Chapter 1

THE FIELD OF ENGINEERING MANAGEMENT

Engineers are expected to perform a variety of tasks depending on their specialization
and job level. It is important to the engineer that he knows what is expected of him so that he
may be able to perform his job effectively and efficiently. His next concern will be to identify the
skills required but which he does not have. As engineers are not trained to directly deal with
people, it is expected that their weakness will most often be on people-based skills. This
difficulty will be more apparent once they are assigned to occupy management positions. It
follows that if the engineer manager would want to do his job well, some exposure to
engineering management activities becomes necessary.

THE FUNCTIONS OF THE ENGINEER

Since prehistoric times, mankind has benefited from the various tools, equipment, and
projects developed by engineers. Among these are the following:

1. the stone bladed axe which was a very useful tool; and the irrigation system used to
promote crop growing — 6000 to 3000 B.C.;
2. the pyramids of Egypt — 3000 to 600 B.C.;
3. road building by the Romans — 600 B.C. to A.D. 400;
4. the production of paper and gunpowder by the Chinese — 100 A.D. to 1600 A.D.;
5. the production of steam engine and the spinning and weaving machinery — 1601 A.D. to
1799 A.D.; and
6. the manufacture of cars and household appliances — modern times.

A listing of all useful tools, equipment, and projects developed and produced by engineers
will be sufficient to produce volumes of books. These contributions indicate that engineers have
become an indispensable segment of the world's professions. This expectation will continue for
a long time.

Even as engineers are currently producing solutions to many of the difficulties faced by
mankind, much is still expected of them. Their outputs, new or improvements of old ones, are
very much needed in the following specific problem concerns:

1. the production of more food for a fast growing world population;

2. the elimination of air and water pollution;
3. solid waste disposal and materials recycling;
4. the reduction of noise in various forms;
5. supplying the increasing demand for energy;
 6. supplying the increasing demand for mobility;
7. preventing and solving crimes; and
8. meeting the increasing demand for communication facilities.

Specifically, the functions of engineering encompass the following areas:

1. Research — where the engineer is engaged in the process of learning about nature and codifying
this knowledge into usable theories.
2. Design and development — where the engineer undertakes the activity of turning a product
concept to a finished physical item. Design for manufacturability and value engineering teams (a
feature of some companies) are charged with improvement of designs and specifications at the
research, development, design, and production stages of product development.
3. Testing — where the engineer works in a unit where new products or parts are tested for work-
ability.
4. Manufacturing — where the engineer is directly in charge of production personnel or assumes
responsibility for the product.
5. Construction — this is where the construction engineer (a civil engineer) is either directly in
charge of the construction personnel or may have responsibility for the quality of the
construction process.
6. Sales — where the engineer assists the company's customers to meet their needs, especially
those that require technical expertise.
7. Consulting — where the engineer works as consultant of any individual or organization requiring
his services.
8. Government — where the engineer may find employment in the government performing any of
the various tasks in regulating, monitoring, and controlling the activities of various institutions,
public or private.
9. Teaching — where the engineer gets employment in a school and is assigned as a teacher of
engineering courses. Some of them later become deans, vice presidents, and presidents.
10. Management — where the engineer is assigned to manage groups of people performing specific
tasks.

THE ENGINEER IN VARIOUS TYPES OF ORGANIZATION

From the viewpoint of the engineer, organizations may be classified according to the
degree of engineering jobs performed:

1. Level One — those with minimal engineering jobs like retailing firms.
2. Level Two — those with a moderate degree of engineering jobs like transportation
companies.
3. Level Three — those with a high degree of engineering jobs like construction firms.
Figure 1.1 Types of Organization and the Management Skills Required of Engineers

Management Skills Required at Various Levels

Among the types of organizations, the engineer will have a slim chance of becoming the
general manager or president of level one, unless of course, he owns the firm. The engineer
manager may be assigned to head a small engineering unit of the firm, but there will not be too
many firms which will have this unit.

In level two firms, the engineer may be assigned to head the engineering division. The
need for management skills will now be felt by the engineer manager.

Level three firms provide the biggest opportunity for an engineer to become the
president or general manager. In this case, the engineer manager cannot function effectively
without adequate management skills.

WHAT IS ENGINEERING MANAGEMENT?

Engineering management refers to the activity combining "technical knowledge with the
ability to organize and coordinate worker power, materials, machinery, and money."
 When the engineer is assigned to supervise the work of even a few people, he is already
engaged in the first phase of engineering management. His main responsibility is to lead his
group into producing a certain output consistent with the required specifications.

The top position an engineer manager may hope to occupy is the general managership
or presidency of any firm, large or small. As he scales the management ladder, he finds that the
higher he goes up, the less technical activities he performs, and the more management tasks he
accepts. In this case, it is but proper that the management functions taught in pure
management courses be well understood by the engineer manager.

Figure 1.2 A Typical Advertisement for a Pure engineering Job (without management
responsibilities)

GE
THE NAME THE WORLD TRUSTS HAS PLACED ITS
TRUST IN US

FUJI-HAYA ELECTRIC
An affiliate of Fuji Electric Co., Ltd., of Japan

For immediate hiring

LICENSED ELECTRICAL ENGINEERS

Technical Services Group
(Canlubang-based)

Design Engineers (2)

The successful candidate will handle project design and coordination for switchgears
manufacturing and substation installation.

Application Engineers (2)

The successful candidates will prepare lay-out drawings of switchgears distribution/lighting
panel boards, etc., and bill of components. He/She will transact with customers regarding
revisions and approvals.

Qualifications for Engineering Positions:

• With at least one year work experience; overseas experience will be an advantage
• With adequate understanding of and actual operating skills in CAD and windows
software
• With effective English communication skills and inter-personal skills to efficiently
handle transactions in various levels
• Preferably with a driver's license
Applicants are requested to apply in person with their comprehensive resumes, 1 x 1 photo, and
college transcripts at the 2nd Flr. Matrino Bldg., 2178 Pasong Tamo St., Makati City. For
inquiries, please call Odette Panganiban at 892-88-86. Interviews will be held from 8:00 A.M.-
12:00 NN, Monday to Saturday. Deadline for application is Saturday, 02 March 1996.

*From an advertisement, Philippine Daily Inquirer, February 26, 1996, p. B -1.

Figure 1.3 A Typical Advertisement for an Engineer Manager as a Lower Level Executive
(Supervisor)

ONE OF THE COUNTRY'S LEADING STRUCTURE

SPECIALISTS NEEDS THE FOLLOWING FOR ITS
EXPANSION

FABRICATION SUPERVISOR (1)

— Male, BSCE/BSME graduate, not more than 35 years old
— At least 5 years experience in steel fabrication
— Willing to work on shifting schedule

STRUCTURAL DETAILERS (6)

— M/F, B.S. in Engineering, below 35 years old
— Knowledge in steel connections standard and steel fabrication (shop drawings)

PROJECT ENGINEERS
— Male, licensed Civil Engineer, with at least 5 years experience on steel erection and willing to
be assigned outside Metro Manila

WELDING FOREMAN
— Male, at least high school graduate and with at least 5 years experience as Welding Foreman

Apply at:
STEEL CENTRE PHILS., INC.
Arnang Rodriguez Ave., Bo. Manggahan, Pasig City

Or send comprehensive resume to:

P.O. BOX 3702, MANILA

*From an advertisement, Manila Bulletin, February 25. 1996, p. F-24.

Figure 1.4 A Typical Advertisement for an Engineer Manager as a Middle Level Executive

A PROGRESSIVE INDUSTRIAL COMPANY IS LOOK¬ING FOR TALENTED AND DYNAMIC

INDIVIDUALS WHO ARE WILLING TO FILL UP THE FOLLOWING POSITIONS:

PRODUCTION MANAGER
- Male, 35-45 years of age
— Mechanical Engineering/Industrial Engineering graduate or any related course
— With 4 to 6 years working experience in handling production preferably in a steel industry
— Extensive experience in maintenance program
— Cost-cutting oriented person.

Interested parties, please apply in person with bio-data and resume, 2 x 2 picture and other
credentials at:

81F GEDISCO TOWER

534 Asuncion St., Binondo, Manila
Tel. 241-92-51

*From an advertisement, Manila Bulletin, February 25, 1996, p. F-18.

Figure 1.5 Typical Advertisements for Engineer Managers as Top Executives

WE ARE A FAST GROWING GROUP OF COMPANIES IN NEED OF A QUALIFIED AND HIGHLY

MOTIVATED

GENERAL MANAGER

- Male, 35-45 years old

- Preferably a graduate of Industrial or Mechanical Engineering
- Highly skilled in the field of general management
- Sales oriented
- Fluent in spoken and written English

The qualified applicant will receive an attractive compensation package and benefits.

Interested applicants may send their resume with a latest photo to the PERSONNEL
DEPARTMENT, BOX 193 – MAIN '96 C/O MANILA BULLETIN

• From an advertisement, Manila Bulletin, April 28, 1996, p. E-5.

GENERAL MANAGER
A very progressive chemical manufacturing company seeks a mature and highly qualified
candidate to assume the above post.

Directly reporting to the Vice President, the ideal candidate must be:
- Male, 35.45 years old
- Graduate of Chemical Engineering in a prestigious college or university
- Aggressive and result oriented
- With leadership and management skills
- Excellent communication skills
-
We offer a competitive salary and excellent benefits. Interested applicants are requested to
send their resume with a recent photo to:
THE HRD DEPARTMENT
BOX 192 -- MAIN '96
c/o MANILA BULLETIN

From an advertisement, Manila Bulletin, April 28, 1996, p. E-5.

Figure 1.6 An Advertisement for an Engineering Manager

FOR IMMEDIATE HIRING

ENGINEERING MANAGER

This person will be responsible for the effective management of the engineering and
maintenance department.

We are looking for a licensed Mechanical Engineer, preferably with an MBA or graduate school
degree.

He must carry with him at least five years experience in the operation, trouble shooting and
preventive maintenance system of all mechanical, refrigeration and air-conditioning equipment
preferably gained from a food business industry or in a manufacturing firm in a managerial
capacity.

We offer a very competitive compensation package and a car plan to the qualified candidate.
Interested parties, may send their comprehensive resume, application letter and a passport
sized ID to:

BOX NO. 153 CUBAO '96

c/o MANILA BULLETIN
*From an advertisement, Manila Bulletin, August 25, 1996, p. C-3.

MANAGEMENT DEFINED
Since the engineer manager is presumed to be technically competent in his
specialization, one may now proceed to describe more thoroughly the remaining portion of his
job, which is management.

Management may be defined as the "creative problem solving-process of planning,

organizing, leading, and controlling an organization's resources to achieve its mission and
objectives."'

THE PROCESS OF MANAGEMENT

Management is a process consisting of planning, organizing, directing (or leading), and
controlling.

Explained in a simple manner, management must seek to find out the objectives of the
organization, think of ways on how to achieve them, decide on the ways to be adapted and the
material resources to be used, determine the human requirements of the total job, assign
specific tasks to specific persons, motivate them, and provide means to make sure that the
activities are in the right direction.

The specific activities in the management process are discussed more thoroughly in the
succeeding chapters.

REQUIREMENTS FOR THE ENGINEER MANAGER'S JOB

Depending on the type of products or services a firm produces, the engineer manager must
have the following qualifications:

1. a bachelor's degree in engineering from a reputable school; In some cases, a master's degree in
engineering or business management is required;
2. a few years experience in a pure engineering job;
3. training in supervision;
4. special training in engineering management.

These qualifications will be of great help to the engineer manager in the performance of the
various management functions.

HOW ONE MAY BECOME A SUCCESSFUL ENGINEER MANAGER

 Successful engineer managers do not happen as a matter of chance, although luck is a
contributory factor. It is very important for the engineer manager to know the various factors
leading to successful management.

Kreitner indicates at least three general preconditions for achieving lasting success as a
manager. They are as follows:

1. ability
2. motivation to manage, and
3. opportunity.

Ability

Managerial ability refers to the capacity of an engineer manager to achieve

organizational objectives effectively and efficiently.

Effectiveness, according to Higgins, refers to a description of "whether objectives are

accomplished", while efficiency is a description of the relative amount of resources used in
obtaining effectiveness."

To illustrate:

If a civil engineer was asked by his superiors to finish a 100-kilometer road cementing
project within eight months, he is said to be effective if he finished the job within the required
period. On the other hand, his efficiency is measured by the inputs (labor and materials) he
poured into the project in relation to the actual output (the 100 kilometer road). If the same
output is made with less input, the more efficient the civil engineer becomes.

Motivation to Manage

Many people have the desire to work and finish specific tasks assigned by superiors, but
not many are motivated to manage other people so that they may contribute to the realization
of the organization's objectives.

A management researcher, John B. Miner, developed a psychometric instrument to

measure objectively an individual's motivation to manage. The test is anchored to the following
dimensions:

1. Favorable attitude toward those in positions of authority, such as superiors.

2. Desire to engage in games or sports competition with peers.
3. Desire to engage in occupational or work-related competition with peers.
4. Desire to assert oneself and take charge.
5. Desire to exercise power and authority over others.
6. Desire to behave in a distinctive way, which includes standing out from the crowd.
7. Sense of responsibility in carrying out the routine duties associated with managerial work.

High scores in the foregoing dimensions are associated with high motivation to manage.

Opportunity

Successful managers become possible only if those having the ability and motivation are
given the opportunity to manage. The opportunity for successful management has two
requirements:

1. Obtaining a suitable managerial job, and

2. Finding a supportive climate once on the job.

Newspaper advertisements abound with needs for engineer managers. It is a little

difficult to determine if the firms requiring their services provide a supportive climate for
effective and efficient management. A supportive climate is characterized by the recognition of
managerial talent through financial and nonfinancial rewards.

QUESTIONS FOR REVIEW AND DISCUSSION

1. Why are engineers considered an important segment of the society?
2. What are expected of engineers in general?
3. In what current concerns are engineering outputs needed?
4. In what areas are engineers currently involved?
5. How may organizations be classified according to the engineering jobs performed?
6. Which organization level requires the highest management skills for engineer managers?
7. What is engineering management?
8. How may one define management?
9. What qualifications must an engineer manager have?
10. How may one become a successful engineer manager?

SUGGESTED ITEM FOR RESEARCH

1. Prepare a list of ten engineers who became president or general manager of a large
company.

Case 1. ALMA ELECTRONICS: I'll Dream of You

 Mr. Andy Mallari opened a small shop selling transistor radios in 1979. His store was
located at one corner (General Luna St.) of the entire stretch of Burgos Avenue, the main
thoroughfare of Cabanatuan City.

The demand for electronic parts made him carry a wide assortment of parts that are
used in the assembly and maintenance of radios, tape recorders, amplifiers, and various related
appliances.

By 1990, Mr. Mallari was able to save enough money for the purchase of a 300 square
meter lot along Del Pilar Street. He constructed a 10 meters x 15 meters two-storey building on
the lot. The ground floor is used as his store where sales are made to customers which grew in
number month after month. The second floor is used as his residence.

Mr. Mallari thinks that he can duplicate his feat in the other big towns of San Jose City,
Gapan, and GIiimba. He has already started operating his stores in those towns and sales are
already picking up. His current operations cover sales and repair. There are five salesladies in
Cabanatuan attending to the various needs of the customers. Those who bring their appliances
for repair are served by one of the six technicians. The parts used come from the stocks
maintained at the store.

Those who purchase parts from the store consist of technicians from the various towns
of Nueva Ecija. Sometimes, the technicians send somebody to do the purchasing of parts.
Mr. Mallari's perspective has changed drastically after he met his former classmate Estelito Chan
in a class reunion at Araullo University. Mr. Chan has a well-established appliance assembly
plant in Manila. He indicated that he did not start big but rather as a subcontractor for a large
assembly plant. Slowly, Mr. Chan's business picked up until he was able to establish his own
factory.

Mr. Mallari thinks that he can follow the footsteps of his friend. As he is already 47 years
old and his oldest child is about ready to enter college, he thinks this is the best time for him to
consider sending his son to an engineering school. His decision will center on which school and
which engineering course. He feels that his children are keenly interested in whatever career he
will ask them to take.

Mr. Mallari has three sons, all belonging to the top ten in their respective classes. He
thinks all three have the potential to help him realize his dream of establishing his own
assembly plant. His immediate concern now is to identify the right college courses for his
children.
Chapter 2

DECISION MAKING
Managers of all kinds and types, including the engineer manager, are primarily tasked to
provide leadership in the quest for the attainment of the organization's objectives. If he is to
become effective, he must learn the intricacies of decision-making. Many times, he will be
confronted by situations where he will have to choose from among various options. Whatever
his choice, it will have effects, immediate or otherwise, in the operations of this organization.

The engineer manager's decision-making skills will be very crucial to his success as a
professional. A major blunder in decision-making may be sufficient to cause the destruction of
any organization. Good decisions, on the other hand, will provide the right environment for
continuous growth and success of any organized effort.

DECISION-MAKING AS A MANAGEMENT RESPONSIBILITY

Decisions must he made at various levels in the workplace. They are also made at the
various stages in the management process. If certain resources must be used, someone must
make a decision authorizing certain persons to appropriate such resources.

Decision-making is a responsibility of the engineer manager. It is understandable for

managers to make wrong decisions at times. The wise manager will correct them as soon as
they are identified. The bigger issue is the manager who cannot or do not want to make
decisions. Delaney concludes that this type of managers aredangerous and "should be removed
from their position as soon as possible."

Management must strive to choose a decision option as correctly as possible. Since they
have that power, they are responsible for whatever outcome their decisions bring. The higher
the management level is, the bigger and the more complicated decision-making becomes.

An example may be provided as follows:

The production manager of a certain company has received a written request from a
section head regarding the purchase of an airconditioning unit. Almost simultaneously,
another request from another section was forwarded to him requiring the purchase of a
forklift. The production manager was informed by his superior that he can only buy one
of the two requested items due to budgetary constraints.
 The production manager must now make a decision. His choice, however, must be based
on sound arguments for he will be held responsible, later on, if he had made the wrong
choice.

WHAT IS DECISION-MAKING?
Decision-making may be defined as "the process of identifying and choosing alternative
courses of action in a manner appropriate to the demands of the situation."2
The definition indicates that the engineer manager must adapt a certain procedure designed to
determine the best option available to solve certain problems.
Decisions are made at various management levels (i.e., top, middle, and lower levels) and at
various man-agement functions (i.e., planning, organizing, directing,and controlling). Decision-
making, according to Nickels and others, "is the heart of all the management functions."

THE DECISION-MAKING PROCESS

Rational decision-making, according to David H. Holt, is a process involving the following
steps:

1. diagnose problem
2. analyze environment
3. articulate problem or opportunity
4. develop viable alternatives
5. evaluate alternatives
6. make a choice
7. implement decision
8. evaluate and adapt decision results

Diagnose Problem

If a manager wants to make an intelligent decision, his first move must be to identify the
problem. If the manager fails in this aspect, it is almost impossible to succeed in the subsequent
steps. An expert once said "identification of the problem is tantamount to having the problem
half-solved."

What is a Problem? A problem exists when there is a difference between an actual

situation and a desired situation.' For instance, the management of a construction company
entered into a contract with another party for the construction of a 25-storey building on a
certain site.

The actual situation of the firm is that it has not yet con-structed the building. The
desired situation is the finished 25-storey building. In this case, the actual situation is different
from the desired situation. The company, there-fore, has a problem and that is, the construction
of the 25-storey building.

Analyze the Environment

The environment where the organization is situated plays a very significant role in the
success or failure of such an organization. It is, therefore, very important that an analysis of the
environment be undertaken.

The objective of environmental analysis is the identification of constraints, which may be

spelled out as either internal or external limitations. Example of internal limitations are as
follows:

1. Limited funds available for the purchase of equipment.

2. Limited training on the part of employees.
3. III-designed facilities.

Examples of external limitations are as follows:

1. Patents are controlled by other organizations.

2. Avery limited market for the company's products and services exists.
3. Strict enforcement of local zoning regulations.

When decisions are to be made, the internal and external limitations must be considered. It
may be costly, later on, to alter a decision because of a constraint that has not been previously
identified.

An illustration of failure to analyze the environment is as follows:

The president of a new chemical manufacturing company made a decision to

locate his factory in a place adjacent to a thickly populated area. Construction of the
building was made with precision and was finished in a short period. When the
clearance for the commencement of operation was sought from local authorities, this
could not be given. It turned out that the residents opposed the operation of the firm
and made sure that no clearance is given.

The president decided to relocate the factory but not after much time and
money has been lost. This is a clear example of the cost associated with man¬agement
disregarding the environment when decisions are made. In this case, the president did
not consider what the residents could do.

Components of the Environment. The environment consists of two major concerns:

1. internal and
 2. external.

The internal environment refers to organizational activities within a firm that surrounds
decision-making! Shown in Figure 2.1 are the important aspects of the internal environment.
The external environment refers to variables that are outside the organization and not
typically within the short-run control of top management. Figure 2.2 shows the forces
comprising the external environment of the firm.

Develop Viable Alternatives

Oftentimes, problems may be solved by any of the solutions offered. The best among the
alternative solutions must be considered by management. This is made pos¬sible by using a
procedure with the following steps:

1. Prepare a list of alternative solutions.

2. Determine the viability of each solutions.
3. Revise the list by striking out those which are not viable.

To illustrate:

An engineering firm has a problem of increasing its output by 30%. This is the
result of a new agreement between the firm and one of its clients.
Figure 2.1 The Engineering Firm and the Internal Environment in Decision-Making

INTERNAL ENVIRONMENT

Organizational Aspects

like org. structure,

policies, procedures,
rules, ability of
management, etc. EXTERNAL
ENVIRONMENT
Marketing Aspects

like product strategy,

promotion strategy, etc.

DECISION
Personnel Aspects

like recruitment practices,

Incentive systems, etc.

EXTERNAL
Production Aspects ENVIRONMENT

like plant facility

layout, inventory
control, etc.

Financial Aspects

like liquidity,
profitability, etc.
Figure 2.2 The Engineering Firm and Its External Environment

The list of solutions prepared by the engineering manager shows the following
alternative courses of action:

1. improve the capacity of the firm by hiring more workers and building additional facilities;
2. secure the services of subcontractors;
3. buy the needed additional output from another firm;
4. stop serving some of the company's customers; and
5. delay servicing some clients.

The list was revised and only the first three were deemed to be viable. The last two were
deleted because of adverse effects in the long-run profitability of the firm.

Evaluate Alternatives

After determining the viability of the alternatives and a revised list has been made, an
evaluation of the remaining alternatives is necessary. This is important because the next step
involves making a choice. Proper evaluation makes choosing the right solution less difficult.

How the alternatives will be evaluated will depend on the nature of the problem, the
objectives of the firm, and the nature of alternatives presented. Souder suggests that "each
alternative must be analyzed and evaluated in terms of its value, cost, and risk characteristics.”
 The value of the alternatives refers to benefits that can be expected. An example may be
described as follows: a net profit of P10 million per year if the alternative is chosen.

The cost of the alternative refers to out-of-pocket costs (like P100 million for
construction of facilities), opportunity costs (like the opportunity to earn interest of P2 million
per year if money is invested elsewhere), and follow-on costs (like P3 million per year for
maintenance of facilities constructed).

The risk characteristics refer to the likelihood of achieving the goals of the alternatives. If
the probability of a net profit of P10 million is only 10 percent, then the decision-maker may opt
to consider an alternative with a P5 million profit but with an 80 percent probability of success.

