ill.: Irwin.

Kuehn, Alfred A. 1962 Consumer Brand Choice: A Learning Process? Pages 390−403 in Ronald E. Frank (editor), Quantitative Techniques in Marketing Analysis. Homewood, Ill.: Irwin.

Kuehn, Alfred A.; and Hamburger, Michael J. 1963 A Heuristic Program for Locating Warehouses. Management Science 9:643−666.

Modigliani, Franco; and Miller, Merton H. (1958) 1959 The Cost of Capital, Corporation Finance and the Theory of Investment. Pages 150−181 in Ezra Solomon (editor), The Management of Corporate Capital. Glencoe, III.: Free Press. → First published in the American Economic Review.

Mueller, Eva 1954 A Study of Purchasing Decisions. Part 2: The Sample Survey. Consumer Behavior 1: 38−87.

Simon, Herbert A. 1960 The New Science of Management Decision. New York: Harper.

Solomon, Ezra 1963 The Theory of Financial Management. New York: Columbia Univ. Press.

Tonge, Fred M. 1961 A Heuristic Program for Assembly Line Balancing. Englewood Cliffs, N.J.: Prentice-Hall.

Weingartner, H. Martin 1963 Mathematical Programming and the Analysis of Capital Budgeting Problems. Englewood Cliffs, N.J.: Prentice-Hall.

Management Levels

TOP-LEVEL MANAGERS
MIDDLE-LEVEL MANAGERS
FIRST-LEVEL MANAGERS
MANAGEMENT LEVELS AND THE FOUR MANAGERIAL FUNCTIONS
MANAGEMENT ROLES
MANAGEMENT SKILLS
CHANGES IN MANAGEMENT HIERARCHIES
BIBLIOGRAPHY

Managers are organizational members who are responsible for the work performance of other organizational members. Managers have formal authority to use organizational resources and to make decisions. In organizations, there are typically three levels of management: top-level, middle-level, and first-level. These three main levels of managers form a hierarchy in which they are ranked in order of importance. In most organizations, the number of managers at each level is such that the hierarchy resembles a pyramid, with many more first-level managers, fewer middle managers, and the fewest managers at the top level. Each of these management levels is described below in terms of their possible job titles and their primary responsibilities and the paths taken to hold these positions. Additionally, there are differences across the management levels as to what types of management tasks each does and the roles that they take in their jobs. Finally, there are a number of changes that are occurring in many organizations that are changing the management hierarchies in them, such as the increasing use of teams, the prevalence of outsourcing, and the flattening of organizational structures.

The “Dean” of business history, Alfred Chandler, saw the managerial class as one of the great leaps forward in the business world. Chandler noted that managers and management levels arose from the need to further allocate responsibility and coordinate activities as large corporations emerged in the nineteenth century. For example, railroads were faced with the enormous task of coordinating activities (including scheduling) over wide geographic areas. Clear managerial roles helped this process. Chandler also reasoned that managers, because they had more specialized educational backgrounds, would tend to desire lifelong careers within a single corporation. As a result, managers favored long-range planning as opposed to short-term profits. Simply put, it is unlikely that the modern corporation

would have developed without the development of different and well-defined management levels.

TOP-LEVEL MANAGERS

Top-level managers, or top managers, are also called senior management or executives. These individuals are at the top one or two levels in an organization, and hold titles such as: chief executive officer (CEO), chief financial officer (CFO), chief operational officer (COO), chief information officer (CIO), chairperson of the board, president, vice president, corporate head.

Often, a set of these managers will constitute the top management team, which is composed of the CEO, the COO, and other department heads. Top-level managers make decisions affecting the entirety of the firm. Top managers do not direct the day-to-day activities of the firm; rather, they set goals for the organization and direct the company to achieve them. Top managers are ultimately responsible for the performance of the organization, and often, these managers have very visible jobs.

Top managers in most organizations have a great deal of managerial experience and have moved up through the ranks of management within the company or in another firm. An exception to this is a top manager who is also an entrepreneur; such an individual may start a small company and manage it until it grows enough to support several levels of management. Many top managers possess an advanced degree, such as a master's in business administration, but such a degree is not required.

Some CEOs are hired in from other top management positions in other companies. Conversely, they may be promoted from within and groomed for top management with management development activities, coaching, and mentoring. They may be tagged for promotion through succession planning, which identifies high potential managers.

MIDDLE-LEVEL MANAGERS

Middle-level managers, or middle managers, are those in the levels below top managers. Middle managers' job titles include: General manager, Plant manager, Regional manager, and Divisional manager.

Middle-level managers are responsible for carrying out the goals set by top management. They do so by setting goals for their departments and other business units. Middle managers can motivate and assist first-line managers to achieve business objectives. Middle managers may also communicate upward, by offering suggestions and feedback to top managers. Because middle managers are more involved in the day-to-day workings of a company, they may provide valuable information to top managers to help improve the organization's bottom line.

Jobs in middle management vary widely in terms of responsibility and salary. Depending on the size of the company and the number of middle-level managers in the firm, middle managers may supervise only a small group of employees, or they may manage very large groups, such as an entire business location. Middle managers may be employees who were promoted from first-level manager positions within the organization, or they may have been hired from outside the firm. Some middle managers may have aspirations to hold positions in top management in the future.

FIRST-LEVEL MANAGERS

First-level managers are also called first-line managers or supervisors. These managers have job titles such as: Office manager, Shift supervisor, Department manager, Foreperson, Crew leader, Store manager.

First-line managers are responsible for the daily management of line workers—the employees who actually produce the product or offer the service. There are first-line managers in every work unit in the organization. Although first-level managers typically do not set goals for the organization, they have a very strong influence on the company. These are the managers that most employees interact with on a daily basis, and if the managers perform poorly, employees may also perform poorly, may lack motivation, or may leave the company.

In the past, most first-line managers were employees who were promoted from line positions (such as production or clerical jobs). Rarely did these employees have formal education beyond the high-school level. However, many first-line managers are now graduates of a trade school, or have a two-year associates or a four-year bachelor's degree from college.

MANAGEMENT LEVELS AND THE FOUR MANAGERIAL FUNCTIONS

Managers at different levels of the organization engage in different amounts of time on the four managerial functions of planning, organizing, leading, and controlling.

Planning is choosing appropriate organizational goals and the correct directions to achieve those goals. Organizing involves determining the tasks and the relationships that allow employees to work together to achieve the planned goals. With leading, managers motivate and coordinate employees to work together to achieve organizational goals. When controlling, managers monitor and measure the degree to which the organization has reached its goals.

The degree to which top, middle, and supervisory managers perform each of these functions is presented in Exhibit 1. Note that top managers do considerably more planning, organizing, and controlling than do managers at any other level. However, they do much less leading. Most

of the leading is done by first-line managers. The amount of planning, organizing, and controlling decreases down the hierarchy of management; leading increases as you move down the hierarchy of management.

MANAGEMENT ROLES

In addition to the broad categories of management functions, managers in different levels of the hierarchy fill different managerial roles. These roles were categorized by researcher Henry Mintzberg, and they can be grouped into three major types: decisional, interpersonal, and informational.

Decisional Roles. Decisional roles require managers to plan strategy and utilize resources. There are four specific roles that are decisional. The entrepreneur role requires the manager to assign resources to develop innovative goods and services, or to expand a business. Most of these roles will be held by top-level managers, although middle managers may be given some ability to make such decisions. The disturbance handler corrects unanticipated problems facing the organization from the internal or external environment. Managers at all levels may take this role. For example, first-line managers may correct a problem halting the assembly line or a middle level manager may attempt to address the aftermath of a store robbery. Top managers are more likely to deal with major crises, such as requiring a recall of defective products. The third decisional role, that of resource allocator, involves determining which work units will get which resources. Top managers are likely to make large, overall budget decisions, while middle managers may make more specific allocations. In some organizations, supervisory managers are responsible for determining allocation of salary raises to employees. Finally, the negotiator works with others, such as suppliers, distributors, or labor unions, to reach agreements regarding products and services. First-level managers may negotiate with employees on issues of salary increases or overtime hours, or they may work with other supervisory managers when needed resources must be shared. Middle managers also negotiate with other managers and are likely to work to secure preferred prices from suppliers and distributors. Top managers negotiate on larger issues, such as labor contracts, or even on mergers and acquisitions of other companies.