Another example of an evaluation of alternatives is shown below:

An engineer manager is faced with a problem of choosing between three applicants to

fill up a lone vacancy for a junior engineer. He will have to set up certain criteria for
evaluating the applicants. If the evaluation is not done by a professional human
resources officer, then the engineer manager will be forced to use predetermined
criteria.

A typical evaluation of job applicants will appear as follows:

EVALUATION SHEET

Title of Vacant Position: JUNIOR ENGINEER

Date of Evaluation: December 28, 1996
Applicant Education Training Experience Age Total Points
1 Jose Sibayan, Jr. 40 35 4 10 89
2. Menandro Rillon 40 36 5 9 90
3 Dante dela Cruz 40 38 6 7 91
Evaluator:
Edgardo J. Viloria
Manager
Engineering Division III

Make a Choice

After the alternatives have been evaluated, the decision-maker must now be ready to
make a choice. This is the point where he must be convinced that all the previous steps were
•correctly undertaken.
 Choice-making refers to the process of selecting among alternatives representing
potential solutions to a problem.9 At this point, Webber advises that "... particular effort should
be made to identify all significant consequences of each choice."

To make the selection process easier, the alternatives can be ranked from best to worst
on the basis of some factors like benefit, cost, or risk.

Implement Decision

After a decision has been made, implementation follows. This is necessary, or decision-
making will be an exercise in futility.

Implementation refers to carrying out the decision so that the objectives sought will be
achieved. To make implementation effective, a plan must be devised.

At this stage, the resources must be made available so that the decision may be properly
implemented. Those who will be involved in implementation, according to Aldag and Stearns,
must understand and accept the solution.

Evaluate and Adapt Decision Results

In implementing the decision, the results expected may or may not happen. It is,
therefore, important for the manager to use control and feedback mechanisms to ensure results
and to provide information for future decisions.

Feedback refers to the process which requires checking at each stage of the process to
assure that the alternatives generated, the criteria used in evaluation, and the solutions
selected for implementation are in keeping with the goals and objectives originally specified.

Control refers to actions made to ensure that activities performed match the desired
activities or goals that have been set.

In this last stage of the decision-making process, the engineer manager will find out
whether or not the desired result is achieved. If the desired result is achieved, one may assume
that the decision made was good. If it was not achieved, Ferrell and Hirt suggest that further
analysis is necessary. Figure 2.3 presents an elaboration of this last step.

APPROACHES IN SOLVING PROBLEMS

In decision-making, the engineer manager is faced with problems which may either be
simple or complex. To provide him with some guide, he must be familiar with the following
approaches:
 1. qualitative evaluation, and

2. quantitative evaluation.

Qualitative Evaluation. This term refers to evaluation of alternatives using intuition and
subjective judgment. Stevenson states that managers tend to use the qualitative approach
when:

Figure 2.3 Feedback as a Control Mechanism in the Decision Making-Process

1. The problem is fairly simple.

2. The problem is familiar.
3. The costs involved are not great.
4. Immediate decisions are needed.
 An example of an evaluation using the qualitative approach is as follows:
A factory operates on three shifts with the following schedule:
First shift - 6:00 A.M. to 2:00 P.M.
Second shift - 2:00 P.M. to 10:00 P.M.
Third shift - 10:00 P.M. to 6:00 A.M.
Each shift consists of 200 workers manning 200 machines. On September 16, 1996, the
operations went smoothly until the factory manager, an industrial engineer, was notified at 1:00
P.M. that five of the workers assigned to the second shift could not report for work because of
injuries sustained in a traffic accident while they were on their way to the factory.
Because of time constraints, the manager made an instant decision on who among the
first shift workers would work overtime to man the five machines.

Quantitative Evaluation. This term refers to the evaluation of alternatives using any
technique in a group classified as rational and analytical.

QUANTITATIVE MODELS FOR DECISION MAKING

The types of quantitative techniques which may be useful in decision-making are as
follows:
1. inventory models
2. queuing theory
3. network models

4. forecasting
5. regression analysis
6. simulation

7. linear programming

8. sampling theory

9. statistical decision theory

Inventory Models

Inventory models consist of several types all designed to help the engineer manager make
decisions regarding inventory. They are as follows:
 1. Economic order quantity model — this one is used to calculate the number of items that
should be ordered at one time to minimize the total yearly cost of placing orders and
carrying the items in inventory.
2. Production order quantity model — this is an economic order quantiy technique applied
to production orders.
3. Back order inventory model — this is an inventory model used for planned shortages.
4. Quantity discount model — an inventory model used to minimize the total cost when
quantity discounts are offered by suppliers.

Queuing Theory

The queuing theory is one that describes how to determine the number of service units
that will minimize both customer waiting time and cost of service.

The queuing theory is applicable to companies where waiting lines are a common
situation. Examples are cars waiting for service at a car service center, ships and barges waiting
at the harbor for loading and unloading by dockworkers, programs to be run in a computer
system that processes jobs, etc.

Network Models

These are models where large complex tasks are broken into smaller segments that can
be managed independently.

The two most prominent network models are:

1. The Program Evaluation Review Technique (PERT) — a technique which enables

engineer managers to schedule, monitor, and control large and complex projects by
employing three time estimates for each activity.

2. The Critical Path Method (CPM) — this is a network technique using only one time
factor per activity that enables engineer managers to schedule, monitor, and control
large and complex projects.
Forecasting

There are instances when engineer managers make decisions that will have implications
in the future. A manufacturing firm, for example, must put up a capacity which is sufficient to
produce the demand requirements of customers within the next 12 months. As such, man-
power and facilities must be procured before the start of operations. To make decisions on
capacity more effective, the engineer manager must be provided with data on demand
requirements for the next 12 months. This type of information may be derived through
forecasting.

Forecasting may be defined as "the collection of past and current information to make
predictions about the future.”

Regression Analysis

The regression model is a forecasting method that examines the association between two or
more variables. It uses data from previous periods to predict future events.

Regression analysis maybe simple or multiple depending on the number of independent

variables present. When one independent variable is involved, it is called simple regression;
when two or more independent variables are involved, it is called multiple regression.

Simulation

Simulation is a model constructed to represent reality, on which conclusions about real-

life problems can be used. It is a highly sophisticated tool by means of which the decision maker
develops a mathematical model of the system under consideration.

Simulation does not guarantee an optimum solution, but it can evaluate the alternatives
fed into the process by the decision-maker.

Linear Programming

Linear programming is a quantitative technique that is used to produce an optimum

solution within the bounds imposed by constraints upon the decision:Linearprogramming is
very useful as a decision-making tool when supply and demand limitations at plants,
warehouse, or market areas are constraints upon the system.
programming is very useful as a decision-making tool when supply and demand limitations at
plants, warehouse, or market areas are constraints upon the system.

Sampling Theory

Sampling theory is a quantitative technique where samples of populations are

statistically determined to be used for a number of processes, such as quality control and
marketing research.

When data gathering is expensive, sampling provides an alternative. Sampling, in effect,

saves time and money.
Statistical Decision-Theory

Decision theory refers to the "rational way to conceptualize, analyze, and solve problems
in situations involving limited or partial information about the decision environment."

A more elaborate explanation of decision theory is the decision making process

presented at the beginning of this chapter. What has not been included in the discussion on the
evaluation of alternatives, but is very important, is subjecting the alternatives to Bayesian
analysis.

The purpose of Bayesian analysis is to revise and update the initial assessments of the
event probabilities generated by the alternative solutions. This is achieved by the use of
additional information.

When the decision-maker is able to assign probabilities to the various events, the use of
probabilistic decision rule, called the Bayes criterion, becomes possible. The Bayes criterion
selects the decision alternative having the maximum expected payoff, or the minimum expected
loss if he is working with a loss table."

QUESTIONS FOR REVIEW AND DISCUSSION

1. Can the engineer manager avoid making management decision? Why or why not?
2. When a problem becomes apparent and the engineer manager chooses to ignore it, is
he making a decision? Explain your answer.
3. Why is proper diagnosis of the problem important?
4. What are the components of the environment from the point of view of the decision-
maker? What do they consist of?
5. How may one develop viable alternatives in problem solving?
6. How may alternative solutions be evaluated?
7. Why is it important for those who will be involved in implementation to understand and
accept the solution to the problem?
8. What are the approaches in solving problems?
9. What quantitative techniques are useful in decision-making?
10. What is the purpose of Bayesian analysis?

SUGGESTED ITEM FOR RESEARCH

1. Provide an illustration of how Bayesian analysis is used.

Case 2. R. E.CONSTRUCTION: It’s Now or Never

When Engineer Romeo Estabillo finished his Civil Engineering course at Mapua Institute
of Technology, he took the board examination and passed it in 1981, Wanting to start
independently, he went back to his hometown (Santiago .City) to organize his own construction
firm, In his first few years of operation, he accepted contracts for the construction. of residential
houses. As he gained experience, his clients grew in number, and even the most prominent
persons in the province of Isabela availed of his services.

At the start, he hired two assistants to help him in his daily routine as contractor. One of
the two assistants, Mr. Silvino Santiago was-a third year civil engineering student who had
stopped schooling due to financial difficulties. His main ask was as draftsman. His duty was to
produce all documents relating to the physical requirements of the various contracts entered
into by his boss. Among these .documents are the building plan, specifications, bill of materials,
building permit, etc. His additional duty was to assist Engineer Estabillo in supervising the
foremen and workers at the various construction sites.

The second assistant, Mr. Romulo Mamaril, was assigned to coordinate purchasing,
bookkeeping, and other related administrative activities.

At the third year of operations, Engineer Estabillo was already directing operations in his
newly constructed office inside his residential compound. By this time, two more female
employees were hired to assist in the various tasks performed in the office.

By 1994, Engineer Estabillo reviewed his company's payroll. It indicated that he has in his
employ six full-time civil engineers, two draftsmen, ten administrative personnel, one
messenger and one security guard. The foremen and laborers working at the various projects
were contractual.

By June 1996, Engineer Estabillo felt that business was continuously growing, so he will
have to secure the services of four additional civil engineers on a full-time basis. As he was
directly supervising all operations, he now feels that he may not be able to perform his
functions effectively if he will push through with the plan. He wants to make a decision, but he
is apprehensive. He thinks operations are now more complex that decision-making must be a
littlescientific. With this thoughts, he pondered on how he will go about solving the problem.
CHAPTER 3

PLANNING TECHNICAL ACTIVITIES

If managing in organization is to be pursued vigorously, planning will constitute
the most important activity Managers who plan are afforded with the opportunity to
carefully analyze situations which directly contribute to effective decision-making.

The engineer manager, regardless of his manage-intuit level, will have to devote some of
his time to plan-ping. The higher the management levels the engineer manager is in, the more
sophisticated his planning activity becomes. Why and how this is so shall be discussed in this
chapter.

THE NATURE OF PLANNING

There are many instances when managers are overwhelmed by various activities which
at times becloud his judgment. This must be expected since anybody who is confronted by
several situations happening simultaneously will loose sight of the more important concerns. To
minimize mistakes in decision-making, planning is undertaken.
 A plan, which is the output of planning, provides a methodical way of achieving desired
results. In the Implementation of activities, the plan serves as a useful guide. Without the plan,
some minor tasks may be afforded major attention which may, later on, hinder the accom-
plishment of objectives.

An example of the difficulty of not having a plan is illustrated below.

The management of an engineering firm was able to identify the need to

hire additional three employees. The manager proceeded to invite applicants,
screen them, and finally hired three of them. When the hiring expense report
was analyzed, it involved more than double the amount spent by other firms in
hiring the same number of people.

When an inquiry was made, it was found out that the manager
committed some errors of judgment. For instance, he used an expensive
advertising layout in a newspaper when a simple message will do.

Also, it was found out that the absence of a hiring plan contributed to the
high cost of hiring.

PLANNING DEFINED

PLANNING DEFINED

Various experts define planning in various ways, all of which are designed to suit specific
purposes.

Planning, according to Nickels and others, refers to "the management function that
involves anticipating future trends and determining the best strategies and tactics to achieve
organizational objectives.” This definition is useful because it relates the future to what could be
decided now.

Aldag and Stearns, on the other hand, define planning as "the selection and sequential
ordering of tasks required to achieve an organizational goal," This definition centers on the
activity required to accomplish the goals.

The definition of Cole and Hamilton provides a better guide on how to effectively
perform this vital activity. Planning, according to them isdeciding what will be done, who will do
it, where, when and how it will be done, and the standards to which it will be done."
 For our purpose, it will suffice to define planning as selecting the best course of action so
that the desired result may be achieved. It must be stressed that the desired result takes first
priority and the course of action chosen is the means to realize the goal.

PLANNING AT VARIOUS MANAGEMENT LEVELS

Since engineer managers could be occupying positions in any of the various
management levels, it will be useful for them to know some aspects of planning undertaken at
the different management levels.

Planning activities undertaken at various levels are as follows:

1. Top management level — strategic planning

2. Middle management level — intermediate planning
3. Lower management level — operational planning.

Strategic Planning

The term strategic planning refers to the process of determining the major goals of the
organization and the policies and strategies for obtaining and using resources to achieve those
goals. The top management of any firm ill involved in this type of planning.

In strategic planning, the whole company is considered, specifically its objectives and
current resources.

The output of strategic planning is the strategic plan which spells out "'the decision
about long-range goals and the course of action to achieve these goals.”

Intermediate Planning

Intermediate planning refers to “the process of determining the contributions that

subunits can make with allocated resources.” This type of planning is undertaken by middle
management.
Under intermediate planning, the goals of a subunit are determined and a plan is
prepared to provide a guide to the realization of the goals. The intermediate plan is designed to
support the strategic plan.

Figure 3.1 Types of Planning

Figure 3.2 The Organization and Types of Planning Undertaken

Operational Planning

The term operational planning refers to "the process of determining how specific tasks
can best be accomplished on time with available resources."' This type of planning is a
responsibility of lower management. It must be performed in support of the strategic plan and
the intermediate plan.
THE PLANNING PROCESS
THE PLANNING PROCESS

The process of planning consists of various steps depending on the management level
that performs the planning task. Generally, however, planning involves the following:

1. setting organizational, divisional, or unit goals

2. developing strategies or tactics to reach those goals

3. determining resources needed and

4. setting standards.

Setting Organizational, Divisional, or Unit Goals

The first task of the engineer manager is to provide a sense of direction to his firm (if he
is the chief executive), to his division (if he heads a division), or to his unit (if he is a supervisor).
The setting of goals provide an answer to the said concern. If everybody in the firm (or division
or unit, as the case may be) is awareof the goals, there is a big chance that everybody will
contribute his share in the realization of such goals.

Goals may be defined as the "precise statement of results sought, quantified in time and
magnitude, where possible." Examples of goals are provided in Figure. 3.3.
 Figure 3.3 Examples of Goals, By Organizational Level

Developing Strategies or Tactics to Reach Goals

After determining the goals, the next task is to devise some meal to realize them. The
ways to realize the goals are called strategies and these will be the concern of top management.
The middle and lower management will adapt their own tactics to implement their plans.
A strategy may be defined as "a course of action aimed at ensuring that the organization
will achieve its objectives."
An example of a strategy is as follows:

The decision of a construction firm's management to diversify its business

by engaging also in the trading of construction materials and supplies.

When the above mentioned strategy is implemented, it may help the construction firm
realize substantial savings in the material and supply requirements used in their construction
activities. The firm will also have greater control in the timing of deliveries of materials and
supplies.
A tactic is a short-term action taken by management to adjust to negative internal or
external influences. They are formulated and implemented in support of the firm's strategies.
The decision about short-term goals and the courses of action are indicated in the tactical plan.

An example of a tactic is the hiring of contractual workers to augment the company's

current workforce.

Determining Resources Needed

When particular sets of strategies or tactics have been devised, the engineer manager
will, then, determine the human and nonhuman resources required by such strategies or
tactics. Even if the resource requirements are currently available, they must be specified.

The quality and quantity of resources needed must be correctly determined. Too much
resources in terms of either quality or quantity will be wasteful. Too little will mean loss of
opportunities for maximizing income.

To satisfy strategic requirements, a general statement of needed resources will suffice.

The specific requirements will be determined by the different units of the company.

To illustrate:

Suppose the management of a construction firm has decided, in addition

to its current undertakings, to engage in the trading of construction materials
and supplies.

A general statement of required resources will be as follows: A new

business unit will be organized to deal with the buying and selling of construction
materials and supplies. The amount of P50 million shall be set aside to finance
the activity. Qualified persons shall be recruited for the purpose.

Setting Standards

The standards for measuring performance may be set at the planning stage. When
actual performance does not match with the planned performance, corrections may he made or
reinforcements given.

A standard may be defined as "a quantitative or qualitative measuring device designed

to help monitor the performances of people, capital goods, or processes."
 An example of a standard is the minimum number of units that must be produced by a
worker per day in a given work situation.

TYPES OF PLANS
Plans are of different types. They may be classified terms of functional areas, time
horizon, and frequency of us.

Functional Area Plans

Plans may be prepared according to the needs of the different functional areas. Among
the types of functional area plans are the following:

1. Marketing plan— this is the written document or blueprint for implementing and
controlling an organization's marketing activities related to a particular marketing
strategy.
2. Production plan — this is a written document that states the quantity of output a
company must produce in broad terms and by product family.
3. Financial plan — it is a document that summarizes the current financial situation of the
firm, analyzes financial needs, and recommends a direction for financial activities.
4. Human resource management plan — it is a document that indicates the human
resource needs of a company detailed in terms of quantity and quality and based on the
requirements of the company’s strategic plan.

Plans With Time Horizon

Plans with time horizon consist of the following:

1. Short-range plans — these are plans intended to cover a period of less than one year First-
line supervisors are mostly concerned with these plans.

2. Long-range plans — these are plans covering n time span of more than one year. These are
mostly undertaken by middle and top management.

Plans According to Frequency of Use

 According to frequency of use, plans may be classified as:

1. standing plans and

2. single-use plans.

Standing Plans. These are plans that are used again and again, and they focus on managerial
situations that recur repeatedly.

Standing plans may be further classified as follows:

Standing plarT3 may be further classified as follows;

1. Policies — they are broad guidelines to aid managers at every level in making decisions
about recurring situations or function.

2. Procedures — they are plans that describe the exact series of actions to be taken in a
given situation.
3. Rules—they are statements that either require or forbid a certain action.

Single-Use Plans. These plans are specifically developed to implement courses of action that
are relatively unique and are unlikely to be repeated.

Single-use plans may he further classified as follows:

1. budgets
2. programs, and
3. projects.

A budget, according to Weston and Brigham, is "a plan which sets forth the projected
expenditure for a certain activity and explains where the required funds will come from."

A program is a single-use plan designed to coordinate a large set of activities.

A project is a single-use plan that is usually more limited in scope than a program and is
sometimes prepared to support a program.

PARTS OF THE VARIOUS FUNCTIONAL AREA PLANS

The engineer manager may be familiar with engineering plans, knowing the details from
beginning to end. However, the ever present possibility of moving from one management level
to the next and from one functional area to another presses the engineer manager to be
familiar as well with other functional area plans.
The Contents of the Marketing Plan

The structure and content of marketing plans vary depending on the nature of the
organizations adapting them. William Cohen maintains that the following must be included in
the marketing plan

1. The Executive Summary — which presents an overall view of the marketing project and
its potential.

2. Table of Contents

3. Situational Analysis and Target Market

4. Marketing Objectives; and Goals

5. Marketing Strategies

6. Marketing Tactics

7. Schedules and Budgets

8. Financial Data and Control

The Contents of the Production Plan
The production plan must contain the following:
1. the amount of capacity the company must have
2. how many employees are required
3. how much material must be purchased

The Contents of the Financial Plan

The components of the financial plan are as following:

1. An analysis of the firm's current financial condition as indicated by an analysis of the

most recent statements
2. A sales forecast
3. The capital budget
4. The cash budget
5. A set of pro forma (or projected) financial statements
6. The external financing plan

Figure 3.4 Types of Plans

Figure 3.5 An Example of a Marketing Plan Schedule
Buenavista Manufacturing Company
Marketing Plan Schedule
For the Year Ending December 31, 1998

UNIT AMOUNT

PRODUCT A

January 85,000 ₱430,500

February 90,000 455,500

March 95,000 481,500

Total 1st Quarter 270,000 ₱1,367,500

2nd Quarter 260,000 1,317,000

3rd Quarter 190,000 962,500

4th Quarter 280,000 1,419,000

Total A 1,000,000 ₱5,066,000

PRODUCT B

January 34,000 ₱69,900

February 41,000 84,500

March 45,000 92,600

Total 1st Quarter 120,000 ₱247,000

2nd Quarter 135,000 276,000

3rd Quarter 95,000 195,500

4th Quarter 150,000 308,500

Total B 500,000 ₱1,029,000

Total A and B ₱6,095,000

Figure 3.6 An example of a Production Plan Schedule

Buenavista Manufacturing Company

Detailed Production Plan
For the Year Ending December 31, 1998

REQUIRED ADD FINAL TOTAL LESS UNITS TO

FOR SALES INVENTORY REQUIRED INITIAL BE
OF INVENTORY COMPLETED
FINISHED OF
GOODS FINISHED
 GOODS

PRODUCT A

January 85,000 225,000 310,000 240,000 70,000

February 90,000 215,000 305,000 225,000 80,000

March 95,000 200,000 295,000 215,000 80,000

Total 1st Quarter 270,000 200,000 470,000 240,000 230,000

2nd Quarter 260,000 180,000 440,000 200,000 240,000

3rd Quarter 190,000 220,000 410.000 180,000 230,000

4th Quarter 280,000 200,000 480,000 220,000 260,000

Total 1,000,000 200,000 1,200,000 240,000 960,000

PRDUCT B

January 34,000 100,000 134,000 100,000 34,000

February 41,000 95,000 136,000 100,000 36,000

March 45,000 88.000 133,000 95,000 38,000

Total 1st Quarter 120,000 88,000 208,000 100,000 108,000

2nd Quarter 135,000 93,000 228,000 88,000 140,000

3rd Quarter 95,000 125,000 220,000 93,000 127,000

4th Quarter 150,000 120,000 270,000 125,000 145,000

Total 500,000 120,000 620,000 100,000 520,000

Contents of the Human Resources Plan

The human resources plan must contain the following:

1. personnel requirements of the company
2. plans for recruitment and selection
3. training plan
4. retirement plan
PARTS OF THE STRATEGIC PLAN
The strategic plan must contain the following:
1. Company or corporate mission
2. Objectives or goals
3. Strategies

Company of corporate mission refers to the "strategic statement that identifies why an
organization exists, its philosophy of management, and its purpose as distinguished from other
similar organizations in terms of products, services, and markets."

MAKING PLANNING EFFECTIVE

Planning is done so that some desired results may be achieved. At times, however,
failure in planning occurs.

Planning may be made successful if the following are observed:

1. recognize the planning barriers
2. use of aids to planning

The planning barriers, according to Plunkett and Attner, are as follows:

1. manager's inability to plan
2. improper planning process
3. lack of commitment to the planning process
4. improper information
5. focusing on the present at expense of the future
6. too much reliance on the planning department
7. concentrating on only the controllable variables

Among the aids to planning that may be used are:

1. Gather as much information as possible

2. Develop multiple sources of information
3. Involve others in the planning process

QUESTIONS FOR REVIEW AND DISCUSSION

1. Why is planning an important activity for engineer managers?
2. How may "planning" be defined?
3. What planning activities are undertaken at various management levels?
 4. What are the steps in the planning process?
5. What are the types of plans? How may they be classified?
6. What is a production plan? What are its components?
7. What is a budget?
8. What is meant by “company mission"?
9. What are the barriers to planning?
10. What may be used as aids in planning?

SUGGESTED ITEM FOR RESEARCH

1. Interview the general manager of a construction firm.
Inquire about the planning activities undertaken by the firm.
Prepare a report about the result of the interview.

Case 3. MOTORBUS COMPANY: QuE Sera Sera

Engineer Hernaugenes Ancheta has just receiveD his appointment papers from his new
immediate superior, the Vice President for Operations, he has been promoted from Assistant
Manager to Manager of the Maintenance Department. After congratulating him, his boss gave
him a verbal directive that he should put some order in his department and make it work in the
most effective and efficient manner possible.

Engineer Ancheta has just passed the board examination for Mechanical Engineering
when he joined Motorbus Company in 1993. By June 1995, he informed his former classmates
at the University of Santo 'Tams that he was promoted as Assistant Manager for Maintenance.
The former manager of the department, Engineer Gaudencio Inductivo, joined the company
since it started operations in 1989_ A total of ten buses began plying the Manila-Isabela route, A
maintenance unit was put up at the Manila terminal in Sampaloc, Another unit serves the
Ilagan, Isabela terminal. Each unit has a full-time mechanic and one assistant.

When a company bus comes in for repair, the mechanic diagnoses the various
automotive systems in the bus and later produces a list of parts needing replacement. The
mechanic sends the list to Engineer Inductivo, who, in turn, forwards the same to the company
accountant for approval of the purchase request. Oftentimes, Engineer Inductivo performs the
actual purchasing himself. Later, he sends the purchased items to the mechanic who made the
request.

The maintenance units were operating normally until 40 new buses were procured by
the company in 1993. Since then, every maintenance personnel was so busy that they
threatened to quit their jobs unless additional mechanics and assistants were recruited. By the
end of 1993, each unit has a personnel complement of 5 mechanics and 5 assistants.
Even with current developments, the old method of purchasing was not improved.
Purchase requests started to pile up. Mechanics 'and drivers began complaining to the VP for
Operations about delays in the delivery of needed parts.
 The VP for Operations immediately sent a note to Engineer Inductive ordering that the
problem should be resolved immediately. Engineer Inductivo was hard pressed and he could not
offer an immediate solution. The next day, Engineer Inductivo informed the VP for Operations
that he is requesting for the approval of his application for retirement as he is already 62 years
old.

The VP forwarded the request to the President with an endorsement justifying the
request. On the same day, the request for retirement was approved. The next day, Engineer
Ancheta received his appointment papers promoting him to Manager.

One of the first things Engineer Ancheta did was to inspect the storage room for parts_
He found out that the room was full of an uneven supply of parts. Some parts were of excessive
quantities, while some important ones were inadequately stocked. A corner of the room
contains a big volume of obsolete parts.

At the end of the day, Engineer Ancheta was informed by the VP that the company will
be fielding an additional 50 new buses within 30 days. This will mean that by next month, about
100 buses will be servicing the various routes assigned to Motorbus Company

Engineer Ancheta is now mulling over how he will make the operations of his
department as efficient and effective as possible.
CHAPTER 4

ORGANIZING TECHNICAL ACTIVITIES

The engineer manager needs to acquire various skills in management, including those
for organizing technical activities, In this highly competitive environment, the unskilled manager
will not be able to bring his unit, or his company, as the case may be, to success.

The value of a superior organizational set-up has been proven dramatically during the
Second World War when a smaller American naval force confronted the formidable Japanese
navy at Midway Military historians indicated that the Americans emerged victorious because of
the superior organizational skills of their leaders.

Even today, skills in organizing contribute largely to the accomplishment of the

objectives of many organizations, whether they are private businesses or otherwise, The
positive effects of business success becomes more pronounced when they come as a result of
international operations_ International businesses, however, cannot hope to make huge profits
unless they are properly organized to implement their plans.
The opportunities offered by skillful organizing are too important for the engineer
manager to ignore. This chapter is intended to provide him with some background and insights
in organizing.

REASONS FOR ORGANIZING

Organizing is undertaken to facilitate the implementation of plans. In effective
organizing, steps are undertaken to breakdown the total job into more manageable man-
size jobs. Doing these will make it possible to assign particular tasks to particular persons.
In turn, these will help facilitate the assignment of authority, responsibility, and
accountability for certain functions and tasks.

ORGANIZING DEFINED

Organizing is a management function which refers to the structuring of resources and

activities to accomplish objectives in an efficient and effective manner.”
The arrangement or relationship of positions within an organization i4.4 called the structure.
The result of the organizing process is the structure.

THE PURPOSE OF THE STRUCTURE

The structure serves some very useful purposes. They are the following:

1. It defines the relationships between tasks and authority for individuals and
departments.
2. It defines formal reporting relationships, the number of levels in the hierarchy of the
organization, and the span of control.
3. It defines the groupings of individuals into departments and departments into
organization.
4. It defines the system to effect coordination of effort in both vertical (authority) and
horizontal (tasks) directions.

When structuring an organization, the engineer manager must be concerned with the
following:

1. Division of labor—determining the scope of work and how it is combined in a job.

2. Delegation of authority — the process of assigning various degrees of decision-making
authority to subordinates.
3. Departmentation- the grouping of related jobs, activities, or processes into major
organizational subunits.
4. Span of control — the number of people who report directly to a given manager.
5. Coordination — the linking of activities in the organization that serves to achieve a
common goal or objective.

THE FORMAL ORGANIZATION

After a plan is adapted, management will proceed to form an organization to carry out
the activities indicated in the plan.

The formal organization is "the structure that details lines of responsibilities, authority,
and position." What is depicted in the organization chart is the formal organization. It is the
“planned structure" and it “represents the deliberate attempt to establish patterned
relationships among components that will meet the objectives effectively.”

The formal structure is described by management though:

 1. organization chart
2. organizational manual and

3. policy manuals.

The organization chart is a diagram of the organization's official positions and formal lines of
authority.

The organizational manual provides written descriptions of authority relationships, details

the functions of major organizational units, and describes job procedures.

The policy manual describes personnel activities and company policies.

INFORMAL GROUPS
Formal organizations require the formation of formal groups which will be assigned to
perform specific tasks aimed at achieving organizational objectives. The formal group is a part of
the organization structure.

There are instances when members of an organization spontaneously form a group with
friendship as a principal reason for belonging. This group is called an informal group. It is not a
part of the formal organization and it does not have a formal performance purpose.

Informal groups are oftentimes very useful as it is “vulnerable to expediency,

manipulation, and opportunism,” according to Valentine. Its low visibility, Valentine added,
makes it “difficult for management to detect these perversions and considerable harm can be
done to the company.”

The engineer manager is, therefore, warned that he must be on the lookout for the
possible difficulties that the informal groups may do to the organization. It will be to his best
interest if he could make the informal groups work for the organization.

TYPES OF ORGANIZATIONAL STRUCTURES

Before the commencement of activities, the decision-makers in an organization will have
to decide on what structure to adapt. Depending on the size and type of operations, a certain
structural type may best fit the requirements.

Organizations may be classified into three types. They are the following:
 1. Functional organization — this is a form of departmentalization in which everyone
engaged in. one functional activity, such as engineering or marketing, is grouped into
one unit.
2. Product or market organization — this refers to the organization of a company by
divisions that brings together all those involved with a certain type of product or
customer.
3. Matrix organization — an organizational structure in which each employee reports to
both a functional or division manager and to a project or group manager.

The different types of organizations, with their own distinct advantages and disadvantages,
are briefly presented on the next page.

Figure 4.1 Reasons or Factors for Joining or Forming a Group

Figure 4.2 A Typical Functional Organization Chart of a Construction Company

Functional Organization

Functional organization structures are very effective in smaller firms especially "single-
business firms where key activities revolve around well-defined skills and areas of
specialization.”

Functional organizations have certain advantages. They are the following:

1. The grouping of employees who perform a common task permit economies of scale and
efficient resource use.
2. Since the chain of command converges at the top of the organization, decision-making is
centralized, providing a unified direction from the top.
3. Communication and coordination among employees within each department are
excellent.
4. The structure promotes high-quality technical problem-solving.
5. The organization is provided with in depth skill specialization and development.
6. Employees are provided with career progress within functional departments.

The disadvantages of the functional organization are the following:

1. Communication and coordination between the departments are often poor.

2. Decisions involving more than one department pile up at the top management level and
are often delayed.
3. Work specialization and division of labor, which are stressed in a functional organization,
produce routine, nonmotivating employee tasks.
4. It is difficult to identify which section or group is responsible for certain problems.
1. 5, There is limited view of organizational goals by employees.
5. There is limited general management training for employees.

Product or Market Organization

 The product or market organization, with its feature of operating by divisions, is
"appropriate for a large corporation with .many product lines in several related industries."

The advantages of a product or market organization are as follows:

1. The organization is flexible and responsive to change.

2. The organization provides a high concern for customer's needs.
3. The organization provides excellent coordination across functional departments.
4. There is easy pinpointing of responsibility for product problems.
5. There is emphasis on overall product and division goals.
6. The opportunity for the development of general management skills is provided.

The disadvantages of the product or market organization are as follows:

1. There is a high possibility of duplication of resources across divisions.

2. There is less technical depth and specialization in divisions.
3. There is poor coordination across divisions.
4. There is less top management control,
5. There is competition for corporate resources.

Matrix Organization

A matrix organization, according to Thompson and Strickland, "is a structure with two
(or more) channels of command, two lines of budget authority, and two sources of performance
and reward." Higgins declared that the matrix structure was designed to keep employees in a
central pool and to allocate them to various projects in the firm according to the length of time
they were needed.”

The matrix organization is afforded with the following advantages:

1. There is more efficient use of resources than the divisional structure.

2. There is flexibility and adaptability to changing environment.
3. The development of both general and functional management skills are present,
4. There is interdisciplinary cooperation and any expertise is available to all divisions.
5. There are enlarged tasks for employees which motivate them better.

The matrix organization has some disadvantages, however. They are the following:

1. There is frustration and confusion from dual chain, of command.

2. There is high conflict between divisional and functional interests.
3. There are many meetings and more discussion than action.
 4. There is a need for human relations training for key employees and managers.
5. There is a tendency for power dominance by one side of the matrix.

Figure 4.3 A Typical Product/Market Organization for a Construction Company

TYPES OF AUTHORITY
The delegation of authority is a requisite for effective organizing. It consists of three types.
They are as follows:

1. Line authority — a manager's right to tell subordinates what to do and then see that
they do it.
2. Staff authority — a staff specialist's right to give advice to a superior.
3. Functional authority – a specialist's right to oversee lower level personnel involved in
that specialty, regardless of where the personnel are in the organization.

Line departments perform tasks that reflect the organization's primary goal and mission. In a
construction firm, the department that negotiates and secures contracts for the firm is a line
department. The construction division is also a line function.

Staff departments include all those that provide specialized skills in support of line
departments. Examples of staff departments include those which perform strategic planning,
labor relations, research, accounting, and personnel.
 Staff officers may be classified into the following:

1. Personal staff — those individuals assigned to a specific manager to provide needed staff
services,
2. Specialized staff — those individuals providing needed staff services for the whole
organization.

Functional authority is one given to a person or a work group to make decisions related to
their expertise even if these decisions concern other departments. This authority is given to
most budget officers of organizations, as well as other officers.

Figure 4.4 A Typical Matrix Organization of a Construction Firm

THE PURPOSE OF COMMITTEES
When certain formal groups are deemed inappropriate to meet expectations,
committees are oftentimes harnessed to achieve organizational goals, Many organizations, large
or small, make use of committees.

A committee is a formal group of persons formed for a specific purpose. For instance,
the product planning committee, as described by Millevo, is "often staffed by top executives
from marketing, production, research, engineering, and finance, who work part-time to
evaluate and approve product ideas.”

Committees are very useful most especially to engineering and manufacturing firms.
When a certain concern, like product development, is under consideration, a committee is
usually formed to provide the necessary line-up of expertise needed to achieve certain
objectives.

Committees may be classified as follows:

1. Ad hoc committee — one created for a short-term purpose and have a limited life. An
example is the committee created to manage the anniversary festivities of a certain firm.
1. 2, Standing committee — it is a relatively permanent committee that deals with isaues
on an ongoing basis. An example is the grievance committee set up to handle initially
complaints from employees of the organization.

Committees may not work properly, however, if they are not correctly managed. Delaney
suggests that it might be useful to set up some procedures to make the committee a more
effective tool to accomplish our goals."

Figure 4.5 A Line and Staff Organization

QUESTIONS FOR REVIEW AND DISCUSSION
1. Why is it important for the engineer manager to acquire skills in organizing?
2. How may organizing be defined?
3. What purpose do organizational structures serve?
4. What must be the concern of the engineer manager when structuring the organization?
5. What is the purpose of the formal organization?
6. What are informal groups? Why are they formed?
7. What are the types of organizational structures? How may they be distinguished?
8. What is meant by “line authority”? by "staff authority"?
9. Distinguish “personal staff” from "specialized staff".
10. What are committees? How may they be classified?
SUGGESTED ITEM FOR RESEARCH

1. Prepare an organization chart of a large engineering firm showing line and staff relationships.

Case 4. BITS AND PIECES INTERNATIONAL CORPORATION: Little Things Mean a Lot
The Bits and Pieces international Corporation (BPIC) is one-company that appears to be
succeeding and growth has become a part of its agenda for the next few years. This is quite
unusual for a company whose certificate of incorporation has only been approved by the
Securities and Exchange Commission four years ago,.
BPIC is maintaining an office at Makati Avenue in Makati and a plant at Stn. Rosa,
La.guna... The company is producing various injection molded plastic products classified as
consumer and industrial.
The key officers of the company are as follows:

President and Chairman of the Board: Engineer Rodrigo Reyes

Vice President and General Manager: Engineer Jesus Ualat.

Corporate Secretary: Mrs. Mildred Salazar

Treasurer: Ms. Purita Toquilar

Auditor Ma. Elsa Marzo

Engineering Manager: Engineer Silvino Santiago

Production Manager: Engineer Severo Lagayan

The organization chart of BPI C is shown in Exhibit

The company, classified as a manufacturing corporation, operates on two activities.

1. production of stocks to be sold to the local market
2. production as a subcontractor
BPIC does not maintain a sales force. The general manager acts as marketing executive and
directly transacts business with customers.

The company's average sales per month are as follows:

Product Average Sales Per Month

Ball Pen Tips P 340,000
Sputum Cups 900,000
Grease Cups 100,000
Bottle Caps 100,000
PVC Fittings 200,000
 Total P1,640,000

At current output levels, the company was declared profitable.

The following financial data were provided:

1. profit margin (net income/sales) = 32%

2. return on total assets (net income/total assets) = 72%
3. annual turnover = 15 times
4. current ratio 1.1
5. acid test ratio = 1.05
An analysis of the company's market potential convinced the top management to consider
expansion. It was also decided that a new product, the tissue holder, must be added to its
existing line of products.

The target sales for the next three years are as follows:

Products Year1 Year 2 Year 3

Ball Pen Tips P 43M P7M P 8M

Sputum Cups 12M 22M 33M

Grease Cups 12M 13M 14M

Bottle Caps 24M 36M 54M

PVC Fittings 48ld 5,8M 70M

Tissue Holder 48M 58M 70M

Total P15.4IM P194M P249M

The company made provisions for improving its facilities including land, building,
machinery and equipment. The hiring of additional manpower was also proposed.

The following constitute the positions proposed.

Position Quantity
Finance Manager 1
Quality Control and Research and 1
Development Manager
Senior Machinist 1
Junior Machinist 2
Helpers 2

The president ordered the general manager to prepare an organization chart for the new
set up. The key officers of the company were directed to review the proposed setup and present
their comments on an executive meeting scheduled next week. The proposed organization chart
is shown in Exhibit 2.
Engineer Lagayan is now contemplating on what credible points he is going to raise in
the meeting.
CHAPTER 5
STAFFING THE ENGINEERING ORGANIZATION
After setting up the organizational structure that has been decided to best serve the
interest of a certain firm, the next move that has to be made is to fill up the identified positions
with the most qualified persons available.

Engineering organizations are very sensitive to whatever staffing errors are made.
Placing the wrong person in a highly specialized position like quality control, for instance, may
bring untold damages to the firm. Yet, this refers to a single error only.

An example of the ill-effects of staffing errors was provided by the TV program “Brigada
Siete” The disaster that happened in the Film Center at the Cultural Center Complex in Manila
was highlighted in the program. In November 1981, the whole sixth floor of the Film Center
collapsed while undergoing construction. Many workers and an engineer died as a result.

When interviewed by the TV program's staff, a former construction worker said he was
hired to do masonry job when he does not have training in masonry Some other examples of
staffing errors were provided in the program.

This type of tragedy underscores the importance of staffing in any organization,

engineering or otherwise. Effective staffing, on the other hand places the engineering
organization on a competitive stance.

WHAT IS STAFFING?
WHAT IS STAFFING?

The engineer manager must be concerned with putting the right persons in various
positions within his area of concern. Although some of the important aspects of staffing may be
delegated to the human resource office, the engineer manager assumes a great responsibility in
assuring that the right persons are assigned to positions that fit their qualifications.

Staffing may be defined as the management function that determines human resource
needs, recruits, selects, trains, and develops human resources for jobs created by an
organization..4

Staffing is undertaken to match people with jobs so that the realization of the
organization's objectives will be facilitated.

THE STAFFING PROCEDURE

The staffing process consists of the following series of steps:
1. human resource planning
2. recruitment
3. selection
4. induction and orientation
5. training and development
6. perform appraisal
7. employment decisions (monetary rewards, transfers, promotions and demotions) and
8. separations.

Human Resource Planning

The planned output of any organization will require a systematic deployment of human
resources at various levels. To be able to do this, the engineer manager will have to involve
himself with human resource planning. This will be done in conjunction with the efforts of
the human resource officer, i.e., if the company has one,

90 a systematic deployment of human resources at various levels. Th be able to do this, the

engineer manager will have to involve himself with human resource planning. This will be done
in conjunction with the efforts of the human resource officer, i.e,, if the compeiy has one,
Human resource planning may involve three activities, as follows:

1. Forecasting — which is an assessment of future human resource needs in relation to the

current capabilities of the organization,.
 2. Programming — which means translating the forecasted human resource needs- to
personnel objectives and goals.
3. Evaluation and control — which refers to monitoring human resource action plans and
evaluating their success.

Methods of Forecasting. The forecasting of manpower needs may be undertaken using any
of the following quantitative methods:

1. Time series methods — which use historical data to develop forecasts of the future.

2. Explanatory, or causal models — which are attempts to identify the major variables that
are related to or have caused particular past conditions and then use current measures
of these variables to predict future conditions.

The three major types of explanatory models are as follows:

a) regression models (presented in Chapter 2)
b) econometric models — a system of regression equations estimated from past
time- series data and used to show the effect of various independent
variables on various dependent variables.
c) leading indicators — refers to time series that anticipate business cycle turns.

3. Monitoring methods — are those that provide early warning signals of significant
changes in established patterns and relationships so that the engineer manager can
assess the likely impact and plan responses if required.

Recruitment
When the different positions have been identified to be necessary and the decision to fill
them up has been made, the next logical step is recruitment.
Recruitment refers to attracting qualified persons to apply for vacant positions in the
company so that those who are best suited to serve the company may be selected.

Source of Applicants

When management wants to fill up certain vacancies, the following sources may be
tapped:
 1. The organization's current employees. Some of the organization's current employees
may be qualified to occupy positions higher than the ones they are occupying. They
should be considered.
2. Newspaper advertising. There are at least three major daily newspapers distributed
throughout the Philippines Readership is higher during Sundays.
3. Schools. These are good sources of applicants. Representatives of companies may
interview applicants inside campuses.
4. 4, Referrals from employees. Current employees sometimes recommend relatives and
friends who may be qualified.
5. Recruitment firms. Some companies are specifically formed to assist client firms in
recruiting qualified persons. Examples of these companies are the SGV Consulting and
John Clements Consultants, Inc, (See Figure 5.1).
6. Competitors. These are useful sources of qualified but underutilized personnel.

For entry-level personnel, the engineer manager will likely rely on newspaper advertising,
schools} and referrals. When recruiting managers, the reliable sources are current employees,
recruitment firms, and competitors.

Selection

Selection refers to the act of choosing from those that are available the individuals most
likely to succeed on the job. A requisite for effective selection is the preparation of a list
indicating that an adequate pool of candidates is available.
The purpose of selection is to evaluate each candidate rind to pick the most suited for
the position available,
Selection procedures may be simple or complex depending on the costs of a wrong
decision. If the management picks the wrong person and the subsequent effect to the
organization is negligible, then the selection process is made simple. This is true in the case of
construction laborers where a review of their applications is done. Within a few days or even a
few hours, the applicants are informed of the decision.

Figure 5.1 An Example of the Services Provided by a Professional Recruitment Firm

PROFESSIONAL STAFFERS

A Division of John Clements Consultants, Inc.

A multinational firm which poised to revolutionized the building materials industry

locally and internationally, our client is offering rewarding career opportunities to highly driven
professionals who can assume the post of:
 SALES ENGINEERS
SALES ENGINEERS

SALES REPRESENTATIVE

in maintaining and developing dealer accounts, the appointees will be expected to provide pre-
sales and post-sales support to dealers and implement marketing activities. The background we
seek consists of:
 2-3 years of experience in selling construction/building materials gained from a
manufacturing or marketing firm;

 Exposure in wood business will be an advantages;

 Aggressiveness and good command of the English language;

 Computer literacy and driving skills;

 Knowledge of Chinese dialect is a plus factor but not a requirement;

 Degrees in Engineering or Architecture is preferred but post is open to any business

course;

 Male or female, 25 to 30 years old.

Attractive enumeration and benefit packages plus commissions will be offered to the successful
candidates.

Resumés coded Salesforce -96-243 should be forwarded not later than 15 November 1996 to
the address below.

PROFESSIONAL STAFFERS
4/F Golden Rock Building
168 Salcedo Legaspi Village, Makati City
Tel. nos. 812-59-94/813-43-85

*From an advertisement, Manila Bulletin., November 10, 1996, p. C-3.

When the position under consideration involved special skills, a more elaborate
selection process is undertaken.

Ways of Determining the Qualifications of a Job Candidate

 Companies use any or all of the following in determining the qualifications of a
candidate:

1.Application blanks. The application blank provides information about a person's

characteristics such as age, marital status, address, edu cational background,
experience, and special interests. After reading the application blank, the evaluator
will have some basis on whether or not to proceed further in evaluating the
applicant.
2.References. References are those written by previous employers, co-workers,
teachers, dub officers, etc. Their statements may provide some vital information on
the character of the applicant,
3.Interviews. Information may be gathered in an interview by asking a series of relevant
questions to the job candidate.
4. Testing, This involves an evaluation of the future behavior or performance of an
individual.

Types of Tests

Tests may be classified as follows:

1. Psychological tests — which is "an objective, standard measure of a sample behavior.”

It is classified into:

a) aptitude test — one used to measure a pers onal capacity or potential

ability to learn.
b) performance test — one used to measure a person's current knowledge of a
subject.
c) personality test — one used to measure personality traits as dominance,
sociability, and conformity.
d) interest test — one used to measure a person's interest in various fields of work.

2. Physical examination — a type of test given to assess the physical health of an applicant.
It is given “to assure that the health of the applicant is adequate to meet the job
requirements.”

Induction and Orientation

After an applicant is finally selected from among the various ones and then subsequently
is hired, the next steps. undertaken are induction and orientation.
 In induction, the new employee is provided with the necessary information about the
company. His duties, responsibilities, and benefits are relayed to him. Personnel and health
forms are filled up, and passes are issued. The company history, its products and services, and
the organization structure are explained to the new employee.