Interpersonal Roles. Interpersonal roles require managers to direct and supervise employees and the organization. The figurehead is typically a top or middle manager. This manager may communicate future organizational goals or ethical guidelines to employees at company meetings. A leader acts as an example for other employees to follow, gives commands and directions to subordinates, makes decisions, and mobilizes employee support. Managers must be leaders at all levels of the organization; often lower-level managers look to top management for this leadership example. In the role of liaison, a manager must coordinate the work of others in different work units, establish alliances between others, and work to share resources. This role is particularly critical for middle managers, who must often compete with other managers for important resources, yet must maintain successful working relationships with them for long time periods.

Informational Roles. Informational roles are those in which managers obtain and transmit information. These roles have changed dramatically as technology has improved. The monitor evaluates the performance of others and takes corrective action to improve that performance. Monitors also watch for changes in the environment and within the company that may affect individual and organizational performance. Monitoring occurs at all levels of management, although managers at higher levels of the organization are more likely to monitor external threats to the environment than are middle or first-line managers. The role of disseminator requires that managers inform employees of changes that affect them and the organization. They also communicate the company's vision and purpose.

Managers at each level disseminate information to those below them, and much information of this nature trickles from the top down. Finally, a spokesperson communicates with the external environment, from advertising the company's goods and services, to informing the community about the direction of the organization. The spokesperson for major announcements, such as a change in strategic direction, is likely to be a top manager. But, other, more routine information may be provided by a manager at any level of a company. For example, a middle manager may give a press release to a local newspaper, or a supervisor manager may give a presentation at a community meeting.

MANAGEMENT SKILLS

Regardless of organizational level, all managers must have five critical skills: technical skill, interpersonal skill, conceptual skill, diagnostic skill, and political skill.

Technical Skill. Technical skill involves understanding and demonstrating proficiency in a particular workplace activity. Technical skills are things such as using a computer word-processing program, creating a budget, operating a piece of machinery, or preparing a presentation. The technical skills used will differ in each level of management. First-level managers may engage in the actual operations of the organization; they need to have an understanding of how production and service occur in the organization in order to direct and evaluate line employees. Additionally, first-line managers need skill in scheduling workers and preparing budgets. Middle managers use more technical skills related to planning and organizing, and top managers need to have skill to understand the complex financial workings of the organization.

Interpersonal Skill. Interpersonal skill involves human relations, or the manager's ability to interact effectively with organizational members. Communication is a critical part of interpersonal skill, and an inability to communicate effectively can prevent career progression for managers. Managers who have excellent technical skill, but poor interpersonal skill are unlikely to succeed in their jobs. This skill is critical at all levels of management.

Conceptual Skill. Conceptual skill is a manager's ability to see the organization as a whole, as a complete entity. It involves understanding how organizational units work together and how the organization fits into its competitive environment. Conceptual skill is crucial for top managers, whose ability to see “the big picture” can have major repercussions on the success of the business. However, conceptual skill is still necessary for middle and supervisory managers, who must use this skill to envision, for example, how work units and teams are best organized.

Diagnostic Skill. Diagnostic skill is used to investigate problems, decide on a remedy, and implement a solution. Diagnostic skill involves other skills—technical, interpersonal, conceptual, and politic. For instance, to determine the root of a problem, a manager may need to speak with many organizational members or understand a variety of informational documents. The difference in the use of diagnostic skill across the three levels of management is primarily due to the types of problems that must be addressed at each level. For example, first-level managers may deal primarily with issues of motivation and discipline, such as determining why a particular employee's performance is flagging and how to improve it. Middle managers are likely to deal with issues related to larger work units, such as a plant or sales office. For instance, a middle-level manager may have to diagnose why sales in a retail location have dipped. Top managers diagnose organization-wide problems, and may address issues such as strategic position, the possibility of outsourcing tasks, or opportunities for overseas expansion of a business.

Political Skill. Political skill involves obtaining power and preventing other employees from taking away one's power. Managers use power to achieve organizational objectives, and this skill can often reach goals with less effort than others who lack political skill. Much like the other skills described, political skill cannot stand alone as a manager's skill; in particular, though, using political skill without appropriate levels of other skills can lead to promoting a manager's own career rather than reaching organizational goals. Managers at all levels require political skill; managers must avoid others taking control that they should have in their work positions. Top managers may find that they need higher levels of political skill in order to successfully operate in their environments. Interacting with competitors, suppliers, customers, shareholders, government, and the public may require political skill.

CHANGES IN MANAGEMENT HIERARCHIES

There are a number of changes to organizational structures that influence how many managers are at each level of the organizational hierarchy and what tasks they perform each day.

Flatter Organizational Structures. Organizational structures can be described by the number of levels of hierarchy; those with many levels are called “tall” organizations. They have numerous levels of middle management, and each manager supervises a small number of employees or other managers. That is, they have a small span of control. Conversely, “flat” organizations have fewer levels of middle management, and each manager has a much wider span of control. Examples of organization charts that show tall and flat organizational structures are presented in Exhibit 2.

Many organizational structures are now more flat than they were in previous decades. This is due to a number of factors. Many organizations want to be more flexible and increasingly responsive to complex environments. By becoming flatter, many organizations also become less centralized. Centralized organizational structures have most of the decisions and responsibility at the top of the organization, while decentralized organizations allow decision-making and authority at lower levels of the organization. Flat organizations that make use of decentralization are often

more able to efficiently respond to customer needs and the changing competitive environment.

As organizations move to flatter structures, the ranks of middle-level managers are diminishing. This means that there a fewer opportunities for promotion for first-level managers, but this also means that employees at all levels are likely to have more autonomy in their jobs, as flatter organizations promote decentralization. When organizations move from taller to flatter hierarchies, this may mean that middle managers lose their jobs, and are either laid off from the organization, or are demoted to lower-level management positions. This creates a surplus of labor of middle level managers, who may find themselves with fewer job opportunities at the same level.

Rosabeth Moss Kanter notes that hierarchical arrangements have eroded to make way for organizational structures that are more flexible. Specifically, she states that managers will be increasingly working in what she terms “peer networks.” Ultimately, Kanter argues that these networks, and the network that a manager is a part of, may matter more than a manager's formal level in a hierarchy. However, she also notes that because of these changes, managers may feel a loss of power.

Increased Use of Teams. A team is a group of individuals with complementary skills who work together to achieve a common goal. That is, each team member has different capabilities, yet they collaborate to perform tasks. Many organizations are now using teams more frequently to accomplish work because they may be capable of performing at a level higher than that of individual employees. Additionally, teams tend to be more successful when tasks require speed, innovation, integration of functions, and a complex and rapidly changing environment.

Another type of managerial position in an organization that uses teams is the team leader, who is sometimes called a project manager, a program manager, or task-force leader. This person manages the team by acting as a facilitator and catalyst. He or she may also engage in work to help accomplish the team's goals. Some teams do not have leaders, but instead are self-managed. Members of self-managed teams hold each other accountable for the team's goals and manage one another without the presence of a specific leader.

Outsourcing. Outsourcing occurs when an organization contracts with another company to perform work that it previously performed itself. Outsourcing is intended to reduce costs and promote efficiency. Costs can be reduced through outsourcing, often because the work can be done in other countries, where labor and resources are less expensive than in the United States. Additionally, by

having an outsourcing company aid in production or service, the contracting company can devote more attention and resources to the company's core competencies. Through outsourcing, many jobs that were previously performed by American workers are now performed overseas. Thus, this has reduced the need for many first-level and middle-level managers, who may not be able to find other similar jobs in another company.

Telecommuting. Telecommuting is similar to outsourcing in that both involve work being performed for a company offsite. However, the major difference between the two is that telecommuters are still employees of a company. Because of this, they often have to report to a manager. However, this also means that the relationship between the manager and the employee will change, as will managerial responsibilities. Technovation observed that managers' roles will alter in that they will not be able to observe employees at work, and must focus on outcome with regards to telecommuting employees.