In orientation, the new employee is introduced to the immediate working environment

and co-workers. The following are discussed: location, rules, equipment, procedures, and
training plans, Performance expectations are also discussed. The new employee also undergoes
the "socialization process” by pairing him with an experienced employee and having a one-on-
one discussion with the manager.

Training and Development

If the newly-hired (or newly-promoted) employee is assessed to be lacking the necessary

skills required by the job, training becomes a necessity.

Training refers to the "learning that is provided in order to improve performance on the
present job.'" Training programs consist of two general types, namely:

1. training programs for nonmanagers,

2. training and educational programs for executives.

Training Program for Nonmanagers

This type of training is directed to nonmanagers for specific increases in skill and
knowledge to perform a particular jolt. The four methods under thin type are:

1. On-the-job training — where the trainer is placed in an actual work situation under the
direction of his immediate supervisor, who acts as trainer. This situation motivates
strongly the trainee to learn.

2. Vestibule school — when the trainee is placed in a situation almost. exactly the
same as the workplace where machines, materials, and time constraints are
present. As the trainer works full time r. the trainee is assured of sufficient
attention from him.

3. Apprenticeship program — where a combina tion of on-the-job training and

experiences with classroom instruction in particular subjects are provided to
trainees.
 4. Special courses are those taken which provide more emphasis on education rather than
training, Examples are those which concern specific uses of computer like computer-
aided design and building procedures.

Training Programs for Managers

The training needs of managers may be classified into four areas: decision-making skills,
interpersonal skills, job knowledge, and organizational knowledge.
The decision-making skills of the manager may be enhanced through any of the following
methods of training:

1. In-basket — where the trainee is provided with a set of notes, messages, telephone calls,
letters, and reports, all pertaining to a certain company situation. He is expected to handle the
situation within a given period of 1 or 2 hours.
2, Management games — is a training method where 'trainees are faced with a simulated
situation and are required to make an ongoing series of decisions about that situation.'''
3. Case studies — this method presents actual situations in organizations and enable one to
examine successful and unsuccessful operations. It emphasizes the manager's world, improves
communication skills, offers rewards of solving a mystery, possesses the quality of illustration,
and establishes concrete reference points for connecting theory with practice."

Figure 5.2 An Example of an Invitation for Enrollment In Specialized Courses

CIM TECHNOLOGIES,

offers you the most comprehensive

Auto CAD

— TRAINING COURSES
 Basic AutoCAD Release 13
 AutoCAD R13 Update Training
 Advanced AutoCAD
 Customizing AutoCAD
 AutoLISP Programming

— SPECIALIZED COURSES
(For Mechanical/Manufacturing)

Mechanical Desktop • AutoCAD DESIGNER • AutoSURF

(For Animation/Rendering)
 AutoVISION • 3D Studio Release 4 • 3D Studio Max

(For Civil Engineering)

AutoCIVIL (Land Module/Water Module)

(For Structural Engineering)

STAAD III

(For Plant/Piping Design)

AutoPIPE • AutoPLANT (Designer/lsometrics/P & ID)

For more information, please call or visit us:

CIM TECHNOLOGIES, INC.

The Leader in CAD Technology
LO 103 Peninsula Court, 8735 Paseo de Micas corner
Makati Avenue, Makati City, Metro Manila 1226
Tel. 752-24-68 • Fax: 752-24-70

*From an advertisement, Manila Bulletin, November 10, 1996, p. 18.

1. Role-playing — is a method by which the trainees are assigned roles to play in a given
case incident. They are provided with a script or a description of a given problem and of
the key persons they are to play. The purpose of this method is to improve the skill of
the trainees in human relations, supervision, and leadership.

2. Behavior modeling — this method attempts to influence the trainee by "showing model
persons behaving effectively in a problem situation." The trainee is expected to adapt
the behavior of the model and use it effectively in some instances later on,

3. Sensitivity training— under this method, awareness and sensitivity to behavioral

patterns of oneself and others are developed.

4. Transaction-al analysis — is a training method intended to help individuals not only

understand themselves and others but also improve their interpersonal communication
skills.”

In acquiring knowledge about the actual job the manager is currently holding, the following
methods are useful:
 1. On-the-job experience — this method provides valuable opportunities for the
trainee to learn various skills while actually engaged in the performance of a job.
2. Coaching — this method requires a senior manager to assist a lower-level manager
by teaching him the needed skills and generally providing directions, advice, and
helpful criticism. The senior manager must be skilled himself and have the ability to
educate, otherwise the method will be ineffective.

3. Understudy — under this method, a manager works as assistant to a higher-level

manager and participates in planning and other managerial functions until he is
ready to assume such position himself. Once in a while, the assistant is allowed to
take over.
•

In the attempt to increase the trainee's knowledge of the total organization, exposure to
information and events outside of his immediate job is made. In this regard, the following
methods are useful:

1. Position rotation — under this method, the manager is given assignments in a variety of
departments. The purpose is to expose him to different functions of the organization.

2. Multiple management — this method is premised on the idea that junior executives
must be provided with means to prepare them for higher management positions. To
achieve this, a junior board of directors is created consisting of junior executives as
members. The board is given the authority to discuss problems that the senior board
could discuss. The members are encouraged to take a broad business outlook rather
than concentrating on their specialized lines of work.
Performance Appraisal

Performance appraisal is the measurement of employee performance. The purposes for

which performance appraisal is made are as follows:

1. To influence, in a positive manner, employee performance and development;

2. To determine merit pay increases:

3. To plan for future performance goals;

4. To determine training and development:

5. To assess the promotional potential of employees.

Ways of Appraising Performance

 An employee's performance may he measured using any of the following methods:

1. Rating scale method — where each trait or characteristic to be rated is represented by a

line or scale on which the rater indicates the degree to which the individual possesses
the trait or characteristic.
2. Essay method — where the evaluator composes statements that best describe the
person evaluated.
3. Management by objectives method — where specific goals are set collaboratively for the
organization as a whole, for various subunits, and for each individual member.
Individuals are, then, evaluated on the basis of how well they have achieved the results
specified by the goals.
4. Assessment center method — where one is evaluated by persons other than the
immediate superior. This method is used for evaluating managers.

5. Checklist method — where the evaluator checks statements on a list that are deemed to
characterize an employee's behavior or performance.
6. Work standards method — where standards are set for the realistic worker output and
later on used in evaluating the performance of non-managerial employees.

7. Ranking method — where each evaluator arranges employees in rank order from the
best to the poorest.

8. Critical-incident method — where the evaluator recalls and writes down specific (but
critical) incidents that indicate the employee's performance. A critical incident occurs
when employee's behavior results in an unusual success or failure on parts of the job.

Employment Decisions

After evaluating the performance of employees (managerial or otherwise), the

management will now be ready to make employment decisions. These may consist of the
following:

1. Monetary rewards — these are given to employees whose performance is at par or

above standard requirements,
2. Promotion — this refers to a movement by a person into a position of higher pay and
greater responsibilities and which is given as a reward for competence and ambition.

3. Transfer — this is the movement of a person to a different job at the same or similar
level of responsibility in the organization. Transfers are made to provide growth
opportunities for the persons involved or to get rid of a poor performing employee.
 4. Demotion — this is a movement from one position to another which has less pay or
responsibility attached to it. Demotion is used as a form of punishment or as a
temporary measure to keep an employee until he is offered a higher position.
Separation

Separation is either a voluntary or involuntary termination of an employee. When made

voluntarily, the organization's management must find out the real reason. If the presence of a
defect in the organization is determined, corrective action is necessary.

Involuntary separation (or termination) is the last option that the management exercises
when an employee's performance is poor or when he/she committed an act violating the
company rules and regulations. This is usually made after training efforts fail to produce positive
results.

QUESTIONS FOR REVIEW AND DISCUSSION

1. Why is staffing an important activity?

2. What activities are undertaken in staffing?
3. What is the purpose of human resource planning?
4. How may human resource needs be determined?
5. What are the possible sources of applicants for vacant positions in the firm?
6. What is the implication of the cost of the “wrong decision" in the selection process?
7. How may one determine the qualifications of a job candidate?
8. How may the types of tests be described?
9. In induction, what activities are undertaken?
10. How may the two general types of training be described?

SUGGESTED ITEM FOR RESEARCH

1. Prepare a forecast of the human resource needs of an engineering firm.

Case5. KUNDIMAN COMMUNICATIONS CORPORATION: Mr. Lonely

The Kundiman Communications Corportion (KCC) is a local company with more than
2,000 persons in its payroll. The company's top management is composed of the President, the
Vice President for Marketing, the Vice President for Operations, and the Vice President for
Administration.

A member of the staff, Engineer Lorenzo de Guzman, an electronics engineering

graduate, has just received an order from his immediate superior, the VP for Operations, to
head the newly built telecommunication facility in Antipolo, Rizal. So far, he is the only company
personnel identified with the new facility. He was given three months to make the facility
operational.

Engineer de Guzman appraised that for the Antipolo unit to operate, it will require the
services of a number of persons skilled in the various activities that will be undertaken.
As he has been working with KCC for ten years (five years in the field and five years in the head
office), Engineer de Guzman is familiar with many aspects of the firm's operation. Some of the
supervisors and three of the key officers are his friends.
Engineer de Guzman felt that the various trainings KCC provided hiin had really prepared
him well for the technical aspects of his new job. His exposure to the different units at the head
office will also be useful in some ways to the administrative aspects of his position, However, his
trainings and experiences have not provided him with the expertise to recruit qualified persons
to occupy the various positions that will be created. To begin with, he does not even have
information on the number and nature of the positions to be created.
As he was inspecting the building in Antipolo where he will hold office, Engineer de Guzman
wondered if he could convince top management to transfer some of his acquaintances in the
head office to his new assignment.

Engineer de Guzman knows that his next promotion will depend much in the success of
the new facility under his direction. He thought that if he could only get the right persons, his
job would noy be too difficult. With this in mind, he pondered on what his first move must be.
CHAPTER 6

COMMUNICATING

The achievement of the objectives of the engineering organization will depend on the
performance of the human and non-human elements attached to it. The task of management is
to “program" these elements correctly so that each will respond accordingly to their assigned
tasks. Standard programming methods have already be-en adapted by technologists for most
machines and equipment.

The programming approach to the human element is different must be dealt with using
methods espoused by behavioral scientists. Employees will perform according to the dictates of
their minds. If this is really so, then management must reach them through powerful means of
persuasion under an atmosphere conducive to effective communication.
The issue now will be Is management using the communication option effectively? The
answer must be "yes", for if not, trouble may be forthcoming, if it has not yet arrived.

WHAT COMMUNICATION IS
WHAT COMMUNICATION IS
Morris Philip Wolf and Shirley Kuiper define communication as "a process of sharing
information through symbols, including words and message.”

Communication may happen between superior and subordinate, between peers,

between a manager and a client or customer, between an employee and a government
representative, etc. It may be done face-to-face, or through printed materials, or through an
electronics device like the telephone, etc.

In management, communication must be made for a purpose and because it has a cost
attached to it, it must be used effectively.

FUNCTIONS OF COMMUNICATION
Communication may be used to serve any of the following functions:

1. Information function — Information provided through communication may be used for

decision-making at various work levels in the organization. A construction worker, for
instance, may be given instructions on the proper use of certain equipment. This will
later provide him with a guide in deciding which equipment to use in particular
circumstances.

Another concern is the manager who wants to make sure that his decision in
promoting an employee to a higher position is correct. Through communication, the
information provided will minimize if not eliminate the risk.

2. Motivation function — Communication is also oftentimes used as a means to motivate

employees to commit themselves to the organization's objectives.

3. Control function — When properly communicated, reports, policies, and plans define
roles, clarify duties, authorities and responsibilities. Effective control is then, facilitated.

4. Emotive function — When feelings are repressed in the organization, employees

are affected by anxiety, which, in turn, affects performance. Whatever types of
emotions are involved, whether satisfaction, dissatisfaction, happiness, or
bitterness, communication provides a means to decrease the internal pressure
affecting the individual.

THE COMMUNICATION PROCESS

 The communication process consists of eight steps which are as follows: develop an
idea, encode, transmit, receive, decode, accept, use, and provide feedback.

Figureencodes
6.1 The Communication Process
then
transmits
messages to
RECEIVER

who
receives
message

decodes

accepts
or
rejects then
provides
feedback
to
1

Develop an Idea
The most important step in effective communication is developing an idea. It is
important that the idea to be conveyed must be useful or of some value. An example of a useful
idea is how to prevent accidents in workplaces,

Encode
The next step is to encode the idea into words, illustrations ; figures, or other symbols
suitable for transmission. The method of transmission should be determined in advance so that
the idea may be encoded to conform with the specific requirements of the identified method.
An example of an encoded message using telefax as a means of transmission is shown in Figure
6.2.

Transmit
After encoding, the message is now ready for transmission through the use of an
appropriate communication channel. Among the various channels used include the spoken
word, body movements, the written word, television, telephone, radio, an artist's paint,
electronic mail, etc.
 Proper transmission is very important so the message sent will reach and hold the
attention of the receiver. To achieve this, the communication channel must be free of barriers,
or interference (sometimes referred to as noise).

Receive
The next step is the communication process is the actual receiving of the message by the
intended receiver.

The requirement is for the receiver to be ready to receive at the precise moment the
message relayed by the sender.

Figure 6.2 In Example of an Encoded Message for Telefax Transmission

Calao West Chemicals Corporation

Santiago City Branch
Sales Report for January 1997
Area Volume Amount

(in drums)
I 1,000 P1,00.0,000
II 1,342 1,342,000
III 2,045 2,045,000
Iv 1,089 1,089,000
V 2,686 2,686,000
Vl 3,450 3,450,000
Total 11,612 11,612,000
Prepared by:
Josefina Data
Branch Manager

The message may be initially received by a machine or by a person, In any case,

communication stops when the machine is not turned or tuned on to receive the message, or
the person assigned to receive the message does not listen or pay attention properly.

Decode
The next step, decoding, means translating the message from the sender into a form
that will have meaning to the recipient. If the receiver knows the language and terminology
used in the message, successful decoding may be achieved. Examples of various terms
encoded and decoded are shown in Figure 6.3.
 If the receiver understands the purpose and the background situation of the sender,
decoding will be greatly improved. In legal practice, for instance, the declarations of a dying
person have more weight.

Accept

The next step is for the receiver to accept or reject the message.
Sometimes, acceptance (or rejection) is partial. An example is provided as follows:

A newly-hired employee was sent to a supervisor with ki note from his superior
directing the supervisor to accept the employee into his unit and to provide the
necessary training and guidance.

Figure 6.3 Examples of Encoded and Decoded Information

Where Used Encoded Decoded

Setting 5/10; n/30 Sales on account is allowed

A five percent discount is

deducted from total price if
settled within ten days.
Account must be settled
within 30 days.

Flowcharting start
Indicates beginning of a
flowcharting activity.

Production A basic queuing system

configuration indicating a
single-channel, single-phase
system.

As the supervisor feels that he was not consulted in the hiring process, he thinks that his
only obligation is to accept the employee in his unit and nothing more.

The factors that will affect the acceptance or rejection of a message are as follows:
 1. the accuracy of the message;
2. whether or not the sender has the authority to send the message and/or require action;
and
3. the behavioral implications for the receiver.

Use

The next step is for the receiver to use the information. If the message provides information of
importance to a relevant activity, then the receiver could store it and retrieve it when required. If the
message requires a certain action to be made, then he may do so, otherwise, he discards it as soon as it
is received. All of the above-mentioned options will depend on his perception of the message.

Provide Feedback
The last step in the communication process is for the receiver to provide feedback to the sender.
Depending on the perception of the receiver, however, this important step may not be made.

Even if feedback is relayed, it may not reach the original sender of the message. This may be
attributed to the effects of any of the communication barriers.

FORMS OF COMMUNICATION
Communication consists of two major forms:

1. verbal and
2. nonverbal.

Verbal Communication

Verbal communications are those transmitted through hearing or sight. These modes of
transmission categorizes verbal communication into two classes: oral and written.

Oral communication mostly involves hearing the words of the sender, although
sometimes, opportunities are provided for seeing the sender's body movements, facial
expression, gestures, and eye contact. Sometimes, feeling, smelling, tasting, and touching are
involved.

An alternative to oral communication is the written communication where the sender

seeks to communicate through the written word. The written communication is, sometimes,
preferred over the oral communication because of time and cost constraints. When a sender, for
instance, cannot meet personally the receiver due to some reason, a written letter or memo is
prepared and sent to the receiver.
 The written communication, however, has limitations and to remedy these, some means
are devised. Perfume advertisers, for instance, lace their written message with the smell of their
products. In the same light, the now popular musical Christmas card is an attempt to enhance
the effects of the written note.
Nonverbal Communication

Nonverbal communication is a means of conveying message through body language, as

well as the use of time, space, touch, clothing, appearance, and aesthetic elements. Body
language consists of gestures, bodily movement, posture, facial expression, and mannerisms of
all kinds.

Nonverbal expressions convey many shades of meaning and it is to the advantage

of the communicator to understand what messages are relayed.

THE BARRIERS TO COMMUNICATION

Various factors may impede the efficient of flow of communication. Any or all, of these
factors may, at any point, derail the process. Even if the message is transmitted by the channel,
the timing and the meaning of the message may be affected by the factors.’

The barriers to communication may be classified generally as:

1. personal barriers

2. physical barriers

3. semantic barriers
Personal Barriers

Personal barriers are hindrances to effective communication arising from a

communicator's characteristics as a person, such as emotions, vales, poor listening habits, sex,
age, race, socioeconomic status, religion, education, etc.

Emotions cloud the communicator's ability to judge correctly the real meaning of
messages received. People with different values find it hard to communicate with each other.
Poor listening habits of a receiver frustrate the communication efforts of a sender.

Physical Barriers
Physical barriers refer to interferences to effective communication occurring in the
environment where the communication is undertaken. The very loud sound produced by a
passing jet temporarily drowns out the voice of a guest delivering a speech. Such distraction
does not allow fun understanding of the meaning - of the entire message and is an example of a
physical barrier.

Physical barriers include distances between people, walls, a noisy jukebox near a
telephone, etc. An office that is too tidy may sometimes inhibit a person from meeting the
occupant of the office face-to-face. A menacing pet dog (or secretary) posted near the door may
also prevent a person from directly communicating with the object person behind the door.
A communication channel that is overloaded may also prevent important information to
reach the intended user. Another physical barrier to communication is wrong timing. For
instance, how may one expect a person who has just lost a loved one to act on an inquiry from a
fellow employee?

Semantic Barriers

Semantics is the study of meaning as expressed in symbols. Words, pictures, or actions

are symbols that suggest certain meanings. When the wrong meaning has been chosen by the
receiver, misunderstanding occurs. Such error constitutes a barrier to communication.

A semantic barrier may be defined as an “interference with the reception of a message

that occurs when the message is misunderstood even though it is received exactly as
transmitted.''
For example, the words “wise” and "salvage" will have different meanings to an English
speaking foreigner than to an ordinary Filipino.

OVERCOMING BARRIERS TO COMMUNICATION

When communication barriers threaten effective performance, certain measures

must be it to eliminate them. To eliminate problems due to noise, selective perception,
and distraction, the following are recommended:

1. Use feedback to facilitate understanding and increase the potential for appropriate
action.
2. Repeat messages in order to provide assurance that they are properly received.
3. Use multiple channels so that the accuracy of the information may be enhanced.
4. Use simplified language that is easily understandable and which eliminates the
possibility of people getting mixed-up with meanings.

TECHNIQUES FOR COMMUNICATING IN ORGANIZATIONS

 Communication may be classified as to the types of flow of tire message which are as
follows: downward, upward, or horizontal. Each of the types of message flow has its own
purposes and techniques.

Downward Communication

Downward communication refers to message flows from higher levels of authority to

lower levels. Among the purposes of downward communication are:

1. to give instructions
2. to provide information about policies and procedures
3. to give feedback about performance
4. to indoctrinate or motivate

Among the techniques used in downward communication are as follows: letters, meetings,
telephones, manuals, handbooks, and newsletters.

Letters are appropriate when directives are complex and precise actions are required. When
orders are simple the result depends largely on employee morale, techniques that provide
personal interchange like meetings and the telephone, are appropriate. Modern technology has
made it possible for people to hold meetings even if they are thousands of kilometers apart
from each other.

Manuals are useful sources of information regarding company policy, procedures, and
organization. Unlike using persons as sources of information, manuals are available whenever it
is needed.

Handbooks provide more specific information about be duties and privileges of the
individual worker. It has also the advantage of being available whenever needed.
Figure 6.4 Message Flow and Areas of Concern

Newsletters provide a mixture of personal, social, and work-related information. Articles

about new hirings, promotions, birthdays of employees, questions and answers about work
related issues are presented.

Upward Communication

There is a need for management to provide employees with all the necessary material
and non-material support it can give. The first requirement, however, is for management to
know the specific needs of the employees. This is the primary reason for upward com-
munication.

Upward communication refers to messages from persons in lower-level positions to

persons in higher positions, The messages sent usually provide information on, work progress,
problems encountered., suggestions for improving output, and personal feelings about work
and non-work activities.

Among the techniques used in upward communication are: formal grievance

procedures, employee attitude and opinion surveys, suggestion systems, open-door policy,
informal gripe sessions, task forces, and exit interviews.
 Formed Grievance Procedures. Grievances are part of a normally operating organization.
To effectively deal with them, organizations provide a system for employees to air their
grievances.

Holley and Jennings define grievance as “any employee's concern over a perceived
violation of the labor agreement that is submitted to the grievance procedure for eventual
resolution. Grievances represent an open, upward communication channel whereby employees
can offer suggestions to management.
Depending on the size and nature of the company, the grievance procedure may consist
of a single step or a number of steps. Companies with a collective bargaining agreement with its
union must refer to the grievance procedure spelled out in the law on labor relations.
Employee Attitude and Opinion Surveys. Finding out what the employees think about the
company is very important. The exercise, however, requires expertise and the company may not
be prepared to do it. If the organization's operation is large enough to justify such activity, then
it must be done. If the assistance of an outside research firm is considered, a benefit-mot
analysis must be used as a deciding factor.

Suggestion Systems. Suggestions from employees are important sources of cost-saving

and production enhancing ideas. Even if majority of the suggestions are not feasible, a simple
means of acknowledging them contributes to employee morale.
Open-Door Policy. An open-door policy, even on a limited basis, provides the
management with an opportunity to act on difficulties before they become full-blown
problems.
Informal Gripe Session. Informal gripe sessions can be used positively if management
knows how to handle them. When employees feel free to talk and they are assured of not being
penalized for doing so, then management will be spared with lots of efforts determining the real
causes of problems in the company.

Task Forces. When a specific problem or issue arises, task force maybe created and
assigned to deal with the problem or issue. Since membership of task forces consists of
management and nonmanagement personnel, integration and teamwork are fostered,
creativity is enhanced, and interpersonal skills are developed.

Exit Interviews. When employees leave an organization for any reason, it is to the
advantage of management to know the real reason. If there are negative developments in the
organization that management is not aware of, exit interviews may provide some of the answer.

Horizontal Communication

Horizontal communication refers to messages sent to individuals or groups from another

of the same organizational level or position.
 The purposes of horizontal communication are:

1. to coordinate activities between departments

2. to persuade others at the same level of organization
3. to pass on information about activities or feelings

Among the techniques appropriate for horizontal communication are: memos, meetings,
telephones, picnics, dinners, and other social affairs.