Insourcing. Insourcing is another business trend that came into its own in the early twenty-first century. Insourcing is when outside firms take over major parts of a company's internal process. The journalist and author Thomas Friedman uses UPS and Toshiba computers as an example. Toshiba has insourced its computer repair operations to UPS. Toshiba itself does not work on damaged computers, but UPS does the work instead. This practice has implications for management levels that are similar to outsourcing in that this practice can result in the elimination of some management positions inside an organization.

SEE ALSO Management and Executive Development; Management Functions; Organizational Chart; Organizational Structure; Outsourcing and Offshoring; Teams and Teamwork

BIBLIOGRAPHY

Chandler, Alfred. The Visible Hand. Cambridge, Massachusetts: Bellknap Press, 1977.

DuBrin, Andrew J. Essentials of Management. 6th ed. Peterborough, Ontario: Thomson South-Western, 2003.

Friedman, Thomas. The World is Flat. New York: Farrar, Straus and Giroux, 2005.

Jones, Gareth R., and Jennifer M. George. Contemporary Management. 4th ed. New York: McGraw-Hill Irwin, 2006.

Kanter, Rosabeth Moss. “The New Managerial Work.” Management Skills. San Francisco, California: John Wiley and Sons, 2005. 91–112.

Mintzberg, Henry. “The Manager's Job: Folklore and Fact.” Harvard Business Review July-August 1975, 56–62.

———. The Nature of Managerial Work. New York: Harper & Row, 1973.

Pérez, Manuela, et al. “The differences of Firm Resources and the Adoption of Teleworking.” Technovation 25, no 12 (December 2005): 1476.

Rue, Leslie W., and Lloyd L. Byars. Management: Skills and Applications. 10th ed. New York, NY: McGraw-Hill Irwin, 2003.

Williams, Chuck. Management. Cincinnati, OH: South-Western College Publishing, 2000.

Management Control

Management control describes the means by which the actions of individuals or groups within an organization are constrained to perform certain actions while avoiding other actions in an effort to achieve organizational goals. Management control falls into two broad categories———regulative and normative controls—but within these categories are several types.

The following section addresses regulative controls including bureaucratic controls, financial controls, and quality controls. The second section addresses normative controls including team norms and organization cultural norms.

REGULATIVE CONTROLS

Regulative controls stem from standing policies and standard operating procedures, leading some to criticize regulative controls as outdated and counterproductive. As organizations have become more flexible in recent years by flattening organizational hierarchies, expanding organizational boundaries to include suppliers in inventory management and customers in new product development, forging cooperative alliances with competitors, and developing virtual organizations in which employees are geographically dispersed and may meet only a few time each year, critics point out that regulative controls may prevent rather than promote goal attainment.

There is some truth to this. Customer service representatives at Holiday Inn are limited in the extent to which they can correct mistakes involving guests. They can move guests to a different room if there is excessive noise in the room next to the guest's room. In some instances, guests may get a gift certificate for an additional night at another Holiday Inn if they have had a particularly bad experience. In contrast, customer service representatives at Tokyo's Marriott Inn have the latitude to take up to $500 off a customer's bill to solve complaints.

The actions of customer service representatives at both Holiday Inn and Marriott Inn must follow policies and procedures, yet those at Marriott are likely to feel less constrained and more empowered by Marriott's policies and procedures compared to Holiday Inn customer service representatives. The key in terms of management control is matching regulative controls such as policies and procedures with organizational goals such as customer satisfaction. Each of the three types of regulative controls discussed in the next few paragraphs has the potential to align or misalign organizational goals with regulative controls. The challenge for managers is striking the right balance between too much control and too little.

BUREAUCRATIC CONTROLS

Bureaucratic controls stem from lines of authority and this authority comes with one's position in the organizational hierarchy. The higher up the chain of command, the more an individual will have authority to dictate policies and procedures. Bureaucratic controls have gotten a bad name and often rightfully so. Organizations placing too much reliance on chain of command authority relationships inhibit flexibility to deal with unexpected events. However, there are ways managers can build flexibility into policies and procedures that make bureaucracies as flexible and as able to quickly respond to customer problems as any other form of organizational control.

Consider how hospitals, for example, are structured along hierarchical lines of authority. The Board of Directors is at the top, followed by the CEO and then the Medical Director. Below these top executives are vice presidents with responsibility for overseeing various hospital functions such as human resources, medical records, surgery, and intensive care units. The chain of command in hospitals is clear; a nurse, for example, would not dare increase the dosage of a heart medication to a patient in an intensive care unit without a physician's order. Clearly, this has the potential to slow reaction times—physicians sometimes spread their time across hospital rounds for two or three hospitals and also their individual office practice. Yet, it is the nurses and other direct care providers who have the most contact with patients and are in the best position to rapidly respond to changes in a patient's condition.

The question bureaucratic controls must address is: How can the chain of command be preserved while also building flexibility and quick response times into the system? One way is through standard operating procedures that delegate responsibility downward. Some hospital respiratory therapy departments, for example, have developed standard operating procedures (in health care terms, therapist-driven protocols or TDPs) with input from physicians.

TDPs usually have branching logic structures requiring therapists to perform specific tests prior to certain patient interventions to build safety into the protocol. Once physicians approve a set of TDPs, therapists have the autonomy to make decisions concerning patient care without further physicians' orders as long as these decisions stay within the boundaries of the TDP. Patients need not wait for a physician to make the next set of rounds or patient visits, write a new set of orders, enter the orders on the hospitals intranet, and wait for the manager of respiratory therapy to schedule a therapist to perform the intervention. Instead, therapists can respond

immediately because protocols are established that build in flexibility and fast response along with safety checks to limit mistakes.

Bureaucratic control is thus not synonymous with rigidity. Unfortunately, organizations have built rigidity into many bureaucratic systems, but this need not be the case. It is entirely possible for creative managers to develop flexible, quick-response bureaucracies.

FINANCIAL CONTROLS

Financial controls include key financial targets for which managers are held accountable. These types of controls are common among firms that are organized as multiple strategic business units (SBUs). SBUs are product, service, or geographic lines having managers who are responsible for the SBU's profits and losses. These managers are held responsible to upper management to achieve financial targets that contribute to the overall profitability of the corporation.

Managers who are not SBU executives often have financial responsibility as well. Individual department heads are typically responsible for keeping expenses within budgeted guidelines. These managers, however, tend to have less overall responsibility for financial profitability targets than SBU managers.

In either case, financial controls place constraints on spending. For SBU managers, increased spending must be justified by increased revenues. For departmental managers, staying within budget is typically one key measure of periodic performance reviews. The role of financial controls, then, is to increase overall profitability as well as to keep costs in line. To determine which costs are reasonable, some firms will benchmark other firms in the same industry. Such benchmarking, while not always direct comparison, provides at least some evidence to determine whether costs are in line with industry averages.

QUALITY CONTROLS

Quality controls describe the extent of variation in processes or products that is considered acceptable. For some companies, zero defects–no variation at all–is the standard. In other companies, statistically insignificant variation is allowable.

Quality controls influence the ultimate product or service outcome offered to customers. By maintaining consistent quality, customers can rely on a firm's product or service attributes, but this also creates an interesting dilemma. An overemphasis on consistency where variation is kept to the lowest levels may also reduce response to unique customer needs. This is not a problem when the product or service is relatively standardized such as a McDonald's hamburger, but may pose a problem when customers have nonstandard situations for which a one-size-fits-all solution is inappropriate. Wealth managers, for example, may create investment portfolios tailored to a single client, but the process used to implement that portfolio, such as stock market transactions, will be standardized. Thus, there is room within quality control for both creativity (such as wealth portfolio solutions), and standardization (such as stock market transactions).

NORMATIVE CONTROLS

Rather than relying on written policies and procedures as in regulative controls, normative controls govern employee and managerial behavior through generally accepted patterns of action. One way to think of normative controls is in terms of how certain behaviors are appropriate and others are less appropriate. For instance, a tuxedo might be the appropriate attire for an American business awards ceremony, but totally out of place at a Scottish awards ceremony, where a formal kilt may be more in line with local customs. However, there would generally be no written policy regarding disciplinary action for failure to wear the appropriate attire, thus separating formal regulative controls from the more informal normative controls.