MANAGEMENT INFORMATION SYSTEM

It was mentioned at the beginning of this chapter that communication may be used to
serve the information function. This means that a way must be devised to allow the
organization to absorb information necessary for effective decision-making, In this regard,
companies of various sizes have organized systems to gather information that will be useful to
management.

Management Information System (MIS) is defined by Boone and Kurtz as “an organized
method of providing past, present, and projected information on internal operations and
external intelligence for use in decision making.”

The MIS currently used by corporate firms consists of "written and electronically based
systems for sending reports, memos, bulletins, and the like." The system allows managers of the
different departments within the firm to communicate with each other.

Figure 6.5 the MIS and Its Relation with the Different Departments of the Organization

Manufacturing Marketing

MANAGEMENT
INFORMATION
Finance SYSTEM Personnel

Research and
Manufacturing Development

The Purposes of MIS

 The MIS is established for various reasons, Wheelon and Hunger enumerate them
as follows:

1. To provide a basis for the analysis of early war ning signals that can originate both
externally and internally.
2. To automate routine clerical operations like payroll and inventory reports.
3. To assist managers in making routine decisions like scheduling orders, assigning orders to
machines, and reordering supplies.

4. To provide the information necessary for management to make strategic or

nonprogrammed decisions.

QUESTIONS FOR REVIEW AND DISCUSSION

1. How important is communicating as a function of engineering management?
2. What is communication? How may it be done?
3. For what purposes may communication be used in the organization?
4. What are the steps in the communication process?
5. What is a communication channel? How may each of the channel types be described?
6. What is meant by "noise"?
7. What is "decoding"? How may it be successfully achieved?
8. What are the forms of communication? How is one different from the other?
9. How may barriers to communication be classified? What is the possible effect of
emotion in communication?
10. How may communication barriers be overcome?
11. What techniques may be used in communication?
12. What is a management information system? What are its purposes?

SUGGESTED ITEM FOR RESEARCH

1. Scrutinize an existing engineering organization by classifying techniques used in
communication.

Case 6. NORTHERN CONTAINER CORPORATION: Time to Cry

Engineer Godofredo Monsod, Jr., general manager of Northern Container Corporation
(NCC), was taken aback by a letter-reply from a prospective new customer (see Exhibit 1 His
company has been operating for only five years and is in need of new customers with potentials
of doing business with them in a long-term basis.
 NCC is engaged in the manufacture of general and sanitary tin cans, cooking oil filling
facilities, and moulds and dies fabrication. Its factory and administrative office is located at
Valenzuela, Metro Manila.

Since its first year of operation, Engineer Monsod worked hard to make NCC's operation
at full capacity. The company’s various departments are manned by a personnel complement of
323, growing by 5 percent annually.

The increasing number of employees is a result of the growing patronage of the

company's products by customers. Engineer Monsod felt, however, that the company needs one
more good customer and their operations will be at full capacity. It. was in October 1996 that
Engineer Monsod came in contact with the general manager of a newly established company,
Mr. Godofredo Tapiador. Engineer Monsod was able to convince Mr. Tapiador to order his tin
can requirements from NCC.
In January 10, 1997, NCC's production manager informed Engineer Monsod that unless
new production orders are received by his department, he will be forced to recommend the lay-
off of 12 workers in the factory. Five days later, 12 workers were indeed laid off.

It was in January25 that Engineer Monsod thought of making a follow-up of the

agreement between him and Tapiador. A letter was sent to Mr. Tapiador on the same day. On
January 28, Engineer Monad read the reply of Mr. Tapiador.

After a white, Engineer Monsod composed himself and prepared to think hard about
what happened and what possible remedies could be worked of

Exhibit 1
RED RIBBON MANUFACTURING CORPORATION
1201 Puting Bato
Taytay, Rizal
27 January 1997

THE GENERAL MANAGER

Northern Container Corporation
1526 Amihan St.
Raked Pare, Valenzuela
Metro Manila

Dear Sir:
This is in reply to your letter elated January 25, 1891 inquiring about whether we Oil consider
ordering tin cans from your company.
Please be informed that since we have placed our order while your marketing department as
early as December 1, 1996 and no reply was sent to us, we deemed it wise to deal with another
company an late as January 15, 1997,
Thank you for your intere51 and we hope to do business with you under other circumstances.

Yours truly,

GODOFREDO TAPIADOR
General Manager

CHAPTER 7

MOTIVATION
Productivity has always been a serious concern of management of firms. If it improves, it
means greater chances for the company to grow and be more stable. One reason why the
Philippine economy cannot move steadily forward is our record of low productivity for so many
years.

Higher productivity, however, is not a result of chance. It happens because of harder,

more efficient, and more intelligent work made by the employees. To be willing partners,
however, the requirement is for them to be properly motivated. An example is the management
of construction firm wanting its employees to finish projects on time, with the quality required
at the least cost. To achieve this, various methods of motivation may be applied.

When the cost of the other factors of production is seriously affecting the viability of the
firm, the remaining factor (i.e. labor) may save the company from financial difficulties. However,
this will depend on whether or not labor will be motivated to perform their assigned task.

WHAT IS MOTIVATION?
Motivating refers to the act of "giving employees reasons or incentives… to work to
achieve organizational objectives.” Motivation, on the other hand, refers to the "process of
activating behavior, sustaining it and directing it toward a particular goal.” This definition is use-
ful because it specifies three stages: activating, sustaining, and directing actions towards the
achievement of objectives.

FACTORS CONTRIBUTING TO MOTIVATION

 There are certain factors influencing a person's desire to do his job well. They are the
following:

1. Willingness to do a job. People who like what they are doing are highly motivated to
produce the expected output.
2. Self-confidence in carrying out a task. When employees feel that they have the required
skill and training to perform a task, the more motivated they become.
3. Needs satisfaction. People will do their jobs well if they feel that by doing so, their needs
will be satisfied.

THEORIES OF MOTIVATION

There are various theories of motivation, but only the four most influential ones will be
discussed. They consist of the following:

1. Maslow's needs hierarchy theory

2. Herzberg's two-factor theory
3. Expectancy theory
4. Goal setting theory

Maslow's Needs Hierarchy Theory

Abraham Maslow, a psychologist, theorized that human beings have five basic needs
which are as follows: physiological, security, social, esteem, and self-actualization. These needs
are hierarchical, which means one need will have to be satisfied first before the other need.

Physiological Needs. Those that are concerned with biological needs like food, drink,
rest, and sex fall under the category of physiological needs. These needs take priority over other
needs.

Security Needs. After satisfying the physiological needs, people will seek to satisfy their
safety needs. These needs include freedom from harm coming from the elements or from other
people, financial security which may be affected by loss of job or the breadwinner in the family,
etc.

plus
Figure 7.1 The Process of Motivation
NEEDS MOTIVATION

which leads to
readiness for leads to
the next need

NEED ACTION OR GOAL-

SATISFACTION DIRECTED BEHAVIOR
which
results to
Figure 7.2 Maslow's Hierarchy of Needs

Social Needs. After satisfying his physiological and security needs, the employee will now
strive to secure love, affection, and the need to be accepted by peers.

Esteem Needs. The fourth level of needs is called esteem needs and they refer to the
need for a positive self image and self-respect and the need to be respected by others.

Self-Actualization Needs. The fifth and the topmost level needs in the hierarchy are
called self-actualization needs and involve realizing our full potential as human beings and
becoming all that we are able to be.

The Relevance of Maslow’s Theory to Engineering Management. Even if Maslow's theory

has been largely questioned, one basic premise cannot be discarded: a fulfilled need no longer
motivates an individual. If this is the situation the subordinate is in, the engineer manager must
identify an unfulfilled need and work out a scheme so that the subordinate will be motivated to
work in order to satisfy the unfulfilled need.

Herzberg’s Two-Factor Theory

The two-factor theory is one developed by Frederick Herzberg indicating that a satisfied
employee is motive-hid from within to work harder and that a dissatisfied employee is not self-
motivated.

Herzberg identified two classes of factors associated with employee satisfaction and
dissatisfaction. In his research, Herzberg found out that satisfied employees mentioned the
following factors (called satisfiers or motivation factors) responsible for job satisfaction:
achievement, recognition, work itself, responsibility, advancement, and growth. Dissatisfied
employees mentioned the following factors (called dissatisfiers or hygiene factors) as
responsible for job dissatisfaction: company policy and administration, supervision, relationship
with supervisor, work conditions, salary, relationship with peers, personal life, relationship with
subordinates, status, and security.

If Herzberg's theory will be considered by the engineering manager in motivating

employees, he must do something to eliminate the dissatisfiers and install satisfiers. As shown
in Figure 7.3, even if the dissatisfiers are eliminated (at point zero), the employee is still not
motivated to work hard.

Figure 7.3 Herzberg's Two-Factor Theory

10
9
LEVEL OF
8
SATISFACTION 7
6
5
4
3
2 level of no satisfaction and
1 no dissatisfaction
0 (no reason not to work but
1 no motivation to work
LEVEL OF 2 hard)
DISSATISFACTION 3
4
5
6
7
8
9
10
Expectancy Theory

Expectancy theory is a motivation model based on the assumption that an individual will
work depending on his perception of the probability of his expectations to happen.

The theory poses the idea that motivation is determined by expectancies and valences.
An expectancy is a belief about the likelihood or probability that a particular behavioral act (like
attending training sessions) will lead to a particular outcome (like a promotion). Valence is the
value an individual places on the expected outcomes or rewards.

Expectancy theory is based on the following assumptions:

1. A combination of forces within the individual and in the environment determines

behavior..

2. People make decisions about their own behavior and that of organizations

3. People have different types of needs,

EXPECTANCY goals, and desires.
EXPECTANCY

perceivedbased
4. People make choices among alternative behaviors probability
on the extent to which they
think a certain behavior will lead to a desired outcome.
of receiving outcome,
perceived given performance
Valence +
Shown in Figure 7.4 is a model of the expectancy theory.
probability of
Valence + Second-level
successful
Figure 7.4 An Expectancy Model Outcome (ability
performance, First-level
given effort Outcome to purchase
(compensation) house & lot)
Valence -
EFFORT PERFORMANCE Second-level
Valence + Outcome (ability
to be with
First-level
family)
Outcome
(recognition) Valence +
Second-level
Outcome (self-
esteem)
Valence +
Second-level
Outcome
(esteem of
others)
Goal Setting Theory

Goal setting refers to the process of “improving performance with objectives, deadlines
or quality standard:" When individuals or groups are assigned specific goals, a clear direction is
provided and which later motivates them to achieve these goals.

The goal setting model drawn by Edwin A. Locke and his associates consists of the following
components:
1. goal content

2. goal commitment

3. work behavior

4. feedback aspects

Goal Content. To be sufficient in content, goals must be challenging, attainable, specific

and measurable, timer limited, and relevant.

When goals are challenging, higher performance may be expected. The sales quotas
imposed by companies to individual members of their sales force indicate reliance of these
companies to the use of challenging goals.
 Goals must be attainable if they are to be set. If they are not, then workers will only be
discouraged to perform, if at all.
Goals must be stated in quantitative terms whenever possible. When exact figures to be
met are set, understanding is facilitated and workers are motivated to perform.
There must be a time-limit set for goals to be accomplished.

The more relevant the goals are to the company's mission, the more support it can
generate from various levels of employment in the organization.

Goal Commitment. When individuals or groups are committed to the goals they are
supposed to achieve, there is a chance that they will be able to achieve them.
Work Behavior. Goals influence behavior in terms of direction, effort, persistence, and
planning. When an individual is provided with direction, performance is facilitated. In trying to
attain goals that are already indicated, the individual is provided with a direction to exert more
effort. The identification of goals provide a reason for an individual to persist in his efforts until
the goal is attained.

Once goals are set, the first important input to planning is already in place.
GOAL CONTENT
Feedback Aspects. Feedback provide the individuals with a way of knowing how far they
have gone in achieving objectives. Feedback also facilitate the introduction of corrective
which is
measures whenever they are found to be necessary
challenging
Figure 7.5 How Goals Motivate and Facilitate Performance
attainable

specific and
measurable

time limited

relevant

WORK
BEHAVIOR

with

direction

effort

persistence

planning Situational
Constraints:

tools

materials
TECHNIQUES OF MOTIVATION
Individual or groups of individuals may be motivated to perform through the use of
various techniques. These techniques may be classified as follows
1. motivation through job design
2. motivation through rewards
3. motivation through employee participation
4. other motivation techniques for the diverse work force

Motivation Through Job Design

A person will be highly motivated to perform if he is assigned a job he likes. The first
requisite, however, is to design jobs that will meet the requirements of the organization and the
persons who will occupy them. Job design may be defined as "specifying the tasks that
constitute a job for an individual or a group."
In motivating through the use of job design, two approaches may be used: fitting people
to jobs or fitting jobs to people.

Fitting People to Job s. Routine and repetitive tasks make workers suffer from chronic
dissatisfaction. To avoid this, the following remedies may be adapted:
1. Realistic job previews — where management provides honest explanations of what a job
actually entails.
2. Job rotation — where people are moved periodically from one specialized job to
another.
3. Limited exposure — where a worker's exposure to a highly fragmented and tedious job
is limited.
Figure 7.6 Techniques of Motivation

TECHNIQUES
OF
MOTIVATION

extrinsic quality
rewards control
circles

with
realistic job self-
intrinsic managed
previews
job rotation rewards teams
limited
exposure

Flexible Family
Fitting sabbaticals
work Support
jobs to
schedules services
people

with
job enlargement
job enrichment
 Fitting Jobs to People. Instead of changing the person, management may consider
changing the job. This may be achieved with the use of the following:

1. Job enlargement where two or more specialized tasks in a work flow sequence is
combined into a single job.
2. Job enrichment — where efforts are made to make jobs more interesting, challenging,
and rewarding.

Motivating Through Rewards

Rewards consist of material and psychological benefits to employees for performing
tasks in the workplace. Properly administered reward systems can improve job performance
and satisfaction.

Rewards may be classified into two categories:

1. Extrinsic — those which refer to payoffs granted to the individual by another party.
Examples are money, employee benefits, promotions, recognition, status symbols,
praise, etc.
2. Intrinsic rewards — those which are internally experienced payoffs which are self-
granted. Examples are a sense of accomplishment, self-esteem and self-actualization.

Extrinsic and intrinsic rewards coincide with needs spelled out at the beginning of the
chapter.

Management of Extrinsic Rewards. To motivate job performance effectively, extrinsic

rewards must be properly managed in line with the following:
1. it must satisfy individual needs;
2. the employees must believe effort will lead to reward;
3. rewards must be equitable;

4. rewards must be linked to performance.

Figure 7.7 An Array of Monetary and Other incentives for Employees

Type of Benefit Feature

1. Monthly pay depends on qualifications of employee
2. 13th month pay given at mid-year
3. 14th month pay given at yearend
4. Housing allowance given to permanent employees
5. Sick leave benefits 15 days a year with pay
6. Vacation leave benefits 15 days a year with pay
7. Pension plan given to permanent employees
8. Paid vacation trip given employees with outstanding
performance
9. Health insurance given to permanent employees
10. Accident insurance given to permanent employees

No single type of reward is generally applicable to all employees. This is so because

individual persons have needs different from other persons. As much as possible the particular
needs of an individual must be matched with the corresponding reward if motivation is the
objective. The administrative constraints inherent to such systems, however, will be a hindrance
to its adoption. Whenever feasible, however, it must be used.

Employees must believe that efforts will lead to reward. Otherwise, they will not strive
to turn in more effort in their particular job assignments.

Rewards that are not equitable will not produce the desired motivation.

When employees know that reward is tied up to individual performance, management

may expect extra effort from them. A negative example is the practice in some government
offices where every employee, regardless of performance, is given a productivity bonus. As a
result, the majority are not motivated to exert extra efforts.

Motivation through Employee Participation

When employees participate in deciding various aspects of their jobs, the personal
involvement, oftentimes, is carried up to the point where the task is completed,

The specific activities identified where employees may participate are as follows:

1. setting goals

2. making decisions

3. solving problems, and

4. designing and implementing organizational changes.

The more popular approaches to participation includes the following:

 1. quality control circles

2. self-managed teams

Quality Control Circles. A method of direct employee participation is the quality control
circle (QCC). The objective of the QCC is to increase productivity and quality of output.

The circle consists of “a group of three to ten employees usually doing related work, who
meet at regular intervals (once a week for an hour, for example) to identify problems and
discuss their solutions. The circle includes "a leader such as a foreman, but rely on democratic
processes.” The members are trained in various analysis techniques by a coordinator.

The circle forwards its recommendations to management, which in turn, makes decisions on
its adaption.

Self-managed Teams. When workers have reached a certain degree of discipline, they may
be ripe for forming self-managed teams. Also known as autonomous work groups or high
performance teams, self-managed teams “take on traditional managerial tasks as part of their
normal work routine.”
Figure 7.8 The Quality Control Circle Process

The self-managed teams work on their own, turning out a complete product or service
and receiving minimal supervision from managers who act more as facilitators than supervisors.
 When a product or service is produced by a group of professionals or specialists, they
might as well be formed as a self-managed team to save on supervisory costs.

Requisites to Successful Employee Participation Program

To succeed, an employee participation program will require the following:

1. a profit-sharing or gainsharing plan.

2. a long-term employment relationship with good job security.

3. a concerted effort to build and maintain group cohesiveness.

4. protection of the individual employee's rights.

Other Motivation Techniques

The advent of theories on individual differences and the biological clock of human
beings put pressure on the engineer manager to adapt other motivation techniques whenever
applicable. These refer to the following:

1. flexible work schedules

2. family support services
3. sabbaticals

Flexible Work Schedules. There is an arrangement, called flextime, which allows employees
to determine their own arrival and departure times within specified limits. For example, an
engineering firm may allow one group of employees to take the 8:00 AM to 6:00 PM schedule,
another group takes the 9:00 AM to 6:00 PM schedule, and another takes the 10:00 AM to 7:00
PM schedule.

An alternative to this arrangement is the adaption of the forty-hour work in four days
allowing the employee to choose a "day-off'.

An innovation of a popular bank in Makati is the hiring of part-time tellers to work four
hours a day from Monday to Friday.

There are certain benefits that are offered by flexible work schedules, although it is not
appropriate for all situations. Nevertheless, the engineer manager must decide when it is
applicable,
 Family Support Services. Employees are oftentimes burdened by family obligations like
caring for children. Progressive companies provide day care facilities for children of employees.
A multinational company in far flung Davao province has even opened an elementary and a high
school within the plantation site.

Sabbaticals. A sabbatical leave is one given to an employee after a certain number of years
of service. The employee is allowed to go on leave for two months to one year with pay to give
him time for family, recreations, and travel.

It is expected that when the employee returns for work, his motivation is improved.

QUESTIONS FOR REVIEW AND DISCUSSION

1. Why is motivating relevant to the job of the engineer manager?
2. Are motivation techniques applicable to engineers? Cite examples.
3. When Maslow insinuated that needs are hierarchical, what does he mean?
4. What factors are associated with employee satisfaction and dissatisfaction?
5. What are expectancies and valences? How do they affect performance?
6. What is meant by goal setting? What are the components of the goal setting model?
7. How may an individual be motivated through job design?
8. How may rewards be classified?
9. In what specific activities may employees participate?
10. What benefits are made possible under flexible work schedules?

SUGGESTED ITEM FOR RESEARCH

1. List down the financial and nonfinancial benefits given to employees by an engineering
firm of your choice.

Case 7. BATANGAS POLYTECHNIC COLLEGE: The Morning After

Engineer Felicidad Lazard, a mechanical engineering graduate of Adamson University,

has been operating in the past five years an auto parts supply in Kumintang Clays, Batangas City.
It is a lucrative business she inherited from her father.
Four years ago, she started teaching on a part-time basis at the Batangas Polytechnic
College. After a year, she became a full-time faculty member of the college of engineering. She
attended to her auto parts business after her official hours at the school.
 Miss Lazaro's dedication to her duties earned her the chairmanship of the Mechanical
Engineering Department. When her boss, the dean, was offered a good paying job abroad, he
resigned. Miss Lazaro was named the new dean of the College of Engineering.

Miss Lazaro feels that even if she is offered a job anywhere, she cannot accept it because
other concern for her business. This made her also think that she must take her new job as
dean, seriously.

Miss Lazaro’s first concern is to recruit well-qualified engineers to fill up the slots left by five
faculty members who resigned. An advertisement for the vacancies was made. After a few
weeks of waiting, only ten applications were for carded to her. Nine of the applicants were new
graduates and have no job experience of any kind. The tenth applicant is a newly retired
government employee with no teaching experience.

Miss Lazaro slowly realized that there are good engineers in the area but they are not
attracted by the prospect of teaching engineering subjects. Miss Lazar° is also aware that even
those that are currently employed by the school are only waiting for a good job offer from other
institutions.
Miss Lazaro was mildly shocked when her assistant showed her the enrollment statistics
of the College of Engineering, In the past five years, a steady 10% increase in the number of
students was noted, last year, there was a 16% increase.

Just yesterday, Engineer Lazaro was approached by two engineering professors, one a
department chairman, and the other, a senior faculty member. They were requesting for a
year's leave of absence. Because nobody at the moment could take their place, Engineer Lazard
disapproved their requests. Engineer Lazard was given the information that the two will take
jobs in another company on a one-year trial basis. If prospects are good, they will resign from
the school.

After having been informed of the disapproval of their request for leave, the two
professors filed their irrevocable resignations the next morning.

Engineer Lazaro is now faced with two serious problems:

1. formulating an immediate solution to the short-age of teachers in her area of concern;

and

2. keeping the incumbent ones satisfied with their jobs.

Engineer Lazaro is now contemplating how she will survive this crisis.
CHAPTER 8

LEADING

There are times when in spite of great difficulties, jobs are needed to be done, projects
are needed to be finished on time and services are needed to be provided. Employees in the
production lines tend to be irritated by delays in the arrival of necessary production materials
and supplies. Workers complain when difficult jobs are assigned to their units. When calamities
strike, employees of public works agencies need more than wages to complete assigned tasks as
quickly as possible. These and other difficulties found in the workplaces provide sufficient
reasons for poor productivity. The situations cited require managers with effective leadership.

There are many instances, however, when the ill effects of whatever shortcomings
happen. They seriously affect the performance of workers. Effective leadership tends to
neutralize such difficulties. Good working conditions, however, cannot overcome the
disadvantages of bad leadership. These are proven by many cases which occurred in the past
and even in modern times.

Successful firms regard the leadership skill requirement as a high priority concern. Big
companies like Warner Lambert Philippines, Shell, Fuji-Xerox, and Daewoo are seriously
involved in training their managers to become effective leaders.

Engineer managers, in whatever management level they happen to be, are not
exempted from the problem of effective leadership. If this is really so, then they must be
concerned with the management function of leading.

WHAT IS LEADING?
WHAT IS LEADING?

Leading is that management function which “involves influencing others to engage in the
work behaviors necessary to reach organizational goals.” The definition indicates that a person
or group of persons tasked with managing a group must assume the role performed by leaders.
While leading refers to the function, leadership refers to the process.

HOW LEADERS INFLUENCE OTHERS

Engineer managers are expected to maintain effective work forces. To be able to do so,
they are required to perform leadership roles. Leaders are said to be able to influence others
because of the power they possess. Power refers to the ability of a leader to exert force on
another.