TEAM NORMS

Teams have become commonplace in many organizations. Team norms are the informal rules that make team members aware of their responsibilities to the team. Although the task of the team may be formally documented and

communicated, the ways in which team members interact are typically developed over time as the team goes through phases of growth. Even team leadership must be informally agreed upon; at times, an appointed leader may have less influence than an informal leader. If, for example, an informal leader has greater expertise than a formal team leader, team members may look to the informal leader for guidance requiring specific skills or knowledge. Team norms tend to develop gradually, but once formed, can be powerful influences over behavior.

ORGANIZATIONAL CULTURE NORMS

In addition to team norms, norms based on organizational culture are another type of normative control. Organizational culture involves the shared values, beliefs, and rituals of a particular organization. The Internet search firm, Google, Inc. has a culture in which innovation is valued, the belief that the work of the organization is important is shared among employees, and teamwork and collaboration are common. In contrast, the retirement specialty firm, VALIC, focuses on individual production for its sales agents, de-emphasizing teamwork and collaboration in favor of personal effort and rewards. Both of these examples are equally effective in matching norms with organizational goals; the key is thus in properly aligning norms and goals.

The broad categories of regulative and normative controls are present in nearly all organizations, but the relative emphasis of each type of control varies. Within the regulative category are bureaucratic, financial, and quality controls. Within the normative category are team norms and organization cultural norms. Both categories of norms can be effective and one is not inherently superior to the other. The managerial challenge is to encourage norms that align employee behavior with organizational goals.

SEE ALSO Organizational Culture; Quality and Total Quality Management; Teams and Teamwork

BIBLIOGRAPHY

Berry, Leonard L. “The Collaborative Organization: Leadership Lessons from Mayo Clinic.” Organizational Dynamics 33, no. 3 (2004): 228–242.

Besterfield, Dale H. Quality Control. 8th ed. Upper Saddle River, NJ: Prentice Hall, 2008.

Lalich, J. “Watch Your Culture.” Harvard Business Review 82, no.1 (2004): 34–39.

Merchant, Kenneth, and Wim Van Der Stede. Management Control Systems: Performance Measurement, Evaluation and Incentives. 2nd ed. Upper Saddle River, NJ: Prentice Hall, 2007.

Rollag, K., S. Parise, and R. Cross. “Getting New Hires Up to Speed Quickly”. MIT Sloan Management Review 46, no. 2 (2005): 35–41.

Management Audit

Typically, a management audit is used to examine and appraise the efficiency and effectiveness of management in carrying out its activities. Areas of auditor interest include the nature and quality of management decisions, operating results achieved, and risks undertaken.

The management audit focuses on results, evaluating the effectiveness and suitability of controls by challenging underlying rules, procedures, and methods. Management audits, which are generally performed internally, are both compliance reviews and goals-and-effect analyses. When performed correctly, they are potentially the most useful of evaluation methods because they result in change.

The management audit is a process of systematically examining, analyzing, and appraising management's overall performance. The appraisal is composed of ten categories, examined historically and in comparison with other organizations. The audit measures a company's quality of management relative to those of other companies in its particular industry, as well as the finest management in other industries. The ten categories of the management audit are: (1) economic function, (2) corporate structure, (3) health of earnings, (4) service to stockholders, (5) research and development, (6) directorate analysis, (7) fiscal policies, (8) production efficiency, (9) sales vigor, and (10) executive evaluation. These categories do not represent single functions of management.

ECONOMIC FUNCTION

The economic function category in the management audit assigns to management the responsibility for the company's importance to the economy. In essence, the public value of the company is determined. The value is based on what the company does, what products or services it sells, and how it goes about its business in a moral and ethical sense. It

includes the company's reputation as well as management's view of the purpose of the company.

The public is defined in this sense not only as the consumers of the company's products or services and its shareholders, but also a number of groups that the company must seek to satisfy. These groups include its employees, suppliers, distributors, and the communities in which it operates. A company cannot have achieved maximum economic function unless it has survived trade cycles, met competition, developed and replaced management, and earned a reputation among its various publics.

CORPORATE STRUCTURE

The corporate structure review evaluates the effectiveness of the structure through which a company's management seeks to fulfill its aims. An organization's structure must strengthen decision-making, permit control of the company, and develop the areas of responsibility and authority of its executives. These requirements must be met regardless of the type of company. Companies that have established product divisions or other forms of organization have maximized the delegation of authority, but have not reduced the need for a clear understanding of authority.

Companies are generally decentralized after the lines of authority have been established; but even large companies have endured conflicts as the result of a breakdown in the acceptance of authority. An example of this is General Motors in the early 1920s, when the company endured an $85 million inventory loss because division leaders did not accept the authority of principal executives.

HEALTH OF EARNINGS

The health of earnings function analyzes corporate income in a historical and comparative aspect. The question this function seeks to answer is whether assets have been employed for the full realization of their potential. This can be assessed by a study of the risk assumed in the employment of resources, in the profit returns upon employment, and the distribution of assets among various categories. The actual value of the assets may not be able to be determined, but a company can trace the cost of acquisitions, rate of depreciation, and the extent to which assets have been fully profitable or not. The information needed for this category can usually be found within the company's annual reports.

SERVICE TO STOCKHOLDERS

The evaluation of a company's service to its shareholders can be assessed in three areas: (1) the extent to which stockholders' principal is not exposed to unnecessary risks;(2) whether the principal is enhanced as much as possible through undistributed profits; and (3) whether stockholders receive a reasonable rate of return on their investment through the form of dividends.

The evaluation also covers the quality of service provided by the company to its stockholders, mainly in the form of information and advice about their holdings. Although companies and industries vary widely on the amount of earnings they can pay out in the form of dividends, the rate of return and capital appreciation are the most important indicators of fairness to stockholders.

RESEARCH AND DEVELOPMENT

The evaluation of research and development is essential because it is often responsible for a company's growth and improvement in its industry. Analyzing research results can show how well research dollars have been utilized, but it does not show whether management has realized the maximum from its potential. Just like health of earnings, research should be examined from a historical and comparative standpoint in dollars expended; the number of research workers employed; the ratio of research costs and staff to total expenses; and new ideas, information, and products turned out. The examination of these figures compared with past results show management's willingness to employ research for future growth and health.

The American Institute of Management's evaluation attempts to determine what part of the company's past progress can properly be credited to research and how well research policies are preparing the company for future progress.

DIRECTORATE ANALYSIS

Directorate analysis covers the quality and effectiveness of the board of directors. Three principal elements are considered in the evaluation of the board. First, the quality of each director is assessed along with the quality and quantity of the contributions he or she makes to the board. Second, how well the directorate works together as a team is evaluated. Third, the directors are assessed to determine if they truly act as trustees for the company and act in the shareholders' best interest. This can best be examined in areas where a conflict of interest exists between a company's executives and its owners and public. One of the best areas to evaluate is corporate incentives. The manner in which a board handles conflicts of compensation provides a good key to its value.

FISCAL POLICY

The fiscal policy function of the management audit expresses the past and present financial policies. This function includes the company's capital structure, its organizations for developing fiscal policies and controls, and the application of these policies and controls in different areas of corporate activity.

PRODUCTION EFFICIENCY

Production efficiency is an important function for manufacturing companies as well as non-manufacturing companies. Production efficiency is divided into two parts. The first part, machinery and material management, evaluates the mechanical production of the company's products. The second aspect, manpower management, includes all personnel policies and practices for non-sales and non-executive employees developed by management. Only when both parts are analyzed can an overall evaluation of production be effectively performed.

SALES VIGOR

Sales vigor can be evaluated even though sales practices vary widely among industries. This can be accomplished after marketing goals have been determined and assessed. The goals must be assessed in terms of the overall goals of the company. Historical and comparative data are then analyzed to evaluate how well past sales potential has been realized and how well present company sales policies prepare the organization to realize future potential.

EXECUTIVE EVALUATION

Executive evaluation is the most important function of the management audit. The other nine functions indirectly evaluate the organization's management, since they represent the results of management's decisions and actions. This function addresses the quality of the executives and their management philosophy.

The American Institute of Management has found that the three essential elements in a business leader are ability, industry, and integrity. These elements provide a framework for the executive's evaluation in the management audit and should also be the criteria used in selecting and advancing executives. As a group, executives must regard the continuity of the organization as an important goal, assuring it by sound policies of executive selection, development, advancement, and replacement.

The most important management audit activity is an internal audit function. Each enterprise must have an independent source for developing and verifying controls, above and beyond what the external auditors might do in a financial audit. The internal audit function provides managers with the most appropriate avenue for evaluating the achievements of an organization in terms of operational efficiency, regulatory compliance, and financial success. Kaggerman, Kinney, and Kuting note that as a key component of the internal monitoring systems in organizations, an internal audit consists of predetermined measures aimed at securing assets and guaranteeing efficiency of the accounting systems of organizations.

The importance of the internal audit function in organizations is further demonstrated by the formulation of standards and regulatory frameworks for implementing internal controls in business organizations in the United States. The Sarbanes-Oxley Act and the New York Stock Exchange Listing Standards are some of the regulatory standards for internal controls designed to protect the financial interests of the organizations and investors.

The Sarbanes-Oxley Act provides a regulatory benchmark against which managers can compare the results of the internal policies of organizations. The Act was enacted by the U.S. Congress following the unearthing of grand accounting scandals in major U.S companies in the beginning of the twenty-first century. The internal audit section of the Sarbanes-Oxley Act requires managers to validate financial statements as well as ascertain and report the validity of internal controls over the organization's financial records. The internal audit function is also a compulsory prerequisite requirement for all companies listed in the New York Stock Exchange.

The functions of the management audit remain the same regardless of the type of business. Management audit is a very important exercise that managers can use to analyze the successes and failures of the overall objectives of a business organization. Regular and clearly defined management audits enable managers to identify risk factors that inhibit productivity in the organization and develop appropriate strategies for intervening against such risks. In order to get good results, companies must

observe principles of sound management; the degree to which they succeed can be appraised by systems such as the one outlined here.

SEE ALSO Effectiveness and Efficiency

BIBLIOGRAPHY

Craig-Cooper, Michael, and Philippe De Backer. TheManagement Audit: How to Create an Effective Management Team. Alexandria, VA: Financial Times Pitman Publishing, 1993.

Kaggerman, Henning, William Kinney, Karlheinz Kuting, and Claus-Peter Weber, eds. Internal Audit Handbook: Management with the SAP-Audit Roadmap. Springer-Verlag Berlin and Heidelberg GMBH & Co., 2006.

Maizis, P. “Evaluating Observations vs. Deviations.” BNET.20 April 2008. Available from: http://www.asqsandiego.org/articles/auditdecisionmaking.htm.

Sayle, Allan J. Management Audits: The Assessment of Quality Management Systems. Brighton, MI: Allan Sayle Associates, 1997.

Sobel, Paul J. Auditor's Risk Management Guide: IntegratingAuditing and ERM. Chicago: CCH, Inc., 2007.

Torok, Robert M., and Patrick J. Cordon. OperationalProfitability: Conducting Management Audits. Hoboken, NJ: John Wiley & Sons Inc., 1997.

Management

BIBLIOGRAPHY

Management is a set of functions and tasks performed by individuals and groups for the purpose of enabling an organization to achieve its objectives. From one perspective, management consists of planning, organizing, staffing, directing, and controlling (Koontz and O’Donnell 1982). From another perspective, management is distinguishable from, yet operates in tandem with, leadership, which consists of envisioning, enabling, and energizing functions and tasks (Nadler and Tushman 1990). In short, leaders formulate organizational strategy, set direction, mobilize resources, and motivate people to perform, whereas managers execute organizational strategy by clarifying expected behavior, instituting measurements, and administering rewards and punishments (Kotter 1990).

The distinction between management and leadership is relatively new, largely because for much of the twentieth century the majority of industries in the United States and other nations were characterized by oligopoly (a few firms possess concentrated market power) or monopoly (one firm possesses sole market power). When a firm—an organization—possesses market power, it does not need much in the way of leadership because customers have little or no choice in terms of alternative products or services and because there are few or no rival firms that pose competitive threats. In such circumstances a firm needs only management to ensure that organizational objectives will be met.

Irrespective of the competitive structure of particular industries, traditionally managers and leaders of business (and nonbusiness) enterprises have maximized the objectives of those enterprises. Such maximizing behavior is consistent with the utility maximization principle that underlies both classical and neoclassical microeconomics (Marshall 1923) and with the optimization principle that is at the core of management science (Starr and Miller 1960). But when it comes to management, there is a plethora of concepts, evidence, and experience that indicates that management settles for second-or even third-best when it comes to organizational performance (Simon 1947). An especially influential example in this regard is the work of Frederick W. Taylor (1911), the father of scientific management, who early in the twentieth century showed that management consistently and systematically underperformed. Applying the principles of industrial engineering to the design of work, Taylor demonstrated how most jobs could be reconstructed to enhance productivity with no change in the quantity or mix of factors of production—land, capital, and especially labor. Taylor’s work ultimately led to the development and widespread adoption of motion time management (MTM), or time study, whereby jobs were reengineered to maximize efficiency and standard times were set for workers to perform those jobs, with consequent pay rewards if workers overperformed and pay penalties if workers underperformed.

Taylor’s conception of management was a singleminded one in which supervisors (and, by inference, managers) did the thinking and issued orders with which workers would presumably comply. But workers proved to be far more independent-minded, even obstreperous, than Taylor envisioned, and they often banded together to attempt to influence and change their terms and conditions of employment. A prime example of this was the industrial union movement of the 1930s, during which workers from a wide variety of companies sought official recognition in order to negotiate collective bargaining agreements with the managements of those companies. That these efforts were strongly resisted by company management is readily evident from historical accounts of labor violence during this period (Rayback 1966).

Ironically, the scientific management movement was followed by, and in significant respects supplanted by, the “human relations” movement, which was founded on the principle that workers are social beings rather than only or even primarily economic beings. The well-known work of Elton Mayo (1933) and his colleagues, which was conducted at the Hawthorne Works of the Bell Telephone System, showed that workers’ job performance could be greatly enhanced if management paid close attention to workers’ social needs rather than merely to their economic needs (Roethlisberger and Dickson 1939). This research was instrumental to the adoption by many companies of employee counseling and industrial welfare programs aimed at addressing workers’ noneconomic needs. Yet at the same time companies strongly and in some cases militantly opposed workers’ efforts to form independent unions and bargain collectively with their employers. Responding to these developments during the Great Depression, the U.S. Congress in 1935 passed the landmark National Labor Relations Act (NLRA), establishing unionization and collective bargaining as labor policy for the private sector—a policy that was ultimately upheld by the U.S. Supreme Court.

As management thought and practice continued to evolve, more attention was paid to external and internal alignment. External alignment refers to the relationship of an enterprise to its external environment and involves the scanning of economic, political, legal, and social developments, the analysis of competitive opportunities and threats, the positioning of the enterprise in its particular sector or industry, and ultimately the formulation of a business strategy and specification of strategic objectives. Internal alignment refers to the linkages among and balancing of elements such as organization structure, reward systems, decision-making processes, human-capital skills and capabilities, and organization culture, all of which are key to the implementation of business strategy.

Each of these external and internal alignment dimensions is the province of specialized academic research; a leading example is Alfred Chandler’s work on organizational structure. Chandler (1962) postulated that an organization’s structure was fundamentally shaped by the organization’s strategy, which meant (among other things) that there is no one ideal organization structure for all enterprises. Based on this reasoning, a classical functional structure aligned well with certain businesses’ strategies, whereas product-based, geographical-based, and matrix structures aligned well with other businesses’ strategies. From this work there developed a more robust contingency model of organizational structure, and similar contingency models were applied to other elements of internal organizational alignment. The main insight or message of such contingency models is that there is no one best way to operate a business in any of its key dimensions.

As the competitive advantage of business enterprises has come to lie more with human or intellectual assets (capital) than with physical assets (capital), much attention has been devoted to the management of human resources for competitive advantage. In this regard there is considerable empirical evidence that decentralized organizational structures and decision making together with team-based work lead to superior performance compared to hierarchical organization structures, centralized decision making, and individual-based work. In particular the notion that competitive advantage can be achieved through the “high-involvement” management of people has taken hold quite firmly in management circles (Pfeffer 1994); from this perspective, employees are managed as assets. But it is also the case that competitive advantage can be achieved through “low-involvement” management of people, most especially through outsourcing and short-term employment contracting, in which employees are managed as labor expense to be controlled (Lewin 2001). Both types of human-resource management practices can lead to positive economic returns to a business enterprise.