Bases of Power

The power possessed by leaders may be classified according to various bases. They are as
follows:

1. legitimate power
2. reward power
3. coercive power
4. referent power
 5. expert power

Legitimate Power. A person who occupies a higher position has legitimate power over
persons in lower positions within the organization. A supervisor, for instance, can issue orders to
the workers in his unit, Compliance can be expected.

Reward Power. When a person has the ability to give rewards to anybody who follows
orders or requests, he is said to have reward power. Rewards may be classified into two
forms; material and psychic.

Material rewards refer to money or other tangible benefits like cars, house and lot, etc.
Psychic rewards consist of recognition, praises, etc.

Coercive Power. When a person compels another to comply with orders through threats or
punishment, he is said to poses coercive power. Punishment may take the form of demotion,
dismissal, withholding of promotion, etc.

Referent Power. When a person can get compliance from another because the latter would
want to be identified with the former, that person is said to have referent power.

Expert Power. Experts provide specialized information regarding their specific lines of
expertise. This influence, called expert power, is possessed by people with great skills in
technology,

The expert power exercised by environmental scientists was enough to force governments
throughout the world to pass legislations favorable to environmental protection.

THE NATURE OF LEADERSHIP

Leadership may be referred to as the “process of influencing and supporting others to

work enthusiastically toward achieving objectives.” Leadership is expected of any manager in
charge of any unit or division.

One cannot expect a unit or division to achieve objectives in the absence of effective
leadership. Even if a leader is present, but if he is not functioning properly, no unit or division
objectives can be expected to be achieved.
Traits of Effective Leaders
There are certain leadership traits identified by researchers and which may be useful in
developing effective leaders. These traits are as follows:
1. a high level of personal drive
2. the desire to lead
3. personal integrity
4. self-confidence
5. analytical ability or judgment
6. knowledge of the company, industry or technology
7. charisma
8. creativity
9. flexibility

Personal Drive. Persons with drive are those identified as willing to accept responsibility,
possess vigor, initiative, persistence, and health, Drive is a very important leadership trait
because of the possibility of failure in every attempt to achieve certain goals_ if a chosen way to
reach a goal is not successful, a leader finds another way to reach it, even if it precedes a
succession of failed attempts. This will, of course, require a high level of personal drive from the
leader.
An example of a person with a high level of personal drive is Paul Mediarito, plant director
of the Polo plant of San Miguel Corporation between 1992 and 1994. He was instrumental in
radically changing the problem-riddled Polo plant to a world-class brewery with modern
technology and a work force with a new attitude. How he was able to prove himself as a leader
with enough drive is a feat worth emulating.
The Desire to Lead. There are some persons who have all the qualifications for leadership,
yet they could not become leaders because they lack one special requirement: the desire to
lead.

Even if they are forced to act as leaders, they will not be effective because their efforts will
be half-hearted. Leaders with a desire to lead will always have a reservoir of extra efforts which
can be used whenever needed.

Personal Integrity. A person who is well-regarded by others as one who has integrity
possesses one trait of leader. One who does not have personal integrity will have a hard time
convincing his subordinates about the necessity of completing various tasks, If this is the case,
the leader will, then, resort to "exercising his authority and getting things done entirely by the
use or threat of use of the coercive powers vested in him by virtue of the rank and position he
occupies in the hierarchy.” If this happens, the economic and emotional costs will be too high to
be maintained for a desirable length of time. As it is, the better option is to have personal
integrity.
 According to V.K. Saraf, integrity means and includes “honesty, honour, incorruptibility,
rectitude, righteousness, uprightness, and similar virtues.”

Self-Confidence. The activities of leaders require moves that will produce the needed
outputs. The steps of conceptualizing, organizing, and implementing will be completed if
sustained efforts are made. For the moves to be continuous and precise, self-confidence is
necessary.

McKinsey and company found in a study they conducted that leaders of mid-sized, high
growth companies were “almost inevitably consummate salesmen who radiate enormous
contagious self-confidence.”
Wess Roberts was very precise when he declared the following as one of the traits of a good
leader.
“A chieftain cannot win if he loses his nerve. He should be self-confident and self-reliant and
even if he does not win, he will know he has done his best."
Analytical Ability. Leaders are oftentimes, fated with difficulties that prevent the completion
of assigned tasks. A subordinate, for instance, may have a record of continually failing to
produce the needed output. A leader with sufficient skill to determine the root cause of the
problem may be able to help the subordinate to improve his production.
The ability to analyze is one desirable trait that a leader can use to tide him over many
challenging aspects of leadership.
Knowidege of the Company, Industry or Technology. A leader who is well-informed about his
company, the industry where the company belongs, and the technology utilized by the industry,
will be in a better position to provide directions to his unit.

A company, for example, may be the industry leader because it satisfies the need of its
particular market, i.e., providing quality products at affordable prices. When a competing firm is
fast catching up with the leader, and the leader's managers know this, they will better serve the
interest of their company,

Charisma. When a person has sufficient personal magnetism that leads people to follow his
directives, this person is said to have charisma. Great personalities in history like Napoleon
Bonaparte, Julius Caesar, Adolf Hitler, George Washington, Elvis Presley and others are said to
possess charisma, This characteristic was greatly responsible for whatever accomplishments
they achieved.

When used properly, charisma will help the leader in achieving his goals. With some
adjustments, subordinates may be expected to do their tasks willingly.

Creativity. Ronnie Millevo defines creativity as the ability to combine existing data,
experience, and preconditions from various sources in such a way that the results will be
subjectively regarded as new, valuable, and innovative, and as a direct solution to an identified
problem situation.”

As leaders are tasked to provide solutions to problems besetting their particular units or
divisions, creativity will be a very useful trait. Problems are oftentimes, complex and
challenging, and if they are, the leader will need all the creative abilities he has.

Flexibility. People differ in the way they do their work, One will adapt a different method
from another person's method, A leader who allows this situation as long as the required
outputs are produced, is said to be flexible.

There is wisdom in being flexible. It allows the other means of achieving goals when the
prescribed manner is not appropriate.

Leadership Skills

Leaders need to have various skills to be effective. They are:

1. technical skills
2. human skills, and
3. conceptual skills.

These skills are used in varying degrees at different management levels (Figure 8.1).
Figure 8.1 Leadership Skills and Their Use at Various Management Levels

Technical Skills, These are skills a leader must possess to enable him to understand
and make decisions about work processes, activities, and technology. Technical skill is the
specialized knowledge needed to perform a job. When a leader has the technical skill related
to his area of responsibility, he will be more confident in performing his functions. The
engineer manager, for instance, must be able to perform engineering jobs, if he wants to
maintain a motivated work force.

The engineer manager of a construction firm must have sufficient technical skills to
undertake construction works. The manager of an electrical engineering firm most possess
the skill to install and maintain electrical facilities and equipment.

Human Skills. These skills refer to the ability of a leader to deal with people, both inside
and outside the organization. Good leaders must know how to get along with people, motivate
them, and inspire them.

Apart from motivating, human skills include coaching, communicating, morale building,
training and development help and supportiveness, and delegating.

Conceptual Skills. These skills refer to “the ability to think in abstract terms, to see how
parts fit together to form the whole." A very basic requirement for effective implementation is a
clear and well-expressed presentation of what must be done. A leader without sufficient
conceptual skills will foil to achieve this

BEHAVIORAL APPROACHES TO LEADERSHIP STYLES

Those in positions of leadership exhibit a pattern of behavior that is unique and different
from other patterns. This total pattern of behavior is called leadership style.

There are several approaches used in classifying leadership styles. They are as follows:

1. According to the ways leaders approach people: to motivate them,

2. According to the way the leader uses power.
3. According to the leader's orientation towards task and people.

Ways Leaders Approach People

There are two ways, a leader may approach people to motivate them. They are: (1)
positive leadership and (2) negative leadership.
Figure 8.2 Behavioral Approaches to Leadership Styles

positive
leadership

autocratic

participative

BEHAVIORAL
free-rein
APPROACH

employee
orientation

task
orientation

When the leader's approach emphasizes rewards, [he style used is positive leadership. The
reward may be economic, like an increase in monthly salary, or it may be noneconomic like membership
in an advisory committee.

When punishment is emphasized by the leader, the style is said to be negative

leadership. The punishment may take the form of reprimand, suspension, or dismissal.

Leaders, sometimes, alternately use positive and negative leadership depending on the
characteristics of the individual subordinates.

Ways Leaders Uses Power

Leadership styles also vary according to how power is used. They are as follows: (1)
autocratic, (2) participative, and (3) free-rein.
 Autocratic Leaders. Leaders who make decisions themselves, without consulting
subordinates are called autocratic leaders. Motivation takes the form of threats, punishment,
and intimidation of all kinds.

The autocratic style is effective in emergencies and when absolute followership is

needed. An example is a civil engineer in charge of constructing a temporary bridge over one
that has been currently damaged.

The disadvantages of autocratic leadership is that the leader “receives little, if any,
information and ideas from his people as inputs into his decision-making."

Participative Leaders. When a leader openly invites his subordinates to participate or

share in decisions, policy-making and operation methods, he is said to be a participative leader.

The advantage of participative leadership is that it generates a lot, of good ideas.

Another advantage is the increased support for decisions and the reduction of the chance that
they will be unexpectedly undermined.

The disadvantage of participative leadership is that it is time-consuming and frustrating

to people who prefer to see a quick decision reached.

Free-Rein Leaders. Leaders who set objectives and allow employees or subordinates
relative freedom to do whatever it takes to accomplish these objectives, are called free-rein
leaders. They are also referred to as laissez-faire leaders. This leadership style is most applicable
to certain organizations manned by professionals like doctors iii d engineers. An example is the
engineering department of a university which is headed by the dean,
If free-rein leadership fits the situation, there is full managerial delegation resulting to
optimum utilization of time and resources. This happens because many people are motivated to
full effort only if given this kind of free-rein.
The weakness of free-rein leadership is that there is very little managerial control and a
high degree of risk. If the leader does not know well the competence and integrity of his people
and their ability to handle this kind of freedom, the result could be disastrous.

Leaders Orientation Toward Tasks and People

Leaders may be classified according to how they view tasks and people. Consequently, a
leader may either be: (1) employee oriented or (2) task oriented.
 Employee Orientation. A leader is said to be employee-oriented when he considers
employees as human beings of "intrinsic importance and with individual and personal need” to
satisfy.
Task Orientation. A leader is said to be task-oriented if he places stress on production
and the technical aspects of the job and the employees are viewed as the means of getting the
work done.

CONTINGENCY APPROACHES TO LEADERSHIP STYLE

The contingency approach is “an effort to determine through research which managerial
practices and techniques are appropriate in specific situations.” The various contingency
approaches are as follows:

1. Fiedler's Contingency Model

2. Hersey and Blanchard's Situational Leadership Model
3. Path-Goal Model of Leadership
4. Vroom’s Decision Making Model

Fiedler's Contingency Model

According to Fred Fiedler, "leadership is effective when the leader's style is appropriate
to the situation.”

The situational characteristics is determined by three principal factors:

1. the relations between leaders and followers
2. the structure of the task, and
3. the power inherent in the leader

The situational characteristics vary from organization to organization. To be effective, the

situation must fit the leader. If this is not so, the following may be tried:
fit the leader. If this is not so, the following may he tried.:14
1. Change the leader's trait or behaviors.
2. Select leaders who have traits or behaviors fitting the situation.
3. Move leaders around in the organization until they are in positions that fit them.
4. Change the situation.

Hersey and Blanchard Situational Leadership Model

The situational leadership model developed by Hersey and Blanchard suggests that the
most important factor affecting the 8eleetion of a leader's style is the development (or
maturity) level of subordinate." The leader should match his or her style to this maturity level.
 Maturity has two components:

1. job skills and knowledge, and

2. psychological maturity.

Blanchard and others elaborated on the leadership style appropriate for the various
maturity level of subordinates. They are as follows:

Style 1: Directing — is for people who lack competence but are enthusiastic and committed.
They need direction and supervision to get them started.

Style 2: Coaching — is for people who have some competence but lack commitment. They
need direction and supervision because they're still relatively inexperienced. They also new
support and praise to build their self-esteem, and involvement in decision-making to restore
their commitment.

Style 3: Supporting — is for people who have competence but lack of confidence or
motivation. They do not need much direction because of their skills, but support is necessary to
bolster their confidence and motivation.

Style 4: Delegating — is for people who have both competence and commitment. They are
able and willing to work on a project by themselves with little supervision or support.

Figure 8.3 Development Stage of Subordinates and Recommended Leadership Style

DEVELOPMENT STAGE
1. Low ability + low willingness
2. Low ability + high willingness
3. High ability + low willingness
4. High ability + high willingness
DEVELOPMENT STAGE
RECOMMENDED STYLE
Style 1 - DIRECTING - structure, control, and
supervise
Style 2 - COACHING - direct and support
Style 3 - SUPPORTING - praise, listen, and
facilitate
Style 4 - DELEGATING - turn over responsibility
for day-to-day decision-making

Path-Goal Model of Leadership

The path-goal model of leadership espoused, by Robert J. House and Terence R.
Mitchell, stipulates that leadership can be made effective because leaders can influence
subordinate's perceptions of their work goals, personal goals, and paths to goal attainment.
 By using the path-goal model, it is assumed that effective leaders can enhance
subordinate motivation
1. clarifying the subordinate's perception of work goals,
2. linking meaningful rewards with goal attainment, and
3. explaining how goals and desired rewards can be achieved.

The path-goal process is shown in Figure 8.4.

Figure 8.4 The Path-Goal Process

appropriate goals
are established

Leader provides
assistance on
employee path
toward goals

employee becomes
satisfied and motivated
and they accept the
leader

effective both employees and

performance organization better
occurs reach their goals
 Leadership Styles. The leadership styles which may be used by path-goal proponents are as
follows:

1. Directive leadership — where the leader focuses on clear task assignments, standards of
successful performance, and work schedules.
2. Supportive leadership — where subordinates are treated as equals in a friendly manner
while striving to improve their well-being.
3. Participative leadership — where the leader consults with subordinates to seek their
suggestions and then seriously considers those suggestions when making decisions.
4. Achievement-oriented leadership — where the leader set challenging goals, emphasize
excellence, and seek continuous improvement while maintaining a high degree of
confidence that subordinates will meet difficult challenges in a responsible manner.

Vroom's Decision-Making Model

Vroom's model of leadership is one that prescribes the proper leadership style for various
situations, focusing on the appropriate degrees of delegation of decision-making authority.

Five distinct decision-making styles are identified under the Vroom model. Two of them are
autocratic, two others are consultative, and one is group directed,
The Vroom model, shown in Figure 8.5, may be useful as a guide for the leader. It may also
be helpful as a training guide.

Figure 8.5 Alternative Decision Making Styles in the Vroom’s

Model
SYMBOL DECISION-MAKING STYLE DEGREE OF SUBORDINATE
PARTICIPATION
AUTOCRATIC LEADER

A-1 Leader solves the problem or makes the None

decision himself using available information.

A-2 Leader obtains necessary information from Low

subordinates, then decides.

CONSULTATIVE LEADER

C-1 Leader approaches subordinates Moderate

individually getting their ideas then makes
decision.
 C-2 Leader shares the problem with Moderate
subordinates as a group, obtaining their
collective ideas and suggestions, then
decides.

GROUP DIRECTED

G-2 Leader shares the problem with High

subordinates as a group. Lets the group
generate and evaluate alternative solutions,
and then collectively decides.

QUESTION FOR REVIEW AND DISCUSSION

1. What is leading? Why is it important to the engineer manager?
2. How do leaders influence others?
3. What is meant by referent power? Give an example of a person with referent power.
4. Why is it important for a leader to have the desire to lead"? What happens if the said desire is
not present?
5. What is meant by "charisma"? Is it a necessary ingredient for leadership?
6. What is meant by 'human skills"? How may these skills help the leader?
7. How is positive leadership different from negative leadership?
8. What are free-rein leaders? When is free-rein leadership appropriate?
9. When the situation does not fit the leader, what options do management have?
10. What leadership styles may be used by path-goal proponents?

SUGGESTED ITEM FOR RESEARCH

1. Identify an engineer of your choice. Describe his leadership style, Are there important
changes that have to he made in his style? What are those? List down the proposed
character change applicable.

Case 8. BUENAVISTA ELECTRIC COOPERATIVE, INC.,: Masquerade

Right after Engineer Oscar Pascua finished his electrical engineering course at FEATI
University in 1985, he was hired as an employee. of the National Electrification Administration
(NEA). lie was assigned to handle jobs in the various units of NEA until his promotion to Chief
Planning Officer in 1994. His main function was to supervise the planning activities of his unit.
Three engineers and two other employees reported directly to him. His performance was rated
very satisfactory.

Engineer Pascua attended training sessions of various kinds including those for
management_ He finished his course in 1996.
When the position of general manager of the Buenavista Electric Cooperative, Inc, (BECI)
became vacant in January 1996, he was nominated by NEA. He got the post in March 1996.
Aware of the many problems besetting the cooperative, he immediately went to work.

When Engineer Pascua called the key officers of the cooperative to a meeting, he was appraised
of the following:
1. that the price of electricity charged to BECI's customers is the fifth highest in the
country;
2. that 25 percent of the electricity service provided by MCI is lost every month and cannot
be accounted for;
3. requisitions for supplies and materials are served after delays of as long as three
months;
4. some employees of the co-operative do not report regularly for work;
5. the increasing amount of uncollected accounts.
Three days after the meeting, he recommended to the board of directors the following:
174
1. the dismissal from the service of employees not regularly reporting for work;
2. salary increases of up to 20 percent for every employee on the payroll;
3. the hiring of eight additional employees; and
4. the formation of a team to investigate and recommend measures to minimize “system
loss”.

All his recommendations were approved by the board, after which Engineer Pascua signed
all the necessary memoranda to implement his programs. He made regular inspections of the
activities of the various units of the cooperative.

During the first week of March 1997, he convened the key officers for an evaluation of the
past year's activities. The following points were made clear to him:

1. No reduction in the price of electricity could be extended to BECI's customers because

no reduction in the overall cost of doing business was achieved.
2. Instead of reducing the 25 percent system loss, it even went up to 26 percent.
3. There was no improvement in the requisition of supplies and materials, Delays still reach
three months.
4. There is a new set of employees who do not report regularly for work.
5. The amount of uncollected accounts increased from P3.8 million to P4.2 million .

Engineer Pascua concluded that in spite of the granting of salary increases requested by
the rank and file, no subsequent improvement in services was registered, He is now considering
more drastic measures but he is not sure if it is the right thing to do. In addition, he is also
aware that there are some employees who are qualified and dedicated to their jobs.
9 CONTROLLING

 What is Controlling?
 Importance of Controlling
 Steps in the Control Process
 Types of Control
 Components of Organizational Control Systems
 Strategic Control Systems
 Identifying Control Problems
 Chapter 9

CONTROLLING
The long-term existence of many companies, most often, is placed in jeopardy when
some aspects of their activities go out of control. Consider the following examples:

1. A news report indicated that the fire which destroyed the ₱800 million
Superferry 7 luxury ship on March 26, 1997 was caused by illegal connections
made on its electrical system. If this is true, the losses could be attributed to
inadequate management control.
2. The tragedy that happened at the Ozone Disco in March 18, 1997 clearly
manifested management’s lack of control over the day-to-day operations of the
firm. Even the failure to detect earlier the violations in the Building Code spells
lack of effective government control.
3. The management of a telephone company could not stop the unauthorized use
of lines assigned to many of its subscribers. Customers become angry when they
are billed for calls they never made.
The examples presented constitute a very small percentage of unwanted occurrences
that happen every day in the business world. Apart from the destruction of lives and property,
normal business operations are hampered causing discontinuities in employment and the
provision of products and services. These could not have happened if only adequate controls
were instituted.

WHAT IS CONTROLLING
Controlling refers to the “process of ascertaining whether organizational objectives have
been achieved; if not, why not; and determining what activities should then be taken to achieve
objectives better in the future.” Controlling completes the cycle of management functions.
Objectives and goals that are set at the planning stage are verified as to achievement or
completion at any given point in the organizing and implementing stages. When expectations
are not met at scheduled dates, corrective measures are usually undertaken.

IMPORTANCE OF CONTROLLING
When controlling is properly implemented, it will help the organization achieve its goal
in the most efficient and effective manner possible.
 Deviations, mistakes, and shortcomings happen inevitably. When they occur in the daily
operations, they contribute to unnecessary expenditures which increase the cost of producing
goods and services. Proper control system, for instance, if not totally eliminates losses in
inventory.

The importance of controlling may be illustrated as it is applied a typical factory. If the

required standard daily output for individual workers is 100 pieces, all workers who do not
produce the requirement are given sufficient time to improve; if no improvements are
forthcoming, they are asked to resign. This action will help the company keep its overhead and
other costs at expected levels. If no such control is made, the company will be faced with
escalating production costs, which will place the viability of the firm in jeopardy.

STEPS IN THE CONTROL PROCESS

The control process consists of four steps, namely:

1. establishing performance objectives and standards

2. measuring actual performance
3. comparing actual performance to objectives and standards, and
4. taking necessary action based on the results of the comparisons.
Establishing Performance Objectives and Standards

In controlling, what has to be achieved must first be determined. Examples of such

objectives and standards are as follows:

1. Sales targets – which are expressed in quantity or monetary terms;

2. Production targets – which are expressed in quantity or quality;
3. Worker attendance – which are expressed in terms of rate or absences;
4. Safety record – which are expressed in number of accidents for given periods;
5. Supplies used – which are expressed in quantity or monetary terms for given periods.
Once objectives and standards are established, the measurement of performance will be
facilitated. Standards differ among various organizations. In construction firms, project
completion dates are useful standards. In chemical manufacturing firms, certain pollution
measures form the basis for standard requirements.

After the performance objectives and standards are established, the methods for measuring
performance must be designed. Every standard established must be provided with its own
method for measurement.
Figure 9.1 Steps in the Control Process

ESTABLISH PERFORMANCE
OBJECTIVES AND
STANDARDSSENDER

MEASURE ACTUAL
PERFORMANCEdev
elops idea

Do nothing
DOES ACTUAL
PERFORMANCE
MATCH THE Yes
STANDARDS?

No

TAKE
CORRECTIVE
ACTION

Measuring Actual Performance

There is a need to measure actual performance so that when shortcomings occur,
adjustments could be made. The adjustments will depend on the actual findings.

The measuring tools will differ from organization to organization, as each have their own
unique objectives. Some firms, for instance, will use annual growth rate as standard basis, while
other firms will use some other tools like the market share approach and position in the
industry.
Comparing Actual Performance to Objectives and Standards
Once actual performance has been determined, this will be compared with what the
organization seeks to achieve. Actual production output, for instance, will be compared with
the target output. This may be illustrated as follows:

A construction firm entered into a contract with the government to construct a 100-
kilometer road within ten months. It would be, then, reasonable for management to expect at
least 10 kilometers to be constructed every month. As such, this must be verified every month,
or if possible, every week.

Taking Necessary Action

The purpose is comparing actual performance with the desired result is to provide
management with the opportunity to take corrective action when necessary.

If in the illustration cited above, the management of the construction firm found out that
only 15 kilometers were finished after two months, then, any of the following actions may be
undertaken:

1. hire additional personnel;

2. use more equipment; or
3. require overtime.