Finally, much attention has been devoted to the types of incentives systems that best harmonize the interests of business owners and employees, including management employees. The underlying concern, captured by the notion of agency theory, is that management and employees are agents of the principals or owners of a business and as such seek to maximize their own interests rather than those of the principals or owners (Jensen and Meckling 1976). To combat this problem, incentive systems that tie at least some of the pay of managers and employees to the performance of the business have been widely advocated. Such incentives include profit-sharing, bonuses, gain-sharing, productivity-sharing, commissions, stock ownership, and stock-option plans (Lewin and Mitchell 1995). What these plans have in common is that they pay off when a business does well and do not pay off when a business does poorly, which is analogous to what happens to the owners of a business, including shareholders.

SEE ALSO Business; Competition; Corporations; Labor; Leadership; Management Science; Marshall, Alfred; Maximization; Organization Theory; Organizations; Principal-Agent Models; Profits; Simon, Herbert A.; Taylorism

BIBLIOGRAPHY

Chandler, Alfred D. 1962. Strategy and Structure. Cambridge, MA: MIT Press.

Jensen, Michael, and William Meckling. 1976. Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure. Journal of Financial Economics 3: 305–360.

Koontz, Harold, and Cyril O’Donnell. 1982. Essentials of Management. 3rd ed. New York: McGraw-Hill.

Kotter, John P. 1990. What Leaders Really Do. Harvard Business Review 68 (3): 103–111.

Lewin, David. 2001. Low Involvement Work Practices and Business Performance. Paper presented at the Fifty-third Annual Meeting, Industrial Relations Research Association. Champaign, IL.

Lewin, David, and Daniel J. B. Mitchell. 1995. Human Resource Management: An Economic Perspective. 2nd ed. Cincinnati, OH: South-Western.

Marshall, Alfred P. 1923. Principles of Economics. 8th ed. London: Macmillan.

Mayo, Elton. 1933. The Human Problems of an Industrial Civilization. New York: Macmillan.

Nadler, David A., and Michael L. Tushman. 1990. Beyond Charismatic Leaders: Leadership and Organization Change. California Management Review 32 (1): 77–90.

Pfeffer, Jeffrey. 1994. Competitive Advantage through People. Boston: Harvard Business School Press.

Rayback, Joseph G. 1960. A History of American Labor. New York: Free Press.

Roethlisberger, Fritz W., and W. J. Dickson. 1939. Management and the Worker. Cambridge, MA: Harvard University Press.

Simon, Herbert A. 1947. Administrative Behavior. New York: Free Press.

Starr, Martin K., and David W. Miller. 1960. Executive Decisions and Operations Research. New York: Prentice Hall.

Taylor, Frederick W. 1911. The Principles of Scientific Management. New York: Harper and Brothers.

David Lewin

Management by Objectives

Management by objectives is a technique applied primarily to personnel management. In its essence it requires deliberate goal formulation for periods of time (like the next calendar or business year); goals are recorded and then monitored. The management guru Peter Drucker (1909–2005) first taught and then described the technique in a 1954 book (The Practice of Management ). In Drucker's formulation the technique was called "management by objectives and self-control," and Drucker saw it as one of the forms of "managing managers." It became popular in the 1960s, by then abbreviated as MBO, the "self-control" parts more or less neglected, at least in talking about the subject. It experienced both an upward and downward drift: it came to be applied to the organization as a whole and to employees below the managerial level as well so that in many corporations many employees labored and still labor, at least once yearly, in formulating objectives. It was and remains an activity practiced predominantly in large corporations, although it spread in the 1970s and 80s to midsized organizations, commercial and other. In the mid-2000s it is viewed in many circles as a somewhat dated technique not well adapted to the rapid changes and uncertainties of a dynamic Information Age. However, it continues to have committed and enthusiastic supporters. In current practice it has also undergone changes and refinements.

MBO BASICS

Planning is the central concept supporting MBO in the sense that individuals and organizations do better by formulating goals than just by working or living alone—simply responding to crises and events. If an organization has clear objectives and managers and employees have set themselves objectives which support and harmonize with the company goals, then a coordination and orchestration of conscious motives will be driving the corporate activity. Thus management by objectives moves corporate planning downward so that it becomes translated into personal goals. But MBO was always articulated as a collective and supervised activity rather than as a personal discipline—precisely so that objectives could be coordinated. Goal setting is an annual exercise. The employee is asked to set five to ten personal goals; ideally these should be measurable in some way. Goals are discussed with the supervisor one level up. If the objectives are too vague or too easy, the employee must try again. Goals are next fixed in writing. Finally, periodic reviews of accomplishments against goals are carried out, the manager evaluating the employee. Reward systems are built around achieving the objectives.

MBO came of age in a time of change and ferment in U.S. management history, with corporations then responding to the dramatic rise of Japanese industry and Japan's commercial invasion—most visibly of the automobile market. To be sure Japanese business culture had different roots than the American; it had its origins in tribal associations and featured a very loyal work force, the latter no doubt supported by Japan's practice of lifetime employment. Meanwhile the American system, based on the creative energy of the entrepreneur, had evolved into very large and bureaucratic organizations. In this environment Japanese techniques were admired and imitated—under the leadership of MBA programs in business schools. "Quality Circles" sprang up and corporations were adopting numerical quality control—a Japanese technique the Japanese had learned from an American, Dr. W. Edwards Deming, and then perfected. Along with these methods came the promotion of other innovations all based on the conviction that loyalty could be trained and commitment induced: catch-phrases like the "learning organization," "total quality control," "team management," "matrix management," "reengineering," and "empowerment" arose in this environment with battalions of consultants and gurus in business to teach the way.

Pros and Cons

The fundamental concept underlying management by objectives is based on wisdom: "If you don't know where you're going, you're certainly not going to get there." In any kind of complex activity, planning is good—be it a wedding or a new product introduction. Highly motivated individuals have conscious goals, pursue them with concentration, and do not rest until their aims are met. Effective individuals have to-do lists—on slips of paper, on personal digital assistants (PDAs), or in the head. In a sense MBO is simply the extension of the to-do list to a longer period with a few additional refinement: goals should be precise and measurable in some way. Discovering a measure in itself leads to closer attention to the goal. If the goal is broad and vague ("Greater Customer Satisfaction") looking for a measurement might refine it into ("Reduce Product Returns by 80 percent")—which goal will then more correctly focus attention on a company's quality problems or poor packaging. Focused, goal driven activity produces all sorts of benefits, not least more effective use of resources, saved time, and also higher morale. Conversely, companies and individuals that simply "go with the flow" may find themselves "swept away." One might say that effective managers and employees practice MBO knowingly or not.

The negative aspects of MBO have been due primarily to the more or less thoughtless and mechanical—and wholesale—application of the technique. MBO was and still is typically introduced as an exercise from the top and then administered by the numbers. Frequently employees with relatively narrow and straight-forward job descriptions (not just managers) are required to scratch their heads and come up with a precisely fixed number of goals. If the technique does not fit job descriptions well—if the only reasonable goals employees can come up with are restatements of tasks they ought to do in any case—the exercise becomes a ritual. Groups of people instinctively know when a technique is pro-forma. For this reason, in many organizations, the exercises resulted in detailed objectives recorded on paper and filed in notebooks to be routinely forgotten. Experience has shown that MBO works reasonably well where management leads and actively promotes goal achievement. But in such situations it is difficult to know whether it was the MBO program or leadership which actually achieved the results.

Rodney Brim, CEO of Performance Solutions Technology, LLC, and a critic of MBO, identified four reasons for the weakness of the MBO technique. He believed that the method went into decline in the market turn-down of the early 1990s when "downsizing," "right sizing," and other coping mechanisms captured management attention. "With the upturn of the market and the start of the Internet gold rush," Brim wrote, "management by objectives slipped further into the past. The term 'management' itself seemed to lose a sense of compelling interest. Riches were made based upon technology, upon acquisitions, upon something new, upon association with the WEB, not (for heaven's sake) management of work effectiveness." Brim's tally of weaknesses includes the following points:

1. Emphasis on goal setting rather than on working a plan.
2. Underestimation of environmental factors, including resources available or absent and the crucial role of management participation (already referred to above).
3. Inadequate attention to unforeseeable contingencies and shocks—which sometimes make objectives irrelevant.
4. Finally, a neglect of human nature.