TYPES OF CONTROL
Control of three distinct types, namely:

1. feedforward control
2. concurrent control, and
3. feedback control.
Figure 9.2 Types of Control and Their Relation to Operations

PRE-
Feedforward
OPERATIONS
Control
PHASE

ACTUAL Feedforward
OPERATIONS Control
PHASE

POST
Feedforward
OPERATIONS
Control
PHASE

Feedforward Control
When management anticipates problems and prevents their occurrence, the type if
control measure undertaken is called feedforward control. This type of control provides the
assurance that the required human and nonhuman resources are in place before operations
begin. An example is provided as follows:

The manager of a chemical manufacturing firm makes sure that the best people are
selected and hired to fill jobs. Materials required in the production process are carefully
checked to detect defects. The foregoing control measures are designed to prevent wasting
valuable resources. If these measures are not undertaken, the likelihood that problems will
occur is always present.

Concurrent Control
When operations are already ongoing and activities to detect variances are made,
concurrent control is said to be undertaken. It is always possible that deviations from standards
will happen in the production process. When such deviations occur, adjustments are made to
ensure compliance with requirements, information on the adjustments are also necessary
inputs in the pre-operation phase.
 Examples of activities using concurrent control are as follows:

The manager of a construction firm constantly monitors the progress of the company’s
projects. When construction is behind schedule, corrective measures like the hiring of
additional manpower are made.

In a firm engaged in the production and distribution of water, the chemical composition
of the water procured form various sources is checked thoroughly before they are distributed to
the consumers.

The production manager of an electronics manufacturing firm inspects regularly the

outputs consisting of various electronics products coming out of the production time.

Feedback Control
When information is gathered about a completed activity, and in order that evaluation
and steps for improvement are derived, feedback control is undertaken. Corrective actions
aimed at improving future activities are features of feedback control.

Feedback control validates objectives and standards. If accomplishments consist only of

a percentage of standard requirements, the standard may be too high or inappropriate.

An example of feedback control is the supervisor who discovers that continuous

overtime work for factory workers lowers the quality of output. The feedback information
obtained leads to some adjustment in the overtime schedule.

COMPONENTS OF ORGANIZATIONAL CONTROL SYSTEMS

Organizational control systems consist of the following:

1. strategic plan
2. the long-range financial plan
3. the operating budget
4. performance appraisals
5. statistical reports
6. policies and procedures
Strategic Plans

A strategic plan (discussed in Chapter 3) provides the basic control mechanism for the
organization. When there are indications that activities do not facilitate the accomplishment of
strategic goals, these activities are either set aside, modified or expanded. These corrective
measures are made possible with the adoption of strategic plans.
The Long-Range Financial Plan

There planning horizon differs from company to company. Most firms will be satisfied
with one year. Engineering firms, however, will require longer term financial plans. This is
because of the long lead times needed for capital projects. An example is the engineering firm
assigned to construct the Light Rail Transit (LRT) within three years. As such, the three -year
financial plan will be very useful.

As presented in Chapter 3, the financial plan recommends a direction for activities. If the
goal does not appear to be where there firm is headed, the control mechanism should be made
to work.

The Operating Budget

An operating budget indicates the expenditures, revenues, or profits planned for some
future period regarding operations. The figures appearing in the budget addresses used as
standard measurements for performance.

Performance Appraisals

Performance appraisal measures employee performance. As such, it provides employees

with a guide on how to do their jobs better in the future. Performance appraisals also function
as effective checks on new policies and programs. For example, if a be equipment has been
acquired for the user of an employee, it would be useful to find out if it had a positive effect on
his performance.

Statistical Reports

Statistical reports pertain to those that contain data on various developments within the
firm. Among the information weigh may be found in a statistical report pertains to the
following:

1. labor efficiency rates

2. quality control rejects
3. accounts receivable
4. accounts payable
5. sales reports
6. accident reports
7. power consumption report
Figure 9.3 shows a sample statistical report.

Policies and Procedures

 Policies refer to “the framework within which the objectives must be pursued.” A
procedure is “a plan that describes the exact series of actions to be taken in a given situation.”

An example of policy is as follows:

“Whenever two or more activities compete for the company’s attention, the
client takes priority.”

An example of a procedure is as follows:

“Procedure in the purchase of equipment:

1. the concerned manager forwards a request for purchase to the purchasing

officer;
2. the purchasing officer forwards the request to top management for approval;
3. when approved, the purchasing officer makes a canvass of the requested item; if
disapproved, the purchasing officer returns the form to the requesting manager;
4. the purchasing officer negotiates with the lowest complying bidder.”
Figure 9.3 A Sample Statistical Report

MORNING STAR CHEMICAL CORPORATION

Power Consumption Report

For the First Quarter 1997

By Department (in KWH)

Department January February March Total

A 1,000 1,100 1,200 3,300

B 900 1,400 1,010 3,310

C 1,180 1,650 1,200 4,030

D 500 1,100 600 2,200

E 600 455 632 1,687

Total 4,180 5,705 4,642 14,527

Prepared by:

CECILIA AGPALASIN

Chief

Accounting Division

It is expected that policies and procedures laid down by management will be followed.
When they are breached once in a while, management is provided with a way to directly inquire
on the deviations. As such, policies and procedures provide a better means of controlling
activities.

STRATEGIC CONTROL SYSTEMS

To be able to assure the accomplishment of the strategic objectives of the company,

strategic control systems become necessary. These systems consist of the following:

1. financial analysis
 2. financial ratio analysis
Financial Analysis

The success of Most organizations depends heavily on its financial performance. It is just
fitting that certain measurements of financial performance be made so that whatever
deviations from standards are found out, corrective actions may be introduced.

A review of the financial statements will reveal important details about the company's
performance. The balance sheet contains information about the company's assets liabilities,
and capital accounts. Contrasting the current balance sheet with previous ones may reveal
important changes, which, in turn, provide clues to performance.

The income statement contains information about the company's gross income,
expenses, and profits. When also compared with previous years' income statements, changes in
figures week help management determine if it did well.

Figures 9.4 and 9.5 stressed samples of financial statements.

Financial Ratio Analysis

Financial ratio analysis is a more elaborate approach used in controlling activities. Under
this method, one account appearing in the financial statement is paired with another to
constitute a ratio. The really well be compared with a required norm which is usually related to
what other companies in the industry have achieved, or what the company had achieved in the
past. When deviations occur, expansions are sought in preparation for whatever action is
necessary. Financial ratios may be categorized into the following types:

Figure 9.4 A Sample Balance Sheet Statement

MORNING STAR CHEMICAL CORPORATION

Balance Sheet Statement

As of December 31, 1997

(₱000)

Current assets
Cash ₱ 415
Marketable 1,000
Accounts receivable 3,062
 Inventory 1,980
Prepaid expenses 123
Total current ₱ 6,580
Noncurrent assets
Gross plant and equipment ₱ 11,500
Accumulated depreciation (2,550)
Other assets and intangibles 50
Total assets ₱15,580

Current liabilities
Account payable ₱ 1,594
Notes payable 2,210
Accrued salaries and wages 63
Accrued taxes 174
Current portion of long-term debt 220
Total current ₱ 4,621
Noncurrent liabilities
Bank term loan 500
Mortgage 1,355
Deferred income tax 1,783
Total noncurrent ₱ 3,638
Stockholders’ equity
Common stock (par value is ₱1.00) 4,000
Pain-in surplus 1,513
Retained earnings 2,168
Total stockholders ₱ 7,681
Total liabilities and stockholders’ equity ₱15,580

Figure 9.5 A Sample Income Statement

MORNING STAR CHEMICAL CORPORATION

Income Statement

For the Year Ending December 31, 1997

(₱000)
Net sales ₱ 12,250
Cost of goods sold 8,820
Gross profit ₱ 3,430
Operating expenses
Selling 673
Administrative 653
Depreciation and amortization 600
Operating profit 1,504
Interest expense 350
Profit before taxes 1,154
Taxes 462
Net profit ₱ 692

Common dividends ₱ 429

1. liquidity
2. efficiency
3. financial leverage
4. profitability
Liquidity Ratios. These ratios assess the ability of a company to meet its current obligations.
The following ratios are important indicators of liquidity:

1. Current ratio— This shows the extent to which current assets of the company can cover
its current liabilities. The formula for computing current ratio is as follows:
Current ratio = current assets/current liabilities
2. Acid-test ratio — This is a measure of the firm's ability to pay off short-term obligations
with the use of current assets and without relying on the sale of inventories? The
formula is as follows.
Acid-test ratio = current assets — inventories/current liabilities

Efficiency Ratios. These ratios show how effectively certain assets or liabilities are being
used in the production of goods and services. Among the more common efficiency ratios are:

1. Inventory turnover ratio — This ratio measures the number of times an inventory is
turned over (or sold) each year. This is computed as follows:
Inventory turnover ratio = cost of goods sold/inventory
 2. Fixed asset turnover — This ratio is used to measure utilization of the company's
investment in its fixed assets, such as its plant and equipment. w The formula used is as
follows:
Fixed asset turnover = net sales/net fixed assets

Financial Leverage Ratios. This is a group of ratios designed to assess the -balance of
financing obtained through debt and equity sources. Some of the more important leverage
ratios are as follows:

1. Debt to total assets ratio — This ratio shows how much of the firm's assets are financed
by debt. It may be computed by using the following formula:
Debt to total assets ratio = total debt/total assets
2. Times interest earned ratio= profit before tax + interest expense
interest expense

Profitability Ratios. These ratios measure how much operating income or net income a
company is able to generate in relation to its assets, owner’s equity, and sales. Among the more
notable profitability ratios are as follows:

1. Profit margin ratio — This ratio compares the net profit to the level of sales. The formula
used is as follows:
Profit margin ratio = net profit/net sales
2. Return on assets ratio — This ratio shows how much income the company produces for
every peso invested in assets. The formula used is as follows:
Return on assets ratio = net income/assets
3. Return on equity ratio — This ratio measures the returns on the owner’s investment. It
may be arrived at by using the following formula:
Return on equity ratio = net income/equity

IDENTIFYING CONTROL PROBLEMS

Recognizing the need for control is one thing, actually implementing it is another. When
operations become complex, the engineer manager must consider useful steps in controlling.
Kreitner mentions three approaches:

1. executive reality check

2. comprehensive internal audit
3. general checklist of symptoms of inadequate control

Executive Reality Check

Employees at the frontline often complain that management imposes certain
requirements that are not realistic. In a certain state college, for instance, requests for purchse
of classroom materials and supplies take last priority. This is irregular because requests of such
kind must be of the highest priority considering that the organization is an educational
institution. Ironically, because certain officers of the nonacademic staff have direct access to the
president, their purchase requests almost always get top priority. Later on, when the president
made an inspirational speech on quality teaching, many members of the faculty just shrugged
their shoulders and listened passively.

One school, the Central Luzon State University, provides a good example on how the
executive reality check may be exercised. It requires its executives to handle at least one subject
load each. What the executives will experience in the classroom will make him more responsive
in the preparation of plans and control tools.

The engineer manager of a construction firm could, once in a while, perform the work of
one of his laborers. In doing so, he will be able to see things that he never sees inside the
confines of his air-conditioned office. Because the said action exposes the engineer manager to
certain realities, the term "executive reality check" is very appropriate.

Comprehensive Internal Audit

An internal audit is one undertaken to determine theefficiency and effectivity of the
activities ofan organization. Among the many aspects of operations within the organization, a
small activity that is not done right may continue to be unnoticed until it snowballs into a full-
blown problem.

An example is the resignation of an employee after serving the company for 15 years.
After one week, another employee with ten years of service also resigned. Both were from the
same department. If after another week, a third employee is resigning, a full investigation is in
order. Even if the source of the problem is identified, it may already have caused considerable
losses to the organization. A comprehensive internal audit aims to detect dysfunctions in the
organization before they bring bigger troubles to management.

Symptoms of Inadequate Control

If a comprehensive internal audit cannot be availed of for some reason, the use of a
checklist for symptoms of inadequate control may be used.

Kreitner has listed some of the common symptoms as follows:

1. An unexplained decline in revenues and profits.

2. A degradation of service (customer complaints).
3. Employee dissatisfaction (complaints, grievances, turnover).
4. Cash shortages caused by bloated inventories or delinquent accounts receivable.
 5. Idle facilities or personnel.
6. Disorganized operations (work flow bottlenecks, excessive paperwork).
7. Excessive costs.
8. Evidence of waste and inefficiency (scrap, rework).
It must be noted that behind every symptom is a problem waiting to be solved. Unless
this problem is clearly identified, no effective solution may be derived. Nevertheless, problems
are easily recognized if adequate control measures are in place.

QUESTIONS FOR REVIEW AND DISCUSSION

1. Why is controlling a very important management function?
2. What is controlling? Is it applicable to the day- to-day activities of the engineer
manager?
3. Why is the establishment of performance object- ives and standards an important step
in the control process?
4. Compare and contrast the three distinct types of control.
5. How do strategic plans provide a basis for control?
6. What are policies? In what ways do they facilitate control?
7. When the engineer manager reviews the finan- cial statements of the company under
his super- vision, what benefits does he derive?
8. What are financial ratios? How may they be categorized?
9. What is measured in the debt to total assets ratio? How may it be computed?
10. Do you consider "idle facilities or personnel" as a symptom of inadequate control? Why
or why not?
Case 9. GOOD MUSIC BROADCASTING CORPORATION:
Ebb Tide

Engineer Frederick Panganiban was reading the advertising sales report handed to him
by his assistant. The report contains information consolidated from the ten radio stations
owned and operated by Good Music Broadcasting Corporation (GMBC). These stations are
located in the various parts of the country.

GMBC headquarters and sales office are located in Makati. GMBC derives income from
advertisements lodged by companies like San Miguel Corporation, Ayala Life, and others. The
sales office receives the cassette tapes and written text containing the advertising messages of
the client companies.

The tapes are meant to be played at regular intervals in all of the ten radio stations
operated by GMBC. The written text is an alternate advertising form read by the radio
announcers at regular intervals. An advertising message does not exceed one minute. The
advertisers are billed depending on the frequency of exposure of their messages.

Each station is managed by a station manager who reports directly to Engineer

Panganiban, the general manager. The stations are allowed to accept local advertisements
subject to availability of slots after accommodating the national advertisers.

A certain portion ofthe advertising income is credited to the account of the individual
stations depending on the assignments sent to them by the GMBC headquarters. The total
advertising income of a station consists of the credited account from the head office plus
whatever income from local advertisers is derived.

Engineer Panganiban is now reviewing the consolidated sales report. He wants some
improvement in operations so that the overall income will increase. He feels that the sales
report is useful, but he believes some other data may help him make a better decision.
Exhibit A

GOOD MUSIC BROADCASTING CORPORATION

Consolidated Advertising Income

For the Three-Year Period, 1995, 1996 and 1997

(P000)

Station Advertising Income

1995 1996 1997

1. Dagupan ₱ 15,450 ₱ 16,998 ₱ 17,038

2. Santiago 12,338 11,465 10,308
3. Cabanatuan 10,440 12,444 14,486
4. San Pablo 8,998 7,676 6,493
5. Naga 11,048 12,121 8,788
6. Dumaguete 11,540 10,001 9,494
7. Tacloban 12,490 12,500 12,606
8. Cebu 20,465 22,030 24,848
9. Davao 16,370 17,017 18,644
10. Zamboanga 13,466 12,506 11,897
Total ₱132,595 ₱134,758 ₱134,602
10 MANAGEMENT PRODUCTION AND
SERVICE OPERATIONS

 What Operations Is
 What Operations Management Is
 Operations and the Engineer Manager
 Types of Transformation Process
Manufacturing Processes
Service Processes
 Important Parts of Productive Systems
 Chapter 10

MANAGING PRODUCTIONS AND

SERVICE OPERATIONS
Organizations are designed mainly to produce products or services. If these
organizations must survive and grow, the operations function must be undertaken in the most
economical manner possible. As most companies are expected to make profits, any activity,
including those for operations must be managed to contribute to the accomplishment of such
objectives.

WHAT OPERATIONS IS
Operations refers to "any process that accepts inputs and uses resources to change
those inputs in useful ways." As shown in Figure 10.1, the inputs include land, labor, capital, and
entrepreneurship. The transformation process converts the inputs into final goods or services.

Examples of final goods and services are as follows:

1. Industrial chemicals like methylene chloride, borax powder, phosphoric acid, etc.,
which are produced by chemical manufacturing firms;
2. Services like those for the construction of ports, high-rise buildings, roads,
bridges, etc., which are produced by constructions firms;
3. Electrical products like transformers, circuit breakers, switch gears, power
capacitors, etc., which are produced by electrical manufacturing firms;
4. Electronic products like oscilloscope, microwavetests systems, transistors, cable
testers, etc. which are produced by electronics manufacturing firms;
5. Mechanical devices like forklifts, trucks, loaders, etc. , which are produced by
manufacturing firms;
Figure 10.1 The Production Process
INPUTS TRANSFORMATION OUTPUTS
PROCESS

Land
Equipment
Labor Products
Procedures
Capital Services
Technology
Entrepreneurship
 6. Engineering consultancy services like those for construction management and
supervision, project management services, etc., which are produced by
engineering consultancy firms.

WHAT OPERATIONS MANAGEMENT IS

Operations is an activity that needs to be managed by competent persons. Aldag and
Stearns accurately defined operations management as “the process of planning, organizing, and
controlling operations to reach objectives efficiently and effectively.” As the terms "planning",
"organizing", and "controlling" have already been discussed in the previous chapters,
elaborations on the terms efficiency" and "effectiveness" will be made.

Efficiency is related to "the cost of doing something. or the resource utilization involved "
When a person performs a job at lesser cost than when another person performs the same job,
he is more efficient than the other person.

Effectiveness refers to goal accomplishment. When one is able to reach his objectives,
say produce 10,000 units in one month, he is said to be effective.

Operations management must be performed in coordination with other functions like

those for marketing and finance. Although the specific activities of the operations divisions of
firms slightly differ from one another, the basic function remains the same, i.e., to produce
products or services. Figures 10.2 and 10.3 show typical responsibilities of the operations
divisions of two different firms.

OPERATION AND THE ENGINEER MANAGER

The engineer manager is expected to produce some output at whatever management
level he is. If he is assigned as there manufacturing engineer, his function is "to determine and
define the equipment, told, and processes required to concert the design of the desired product
into treasury in an efficient manner."

The engineer in charge of operations in a construction firm is responsible for the

construction of whatever bridge or road his company has agreed to put up. He is required to do
it using the least-expensive and the easiest methods.

The engineer, as operations manager, must find ways to the production of quality goods
or services and the reduction of costs in his department.

The typical operations manager I'd one with several years of experience in the
operations division and possesses an academic background on engineering.
Figure 10.2 Organization Chart of a Manufacturing Firm

TOP
MANAGEMENT

PRODUCTION/OPERATIONS FINANCE/ACCOUNTING MARKETING

Facilities Disbursement/credits Sales promotion
Construction Accounts receivable Advertising
Maintenance Accounts payable Sales
Production and inventory control General ledger Market research
Scheduling Funds management
Material control Money market
Quality assurance and control International exchange
Procurement Capital requirements
Manufacturing Stock issue
Tooling Bond issue and recall
Fabrication
Assembly
Engineering/design
Product development and design
Detailed product specifications
Industrial engineering
Efficient use of machines, space
and personnel
Process Engineering
Development and installation of
production tools, equipment and
processes
Figure 10.3 Organizational Chart of a Construction Firm

PRESIDENT

Vice President Vice President Vice President

for for Finance & for
Operations Administration Marketing

Manager, Accounting Sales

General
Construction

Manager,
Advertising
Construction Cashier
Equipment

Manager, Human
Steel Resources
Construction

TYPES OF TRANSFORMATION PROCESS

The engineer manager must have some knowledge of the various types of
transformation process. They are as follows:

1. Manufacturing processes
a. job shop
b. batch flow
c. worker-paced line flow
 d. machine-paced line flow
e. batch/continuous flow hybrid
f. continuous flow
2. Service processes
a. service factory
b. service shop
c. mass service
d. professional service

MANUFACTURING PROCESSES
Manufacturing processes are those that refer to the making of products by hand or with
machinery.

Job Shop. Ajob shop is one whose production is “based on sales orders for a variety of
small lots.” Job shops are very useful components of the entire production effort, since they
manufacture products in small lots that are needed by, but cannot be produced economically by
many companies. Depending upon the customer's needs, a job shop may produce a lot
consisting of 20 to 200 or more similar parts.

Job shops produce custom products, in general. products may be manufactured within a
short notice. The equipment used are of the general-purpose type.

The type of layout used by job shops is the process layout, where similar machines are
grouped together. The typical size of operation is generally small. Job shops are labor intensive
and machines are frequently idle. Figure 10.4 shows a process flow diagram for job shop.

Batch Flow. The batch flow process is where lots of generally own designed products are
manufactured. It is further characterized by the following:

1. There is flexibility to produce either low or high volumes.

2. Not all procedures are performed on all products.
3. The type of equipment used are mostly for general purpose.
Figure 10.4 Process Flow Diagram for a Job Shop

Inspection
Preparation and
Lathe and
Grouping of Milling Grinding
Work ShippingOU
Materials
TCOMES

4. The process layout is used

5. The operation is labor intensive, although there is less machine idleness.
 6. The size of operation is generally medium-sized.
Examples of factories using the large batch flow are wineries, scrap-metal reduction plants,
and road-repair contractors.

Worker-Paced Assembly Line. An assembly line refers to a production layout arranged in a

sequence to accommodate processing of large volumes of standardized products or services.
Shown in Figure 10.6 is a diagram of the work flow in an assembly line.

The quality and quantity of output in a worker-paced assembly line depends to a great
extent to the skill of the labor utilized. Examples of worker-paced assembly lines are food marts
like McDonalds and Shakeys.

The worker-paced assembly line is characterized by the following:

1. The products manufactured are mostly standardized.

2. There is a clear process pattern.
3. Specialized equipment is used.
4. The size of operation is variable.
5. The process is worker-paced.
6. The type of layout used is the line flow.
7. Labor is still a big cost item.
Machine-Paced Assembly Line. This type of production process produces mostly standard
products with machines playing a significant role. Among its other features are as follows:

1. The process is of clear, rigid pattern.

2. Specialized type of equipment is used.
3. The line flow layout is used.
4. Capital equipment is a bigger cost item than labor.
 Figure 10.5 Batch Flow Process for a Large Manufacturer of Suits

Reproducing Coat shop

Materials Fittingkno
Materials the marker fittingTask
ordering wledge of
receipts and Cutting complexity
storage results (or Skirt shop
Spreading feedback) fittingjob
knowledge
Final
Sleeves and ability
assembly
Subassembly Major matching Pressing
PERFOR and
Subassembly (sleeves with Motivation
Coat shop MANCE
Fronts Major body)Other thru inspection
Motivation
fitting Backs matching Motivation Employee’ Motivation
Thru
Collars Techniques s thru
Job Design
Participati Rewards
Welts, etc. Other
on
subassemblies

Remaining skirt
Serging Warehouse
Skirt shop operationsFittin Pressing and
fitting g inspection matching of to distributor
people to jobs coat and skirt
Outside
pleating
 5. Operation is large.
6. The process is machine-paced.
Figure 10.6 Assembly Line for Production or Service

Station 1 Station 2 Station 3 Station 4 Finished

Raw material Materials Materials Materials Materials item (or
(for customer) and/or and/or and/or and/or completed
labor labor labor labor service)

Examples of machine-paced assembly line are automobile manufacturers like General

Motors and Ford Motors. Shown in Figure 10.7 is an example of a machine- paced assembly line
process.

Continuous Flow. The continuous flow processing is characterized by –“the rapid rate at
which items move through the system.” This processing method is very appropriate for
producing highly standardized products like calculators, typewriters, automobiles, televisions,
cellular phones, etc.