Concerning the last point, Brim wrote: "People, the world over, set goals every year but don't follow them through to completion. One can surmise that this is the standard goal follow through behavior." Brim points out that business is well aware of this tendency, one reason why "work-out clubs … predictably sell more memberships at the first of the year than they plan on supporting through the year. The problematic assumption is that if you manage by goals and objectives, direct reports and team members will organize their work around what you are managing by, e.g. those same goals and objectives."

MBO AND SMALL BUSINESS

The small business owner who has a vague feeling that his or her business may be adrift might wish to look into management by objectives as a way of reviving focus. The owner will probably benefit from reading one or two books on the subject, including Drucker's own work, available in paperback—and then trying the method on him or herself. MBO was originally conceptualized as a management tool for managers—the managers presumed to be inherently motivated. MBO works well when its principles are internalized. It tends to fail when it is imposed. Its great benefits lie in the planning that it requires. In the case of the small business, corporate plans and the owner's personal plans often coincide, thus giving MBO ideal scope. The requirement of formulating measurable objectives is a good discipline. And "working the plan" with "self-control" applied, may produce quite tangible benefits. Experience with this technique, more than 50 years old and counting, indicates that committed management involvement is vital for success. If the MBO works well for the owner, the owner's own enthusiasm may act infectiously on other managers in the business. Use of the technique beyond a few key managers is more problematical.

BIBLIOGRAPHY

Batten, Joe D. Beyond Management by Objectives: A Management Classic. Resource Publications, December 2003.

Brim, Rodney. "A Management by Objectives History and Evolution." Performance Solutions Technology, LLC. Available from http://www.performancesolutionstech.com/FromMBOtoPM.pdf. 2004.

Drucker, Peter F. The Practice of Management. Reissue Edition. Collins, 26 May 1993.

Weihrich, Heinz. "A New Approach to MBO." Management World. January 2003.

                                        Darnay, ECDI

MANAGEMENT: HISTORICAL PERSPECTIVES

Since the beginning of time, humans have been managing—managing other people, managing organizations, and managing themselves. Management has been dealt with in this publication as a process that is used to accomplish organizational goals. To some, management is thought of as an art; to others, as a science. Each of those perspectives is grounded in the early writings and teaching of a group of managerial pioneers.

INDUSTRIAL REVOLUTION

While it can be argued that management began well before the Industrial Revolution, it is often felt that what emerged as contemporary management thought began with the beginning of industrial development. The Industrial Revolution began in the mid-eighteenth century when factories were first built and laborers were employed to work in them. Prior to this period, most workers were active in an agrarian system of maintaining the land.

Adam Smith (1723–1790), the economist who wrote The Wealth of Nations, was an early contributor to management thought during the Industrial Revolution. He was considered a liberal thinker, and his philosophy was the foundation for the laissez-faire management doctrine. His thoughts about division of labor were fundamental to current notions of work simplification and time studies. His emphasis on the relationship between specialization of labor and technology was somewhat similar to the later thinking of Charles Babbage.

Another early pioneer of management thought regarding the factory system was Robert Owen (1771–1858), an entrepreneur who tried to halt the Industrial Revolution because he saw disorder and evil in what was happening. Owen founded his first factory at the age of 18 in Manchester, England. His approach to managing was to observe everything and to maintain order and regularity throughout the industrial facility.

Owen moved on to a venture in Scotland, where he encountered a shortage of qualified laborers for his factory. His approach to handling disciplinary problems with his workers was to appeal to their moral sense, not to use corporal punishment. He used silent monitors, a system whereby he awarded four types of marks to superintendents, who in turn awarded workers. The marks were colorcoded in order of merit. Blocks of wood were painted with the different colors and placed at each workstation. Workers were rated at the end of each day, and the appropriate color was turned to face the aisle so that anyone passing by could see how the worker had performed the previous day. The system was an attempt to motivate laggards to perform better and good workers to maintain high performance.

Charles Babbage (1792–1871) was noted for his application of technological aids to human effort in the manufacturing process. Babbage invented the first computer, in the form of a mechanical calculator, in 1822. Many more modern computers used basic elements of his design. Supervising construction of this invention led Babbage to an interest in management, particularly in the concept of division of labor in the manufacturing process. Babbage invented equipment that could monitor the output of workers, which led to a profit-sharing system in which workers were compensated based on the profits of the company as well as for suggestions that would improve the manufacturing processes in addition to being paid a wage.

SCIENTIFIC MANAGEMENT

Scientific principles for the management of workers, materials, money, and capital were introduced between 1785 and 1835. Scientific managers made careful and rational decisions, kept orderly and complete books, and were able to react to events quickly and expertly. Some of the men discussed above were important early contributors to the scientific management movement before others came along to solidify the thinking. Scientific management of the twenty-first century was introduced by several more contemporary thinkers.

Frederick Taylor (1856–1915) was an engineer who had an innovative approach to management. His approach was for managers, rather than being taskmasters, to adopt a broader, more comprehensive view of managing and see their job as incorporating the elements of planning, organizing, and controlling. His ideas of management evolved as he worked for different firms. As a result of his experiences as both a worker and a manager, he developed the concept of time and motion studies.

In what became the origin of contemporary scientific management, Taylor set out to scientifically define what workers ought to be able to do with their equipment and resources in a full day of work. In his process of time study, each job was broken into as many simple, elementary movements as possible, and useless movements were discarded. The quickest and best methods for each elementary movement were selected by observing and timing the most skilled workers at each. His system evolved into the piece-rate system.

Frank (1868–1924) and Lillian (1878–1972) Gilbreth refined the field of motion study and laid the foundation for modern applications of job simplification, meaningful work standards, and incentive wage plans. The Gilbreths were interested not only in motion studies

but also in the improvement of the totality of people and the environment, which they believed could be done through training, better work methods, improved environments and tools, and a healthy psychological outlook. Lillian Gilbreth had a background in psychology and management. Frank Gilbreth's fame did not come until after his death in 1924.

BEHAVIORAL MANAGEMENT

The behavioral school of management grew out of the efforts of some to recognize the importance of the human endeavor in an organization. Followers of this school felt that if managers wanted to get things done, it must be through people—the study of workers and their interpersonal relationships.

Henry L. Gantt (1861–1919) was one of the earliest of the behavioral theorists. Although he could be classified in multiple categories, his passionate concern for the worker as an individual and his pleas for a humanitarian approach to management exemplify the behavioral approach. His early writing called for teaching and instructing workers, rather than driving them.

Mary Parker Follett (1868–1933), although trained in philosophy and political science, shifted her interests to vocational guidance, adult education, and social psychology. These led to her lifetime pursuit of developing a new managerial philosophy that would incorporate an understanding of the motivating desires of the individual and the group. She emphasized that workers on the job were motivated by the same forces that influenced their duties and pleasures away from the job and that the manager's role was to coordinate and facilitate group efforts, not to force and drive workers. Because of her emphasis on the group concept, the words "togetherness" and "group thinking" entered the managerial vocabulary.

Elton Mayo (1880–1949), best known for his Hawthorne experiments, introduced rest pauses in industrial plants and in so doing reduced employee turnover from 250 percent to 5 percent in some cases. He was concerned about human performance and working conditions. The work pauses, better known as breaks, reduced employee pessimism and improved morale and productivity.

MANAGEMENT PROCESS

The father of the management process school of thought was the Frenchman Henri Fayol (1841–1925), a mining engineer. He spent his entire working career with the same company, involved with coal mining and iron production. From his experiences as the managing director of the company, Fayol developed his general principles of administration. He thought that the study, analysis, and teaching of management should all be approached from the perspective of its functions, which he defined as forecasting and planning, organizing, commanding, controlling, and coordinating. He thought that planning was the most important and most difficult of these. Much of contemporary management thought revolves around the functions of management.

James D. Mooney (1884–1957), whose writings and research lent credence to the management process school of thinking, is credited with the notion that all great managers use the same principles of management. He emphasized a tight engineering approach to the manager's job of getting work done through others. He gave little thought to the human element, but instead was exclusively process-oriented. His approach to organizational analysis became classic.

CONCLUSION

There are diverse opinions about the people who were the earliest developers of management thought. Although there are many other theorists who can be credited with expanding or enhancing their teachings, the basics of each of the schools of thought can be credited to the individuals discussed.

see also Management

bibliography

Duncan, W. Jack (1989). Great Ideas in Management. San Francisco: Jossey-Bass.

George, Claude S., Jr. (1972). The History of Management Thought. Englewood Cliffs, NJ: Prentice-Hall.

Wren, Daniel A. (1994). The Evolution of Management Thought (4th ed.). New York: John Wiley.

Wren, Daniel A. (2005). The history of management thought (5th ed.). Hoboken, N.J.: Wiley.

Roger L. Luft

Business Management

Reengineering

The rapidly changing economy of the 1990s demanded that companies large and small alter their modes of operation. The first popular managerial fad of the decade was known as "reengineering." James Champy, cofounder of the consulting firm CSC Index, and Michael Hammer, an electrical engineer and former professor of computer science at the Massachusetts Institute of Technology (MIT), conceived of "reengineering" and brought it to international prominence. Champy and Hammer defined the concept as "the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical measures of performance such as cost, quality, service and speed." Central to reengineering is the tenet that companies identify their essential activities and processes, and then make them as efficient as possible. Operations or individuals on the periphery, therefore, had to be discarded. Reengineering thus provided the theoretical rationale for much of the corporate downsizing that took place during the decade. "Don't automate, obliterate," Hammer insisted. In Champy's and Hammer's view, however, reengineering amounted to more than merely altering, refining, and streamlining processes. As they envisioned, it was nothing less than a formula for corporate revolution. If revolution it was, then reengineering failed. There are three basic reasons to explain its breakdown. First, corporations by their very nature are not revolutionary. It is difficult, if not impossible, to change longstanding corporate customs, habits, and practices overnight. Second, reengineering appeared, and often was, inhumane. For reengineering purists, depersonalization became the route to efficiency. Third, reengineering began as an effort to overcome organizational rigidity, but, as many critics pointed out, it replaced one set of organizational strictures with another.

PETS AT WORK

One trend that became popular at several companies during the 1990s was the practice of allowing people to bring their pets to work. Netscape Communications began the practice when it introduced an office policy, "Dogs At Work." Eventually not only dogs were invited to visit their master's office, but also cats and even fish were approved. The rules were simple: the pets could stay as long as they behaved themselves and did not break the "two incidents" rules. The animal could then not come back until it graduated from obedience training. Netscape cited that by allowing such a policy, it had an easier time attracting potential employees. Other companies that instituted similar policies found that in some cases worker productivity went up and that people were willing to work longer hours if they did not have to worry about their pets at home. Some companies took note; however, many managers, citing health and safety concerns, refused to change company policy regarding pets at work. Others, such as Ben and Jerry's Ice Cream, offered a compromise. Employees were allowed to bring their pets to work for the annual "Dog Days of Summer" party where the visitors were given a free flea dip and a lunch of hot dogs.

Liberation Management

To correct the inflexibility inherent within the reengineering model, Tom Peters posited "liberation management" in which organizational structures were notable for their lack of structure. Companies such as the Cable News Network (CNN) and Asea Brown Boveri (ABB) became Peters's exemplars, prospering, he argued, because of an organizational imagination and agility that enabled them to meet the needs of the moment in a perpetually changing marketplace. Crucial to the new, free-flowing, amorphous corporate structures that Peters envisioned were mutually beneficial, albeit temporary, networks of customers and suppliers. "Old ideas about size must be scuttled," Peters wrote. '"New big,' which can be very big indeed, is 'network big.' That is, size measured by market power, say, is a function of the firm's extended family of fleeting and semi-permanent cohorts, not so much a matter of what it owns and directly controls.** Peters's theory is animated by "fashion." The liberation model of corporate organization was fast moving and continually changing, "Tomorrow's effective 'organization'," Peters concluded, "will be conjured up anew each day." Peters hoped that applying his principles would permit organizations to recombine knowledge and work. In the economy of the twenty-first century, he maintained, everyone will have to be an expert of some sort, and companies will not have the luxury of ignoring the ideas and expertise of their "workers" if they wish to survive, "For the last 100 years or so," Peters asserted, "we've assumed that there is one place where expertise should reside: with 'expert' staffs at division, group, sector, or corporate. And another, very different, place where the (mere) work gets done. The new organization regime puts expertise back, close to the action—as it was in craft-oriented, pre-industrial revolution days.… We are not, then, ignoring 'expertise' at all. We are simply shifting its locus, expanding its reach, giving it new respect—and acknowledging that everyone must be an expert in a fast-paced, fashionized world."

The Shamrock, the Federal, and the Triple-I

Among the most extensive and insightful commentaries on liberation management came from British theorist Charles Handy, who saw three interrelated and overlapping types of organizations emerging during the 1990s. The first he called the "shamrock organization"—"a form of organization based around a core of essential executives and workers supported by outside contractors and part-time help." The second was identified as the "federal" model. In federal organizations, management is concerned almost exclusively with developing, coordinating, and implementing long-term planning and strategy. Day-to-day operations, however, are left to regional directors, plant managers, supervisors, and even the workers themselves. The third Handy labeled the "Triple I," for its emphasis on "Information," "Intelligence," and "Ideas." In organizations structured around the "Triple-I," there are, properly speaking, no workers and no managers. There are, instead, individuals who are all, by turns, workers, managers, experts, and executives as need and circumstances dictate. The "wise organization" of the future, Handy wrote, "already knows that their [sic] smart people are not to be easily defined as workers or as managers but as individuals, as specialists, as professionals or executives, or as leader, … and that they and it need also to be obsessed with the pursuit of learning if they are going to keep up with the pace of change."

Sources:

Stuart Crainer, The Management Century: A Critical Review of 20th Century Thought and Practice (San Francisco: Jossey-Bass, 2000).

Michael Hammer and James Champy, Reengineering the Corporation: A Manifesto for the Business Revolution (New York: HarperBusiness, 1993).

Charles Handy, The Age of Unreason (Cambridge, Mass.: Harvard Business School Press, 1989).

Tom Peters, Liberation Management: Necessary Disorganization for the Nanosecond Ninties (New York: Knopf, 1992).

management Either the process of supervision, control, and co-ordination of productive activity in industrial and other formal organizations, or the persons performing these functions. As a process, management is conventionally divided into the line or general management of the main goals of the organization, and staff or specialist management dealing with support roles, such as personnel, legal matters, or research and development. A managerial stratum of persons in industrial society developed as a result of the joint-stock corporation, the growth in size of enterprises, and the expansion of public bureaucracy. Usage of the term is loose enough to include, at one extreme, directors and other senior staff who have a personal stake of some kind in their companies and are, in effect, also employers; and, at the other extreme, propertyless waged or salaried employees entrusted with, or promoted to, varying levels of supervisory responsibility. Managers in this second sense make up a growing proportion of white-collar workers. An excellent account of the role of ideologies of management in the course of industrialization is Reinhard Bendix's Work and Authority in Industry (new edn., 1974). Mike Reed's The Sociology of Management (1989) is a more general textbook. See also CONTINGENCY THEORY; LINE-AND-STAFF; MANAGERIAL REVOLUTION.

man·age·ment / ˈmanijmənt/ • n. 1. the process of dealing with or controlling things or people: the management of elk herds. ∎  the responsibility for and control of a company or similar organization: the management of a great metropolitan newspaper a successful career in management. ∎  [treated as sing. or pl.] the people in charge of running a company or organization, regarded collectively: management was extremely cooperative. ∎  Med. & Psychiatry the treatment or control of diseases, injuries, or disorders, or the care of patients who suffer from them: the use of combination chemotherapy in the management of breast cancer. 2. archaic trickery; deceit: if there has been any management in the business, it has been concealed from me.

management by walking around (MBWA) The practice by managers of spending a significant part of their time listening to staff problems and ideas while walking around an office or plant. The opportunity to communicate with managers can be seen as providing an important contribution to staff motivation.

MANAGEMENT

MANAGEMENT. SeeScientific Management .

management see industrial management .