Its other characteristics are as follows:

1. There is economy of scale in production, resulting to low per unit cost of production.
2. The process is clear and very rigid.
3. Specialized equipmentis used.
4. The line flow layout is used.
5. Operations are highly capital intensive.
6. The size of operations is very large.
7. Processing is fast.
Figure 10.7 A Machine-Paced Assembly Line Process:
Automobile Manufacturing

THE BODY
LINE

Paint Shop
Body Assembly
primer (ELPO bath)
floor plan, body side,
finish coat
roof panel positioning
and welding
door hanging
engine enclosure
positioning and
welding
front-end assembly
(e.g., fenders, hood)
metal finishing

Miscellaneous Chassis
Various Trim Line Operations
Subassemblies gas tank and fuel
lines)
Hard Trim Line brake lines assembled
bumpers and other front-end alignment
chrome rear axle mounted
glass wheel mountingaccording to
vinyl tops ways leaders approach people to
air conditioning motivate them
instrument panel
The Motor Cradle Line
dressing of basic motor
with various parts, hoses,
Soft Trim Line and harnesses
seats transmission, fan
floor and ceiling front axles and brakes
covers mating of motor with its
cradle
exhaust system, rear wheel
The Final Chassis Line brake linesaccording to the ways
Fluid filling THE BODY
the leader uses power
under-hood wiring and DROPaccording to
hose connections the leader’s
test of car’s computer orientation toward
diagnostic system Wheel, tires, wheel
tasks and people
start-up testing balancepositive
leadership
 Figure 10.8 Diagram of the Continuous Flow Process of a Paper-Making Company

Digester
Log and chip Woodroom Centrifugal Bleachery
Inventories of Temporary silo s
receiving and debarking cleaners
logs and chips inventories of
weighing and chipping Recovery
various chip
process for
species to temporary
chemicals
storage

Rewinding,
Temporary slittingLeade
Cleaning Paper Machine
storage, Inventory of r identifies
and Wet end: Rollers, Dry end:
additives “parent” logs employee
blending headbox, drying winders,
introduced needs
wire drums slittingLeader
connects rewards with goals
Broke added
Shipping

Figure 10.8 shows a continuous now process diagram of a paper-making factory.

Batch/Continuous Flow Hybrid. This method of processing is a combination of the batch

and the continuous flow. Two distinct layouts are used, one for batch and one for the
continuous flow. The typical size of operation is also very large giving opportunities for
economies ofscale.

Examples of companies using the batch/continuous flow hybrid are breweries, gelatin
producers, and tobacco manufacturers. A simplified production process using the
batch/continuous flow hybrid is shown in Figure 10.9.

Service Processes
Service processes are those that refer to the provision of services to persons by hand or
with machinery.
 Service Factory. A service factory offers a limited mix of services which results to some
economies of scale in operations. This also affords the company to compete in terms of price
and speed of producing the service.

The process layout preferred by the service factory is the rigid pattern of line flow
processing. McDonalds and Shakeys are also examples of service factories.

Service Shop. A service shop provides a diverse mix of services. The layout used are
those for job shops or fixed position and are adaptable to various requirements.

Service shops abound throughout the Philippines. Examples are Servitek and Megashell.
Among the services provided by these shops are car engine tune-up, wheel balancing, wheel
alignment, change oil, etc.

Shown in Figure 10.10 is a diagram of the process flow of a car repair service shop.

Mass Service. A mass service company provides Services to a large number of people
simultaneously. A unique processing method is, therefore, necessary to satisfy this requirement.
To be able to serve many people, mass service companies offer limited mix of services.

The process layout used is typically fixed position where customers move through the
layout. Shown in Figure 10.11 is a diagram of the process flow for sales transactions and
material receipt in a mass service retailing institution.

Figure 10.9 A Simplified Production Process of a Gelatin Manufacturing Company

Using the Batch/Continuous Flow Hybrid

Grinding Mixed
Hide Hide
and batch
Processing aging
mixing aging

Drying Gel Micro

Mixing (powder) blending cutting

Sugar
Water and
and
acid added
flavoring

Packaging
 Figure 10.10 Process Flow of a Car Repair Service Shop

Withdrawal of
parts from
Parts parts
inventory department

Logging in Road test

Writing up Diagnosis Work on
job at by
job ticket Car of car by
dispatch technician
wait problem technician
tower
If car
fails
test

If car
fails Road test by
test management

Car returned
Papers gathered
and customer
on car and sent
payment
to cashier
processed
Figure 10.11 Process Flow for Material Receipt and Sales Transactions in a Mass
Service
MATERIAL RECEIPT

Truck Checking of Delivery to Checking of Storing Filling

delivery paperwork the floor paperwork items paperwork

Any problem
reports filed
SALES TRANSACTIONS

Presenting
Register merchandise to Sale entry Sale Register
opened customer and on register made closed and
closing sale balanced

Credit not
approved
Sales Cycle Repeat

Professional Services. These are companies that provide specialized services to other
firms or individuals. Examples of such firms are as follows.

1. Engineering or management Consulting services which help in improving the plant

layout or the efficiency of a company.
2. Design services which supply designs for a physical plant, products, and promotion
materials.
3. Advertising agencies which help promote a firm's products.
4. Accounting services.
5. Legal services.
6. Data processing services.
7. Health services.
Professional service firms offer a diverse mix of services. There is a lower utilization of
capital equipment compared to the service factory and the service shop. The process pattern
used is very loose. The process layout used is identical to the job shop.

Professional service firms are, oftentimes, faced with delivery problems brought about
by nonuniform demand. Strategies that may be used depending on the situation are as follows:

1. The use of staggered work-shift schedules

2. The hiring of part-time staff.
 3. Providing the customer with opportunity to select the level of service.
4. Installing auxiliary capacity or hiring subcontractors.
5. Using multiskilled floating staff.
6. Installing customer self-service.

IMPORTANT PARTS OF PRODUCTIVE SYSTEMS

Productive systems consist of six important activities as follows:

1. product design
2. production planning and scheduling
3. purchasing and materials management
4. inventory control
5. work flow layout
6. quality control

Product Design
Customers expect that the products they buy would perform according to assigned
functions. A good product design assures that this will be so. Customers avoid buying products
with poor product design. An example is that certain brand of ballpen which fails to write after
one or two days of actual use. This happens because of poor product design.

Product design refers to “the process of creating a set of product specifications

appropriate to demands of the situation.”

Companies wanting to maintain or improve its market share keeps a product design
team composed of engineers, manufacturing, and marketing specialists.

Production Planning and Scheduling

Production planning may be defined as “forecasting the future sales of a given product,
translating this fore- cast into the demand it generates for various production facilities, and
arranging for the procurement of these facilities.”

Production planning is a very important activity because it helps management to make

decisions regarding capacity. When the right decisions are made, there will be less opportunities
for wastages.

Scheduling is the “phase of production control in- volved in developing timetables that
specify how long each operation in the production process takes.” Efficient scheduling assures
the optimization of the use of human and nonhuman resources.
Purchasing and Materials Management
Firms need to purchase supplies and materials required in the various production
activities. The management of purchasing and materials must be undertaken with a high degree
of efficiency and effectiveness specially in firms engaged in high volume production. The wider
variety of supplies and materials needed adds to the necessity of proper managing and
purchasing of materials.

Materials management refers to “the approach that seeks efficiency of operation

through integration of all material acquisition, movement, and storage activities in the firm”

Inventory Control
Inventory Control is the process of establishing andmaintaining appropriate levels of
reserve stocks of goods. As supplies and materials are required by firms in the production
process, these must be kept available when they are needed. Too much reserves of stocks will
penalize the firm in terms of high storage costs and other related risks like obsolescence and
theft. Too little reserves, on the other hand, may mean lost income opportunities if production
activities are hampered. A balance between the two extremes must be determined.

There are ways of achieving proper inventory control. They are as follows:

1. determining reorder point and reorder quantity

2. determining economic order quantity
3. the use of just-in-time (JIT) method of inventory control
4. the use of the material requirement planning (MRP) method of planning and controlling
inventories.

Work-Flow Layout
Work-flow layout is the process of determining the physical arrangement of the
production system. In the transformation process, the flow of work may be done either
haphazardly or orderly.

The job of the operations manager is to assure that a cost-effective work-flow layout is
installed. A good work-flow layout will have the following benefits:

1. Minimize investment in equipment

2. Minimize overall production time.
3. Use existing space most effectively.
4. Provide for employee convenience, safety, and comfort.
5. Maintain flexibility of arrangement and operation
6. Minimize material handling cost.
 7. Minimize variation in types of material-handling equipment
8. Facilitate the manufacturing (or service) process.
9. Facilitate the organizational structure.

Quality Control
Quality control refers to the measurement of products or services against standards set
by the company. Certain standard requirements are maintained by the management to facilitate
production and to keep customers satisfied.

Poor quality control breeds customer complaints, returned merchandise, expensive

lawsuits, and huge promotional expenditures.

QUESTIONS FOR REVIEW AND DISCUSSION

1. What is meant by “operations”? Does the term cover production of farm products?
2. Why is operations management an important activity? Who are qualified to become
operations managers?
3. What are the types of transformation process? In what ways are they similar and
different?
4. What is a job shop? What makes it a useful transformation process?
5. What is the batch flow process? What possible advantages does it offer?
6. What is the worker-paced assembly line? Why is it called as such?
7. Why is the machine-paced assembly line very popular among large corporations?
8. What is a service factory? Provide an example.
9. What types of services are offered by professional service firms? What production
problems-do these firms encounter?
10. What are the important parts of productive systems? Point out the relationships
between these parts.
CASE 10. PRETTY DOVE DEVELOPMENT CORPORATION: I’ll Follow the Boys

It was in December 19, 1990 when Engineer Milagros Abrera founded her own company,
the Pretty Dove Development Corporation (PDDC). The company was able to buy a 51-hectare
farmland along the diversion road in Baliwag, Bulacan. The land was developed into a
residential subdivision with lot sizes ranging from 300 to 450 square meters. Selling began as
early as June 1992.

Before founding PDDC, Engineer Abrera accumulated many years of experience working
with various companies from construction to real estate development. The exposure helped her
in managing the activities of the company. As general manager of PDDC, Engineer Abrera
expanded its operations. Rawlands were acquired in Cabanatuan City and San Jose City in Nueva
Ecija, in Bataan and in Tarlac. The marketing department of the company was able to sell the
developed residential lots as quickly as they should.

Engineer Abrera feels contented as the company. performance was beyond her
expectations. As she was reminiscing her graduation day at the University of the East in March
1968, she remembers the words of her close friend:

“Mila, we have already finished our B.S. in Civil Engineering course. Someday, you and I
may be success- fill, but remember, nothing lasts forever. However, there is something you can
do to delay the inevitable.”

Engineer Abrera suddenly thought that what her company is reaping now may not last
forever. The demand for residential lots may decline or there may be an over- supply of lots
offered for sale.

In a recent meeting of the key officers of the company, the marketing manager hinted
that the company's sales growth may have already reached its peak and recommended that
maybe it is time to consider designing a new product.

After the meeting, Engineer Abrera sank in deep thought thinking of the relevance of a
new product design, After all, when she considered developing residential lots, it was as if she
had a natural feeling that households will require them. Years of observing keenly the market
gave her with sufficient insights on demand and product specifications. Now, she feels so lost in
deciding what moves she should make.
11 MANAGING THE MARKETING FUNCTION

 What is the Marketing Concept?

 The Engineer and the Four P’s of Marketing
The Product
The Price
The Place
The Promotion
 Strategic Marketing for Engineers
Selecting a Target Market
Developing a Market Mix
 Chapter 11

MANAGING THE MARKET FUNCTION

Engineer managers are engaged in the production of tangible or intangible goods. Some
of these engineer managers are directly responsible for marketing the company's products or
services. If he is promoted as general manager, both the production and marketing functions
become his overall concern.

At whatever management level the engineer manager works, he must be concerned

with convincing others to patronize his outputs. If he is the general manager of a construction
firm, he must convince people with construction needs to avail of the services of the company.
If he is the staff officer of a top executive, he must convince his boss to continuously rely on him
regarding the staff services he provides.

If the foregoing statements are true, the engineer manager has a marketing problem. He
needs to under- stand certain concepts related to the marketing discipline.

WHAT IS THE MARKETING CONCEPT?

Marketing is a group of activities designed to facilitate and expedite the selling of goods
and services. The marketing concept states that the engineer must try to satisfy the needs of his
clients by means of a set of coordinated activities. When clients are satisfied with what the
company offers, they continually provide business.

THE ENGINEER AND THE FOUR PIS OF MARKETING

The engineering organization will be able to meet the requirements of its clients (or
customers) depending on how it uses the four P' s of marketing which are as follows:

1. the product (or service)

2. the price
3. the place, and
4. the promotion.

The Product
In the marketing sense, the term “product” includes the tangible (or intangible) item and
its capacity to satisfy a specific need. When a customer buys a car, he is actually buying the
comfortable ride he anticipates to derive from the car. This is not to mention the psychological
benefits attached to the ownership of a car.

The services provided by the engineer manager will be evaluated by the client on the
basis of whether or not his or her exact needs are met. When a competitor comes into the
picture and sells the same type of service, the pressure to improve the quality of services sold
will be felt. When improvement is not possible, “extras” or “bonuses” are given to clients. An
example is the construction company that provides “free estimates” on whatever inquiries on
construction are received.

The Price
Price refers to “the money or other considerations exchanged for the purchase or use of
the product, idea, or service.” Some companies use price as a competitive tool or as a means to
convince the customer to buy.

When products are similar in quality and other characteristics, price will be a strong
factor on whether or not a sale will be made. This does not hold true, how. ever, in the selling of
services and ideas. This is because of the uniqueness ofevery service rendered or every idea
generated.

Figure 11.1 The Engineer Manager and the Four P’s of Marketing

OBJECTIVES VEHICLE RESULT

The Marketing Product

Objectives of the Success
Price
Engineer or
Place
Manager Failure
Promotion

When a type of service becomes standardized, price can be a strong competitive tool.
When a construction firm, for instance, charges a flat 10 percent service fee for all of its
construction services, a competitor may charge a lower rate. Such action, however, will be
subject to whether or not the industry will allow such practice.

The Place
If every factor is equal, customers would prefer to buy from firms easily accessible to
them. If time is of the essence, the nearest firm will be patronized.
 It is very important for companies to locate in places Where they can be easily reached
by their customers. Not every place is the right location for any company.

When a company cannot be near the customers, it uses other means to eliminate or
minimize the effects of the problem. Some of these means are:

1. hiring sales agents to cover specific areas;

2. selling to dealers in particular areas;
3. establishing branches where customers are located;
4. establishing franchises in selected areas.
Manufacturing companies can choose or adapt all of the above-mentioned options,
Service companies like construction firms adapt the modified versions. An example is the
engineer manager of a construction firm who gives commissions to whoever could negotiate a
construction contract for the firm.

The Promotion
When engineer managers have products or services to sell, they will have to convince
buyers to buy from them. Before the buyer makes the purchasing decision, how- ever, he must
first be informed, persuaded, and influenced. The activity referred to, in this case, is called
promotion.

McCarthy and Perreault define promotion as “communicating information between

seller and potential buyer to influence attitudes and behavior.”

There are promotional tools available and the engineer manager must be familiar with
them if he wants to use them effectively These tools are as follows:

1. advertising
2. publicity
3. personal selling
4. sales promotion
Advertising. Nylen defines advertising as “a paid message that appears in the mass
media for the purpose of informing or persuading people about particular products, services,
beliefs, or action.” The mass media referred to include television, radio, magazines, and news.
papers. Ifthe engineering wants to reach a large number of people, he may use any of the mass
media depending on his specific needs and his budget. Each of the public advertising carriers,
i.e., radio, television, magazines, and newspapers, has their own specific audiences and careful
analysis must be made if the engineering manager wants to pick the right one.

An example of an advertising message is shown in Figure 11.2.

 Publicity. The promotional tool that publishes news or information about a product,
service, or ideaon behalf of a sponsor but is not paid for by the sponsor is called publicity. The
mass media is also the means. used for publicity. If the engineer manager knows how to use it,
publicity is a very useful promotional tool. His message may be presented as a news item,
helpful information, or an announcement.

An example of a publicity release is shown in Figure 11.3.

Personal Selling. A more aggressive means of promoting the sales of a product or service
is called personal selling. It refers to the "oral presentation in a conversation with one or more
prospective purchasers for the purpose of making a sale.

Personal selling may be useful to the marketing efforts of the engineer manager. If, for
instance, he is the general manager of a firm manufacturing spare parts, he may assign some
employees to personally seek out spare parts dealers and big trucking companies to carry their
product lines.

Sales Promotion. Any paid attempt to communicate with the customers other than
advertising, publicity, and personal selling, may be considered sales promotion. This includes
displays, contests, sweepstakes, coupons, trading stamps, prizes, samples, demonstrations,
referral gifts, etc.

Contests and sweepstakes are very popular sales promotion tools. An example is shown
in Figure 11.4

Figure 11.2 An Example of an Advertising Message

ALECTO GENERAL TECHNOLOGY

AND

DEVELOPMENT CORPORATION

ENGINEERS•DESIGNERS • CONTRACTOR •SUPPLIER

Computer Facilities
Design and Installation
 Local Area Network-Cabling
Data Communication and
Telecommunication Works

Electrical Wiring

Mechanical and Civil Works

Fiber Optic Cabling installation and

Termination

Supplier of UTP Fiber Optic and

Coaxial Cable

1495 D. Oliman st., Makati City

Tels. 890-2571, 890-2492
890-3604. 890-3607
Fax No. 890-2978

Figure 11.3 An Example of a Publicity Release

NOKIA PRESENTS THE FIRST PHONE DESIGNED FOR LOCAL NEEDS

Manila, July 1, 1997 — Nokia Mobile Phones, the largest European and world's second
largest manufacturer of mobile phones and a world leader in digital technology, has introduced
to the Philippines the Nokia 3810 “Big Face”, the first mobile phone designed specifically for the
needs of the Asia-Pacific cellular market.

“This new design which was inspired by a regional research is another step in our aim to
strengthen our market position”, Martin Fernandez, Nokia Mobile Phones Philippine Country
Manager said.

The Nokia 3810 is a product of extensive regional research and feedback. According to
the research, there is a demand for a design that would easily accommodate longer and more
detailed messages Asians, including Filipinos, are accustomed to. Jagged as Nokia “Big Face”, the
3810 has a larger screen contained in a small and sleek European styled body, making it easier
to read messages. With its unique full graphic display, the Nokia 3810 displays large or small
text, depending on the length of the message. Combined with Nokia's state of the art menu
systems, it is easier to find what you are looking for.

Moreover, Nokia 3810 provides a comprehensive range of features like call

management, memory functions, short message Services, security/code control, optional
controls, data transmission and has the most complete range of accessories.

Nokia Mobile Phones is a part of the Nokia Group, a global telecommunications

company headquartered in Helsinki, Finland. Nokia employs nearly 34,000 people in 45
countries and has Sales of US$8.5 billion in 1996. Nokia can be visited on the world. Wide web
http:/www.nokia.com.

STRATEGIC MARKETING FOR ENGINEERS

Companies, including those managed by engineer managers, must serve markets that
are best fitted to their capabilities. To achieve this end, a very Important activity called strategic
marketing is undertaken.

Under this set-up, the following steps are made:

1. selecting a target market

2. developing a marketing mix

Selecting a Target Market

A market consists of individuals or organizations, or both, with the desire and ability to
buy a specific product or service. To maximize sales and profits, a company has the option of
serving entirely or just a portion of its chosen market. Within markets are segments with
common needs and which will respond similarly to a marketing action. Figure 11.5 shows an
example of the various segments of a given market.

Figure 11.4 An Example of a Company Using Sweepstakes

as a Sales Promotion Tool

GET A BAYANTEL PHONE, CALL LONG DISTANCE, PAY YOUR MONTHLY BILLS AND GET A
CHANCE TO DRIVE AWAY A WINNER!
 BAYANTEL
BMW
5 to drive

THERE HAS NEVER BEEN A TELEPHONE PROMO BIGGER THAN THIS!

NOW, BayanTeI, the phone company that's helping you communicate not tomorrow, but today,
is giving away not one, not two, not even three, but FIVE, brand-new BMW 3 Series model 316
for its telephone subscribers.

IT'S SO EASY TO GET A CHANCE TO WIN! This promo is open to BayanTel TELEPHONE
SUBSCRIBERS in designated BayanTeI franchise areas (see coverage below) only.

ONE: Get a BayanTeI phone and pay your first monthly charges. right away!

Two: Use your BayanTel phone to call anywhere. Better if international and domestic long
distance. Every ₱200 worth of paid charges (over and above the basic installation charge and
first month advanced service) entitles you to one raffle ticket.

THREE: Pay your monthly bills promptly so you can earn more raffle tickets right away.

Get a BayanTel phone now. Get a BMW to drive soon. Just keep on using that BayanTel phone to
call anywhere — more raffle tickets for long distance!

PROMO ENDS DECEMBER 31, 1997

An analysis of the various segments of. the chosen market will help the company make a
decision on whether to serve all or some of the segments. The segment or segments chosen
become the target market.

In selecting a target market, the following steps are necessary:

1. Divide the total market into groups of people who have relatively similar product or
service needs.
2. Determine the profit potentials of each segment.
3. Make a decision on which segment or segments will be served by the company.
As shown in Figure 11.5, a company may choose any or all of the residential, industrial,
and government segments. This decision will depend, however, on the profit potentials of each
segment and the capability of the firm.
 A smaller company may find it most profitable to supply only the construction material
needs of the residential segment. A bigger company, however, may find it more profitable to
perform actual construction in addition to selling construction materials.

Factors Used in Selecting a Target Market. A target market must have the ability to satisfy the
profit objectives of the company. In selecting a target market, the following factors must be
taken into consideration:

1. the size of the market, and

2. the number of competitors serving the market.
The total demand for the product or service in a given area must be determined first if
the company wants to serve that particular market. If there are existing businesses serving the
market, the net demand must be considered, Figure 11.6 illustrates an example of the
relationship between demand and supply of a particular product. The figures presented indicate
that there is still room for another company in the market for telephone lines in Cabanatuan
City.

Developing a Marketing Mix

After the target market has been identified, a marketing mix must be created and
maintained. The marketing mix consists of four variables: the product, the price, the promotion,
and the place (or distribution).

Given a marketing environment, the engineer manager can manipulate any or all
variables to achieve the company’s goals. As such, the quality of the product may be enhanced,
or the selling price made a little lower, or the promotion activity made a little more aggressive,
or a wider distribution area may be covered. Any or all of the foregoing may be undertaken as
conditions warrant.

As shown in Figure 11.7, all marketing activities are focused on the target market.

Figure 11.6 Total Demand and Net Demand as a Guide for Determining Target Market

Telephone Lines in Cabanatuan City

Demand and Supply Situation
1997

Total Demand 150,000 lines

Supply
 Company A 50,000 lines
Company B 30,000 lines
Company C 10,000 lines
Total Supply 90,000 lines
NET UNSATISFIED DEMAND 60,000 lines

Figure 11.7 The Company, The Marketing Mix and the Target Market

THE COMPANY
Product
Price
Place
Promotion Other
Markets

THE
TARGET
MARKET

Other
Markets
Other
Markets

QUESTIONS FOR REVIEW AND DISCUSSION

1. How may the marketing concept be explained? Is it applicable to engineering firms?

2. What is meant by the term “product”?
3. How may the engineer manager meet the threat of a competitor's product?
4. Why is price said to be a strong competitive tool?
5. What are some of the possible measures to make products easily available to
customers?
6. How may the engineer manager convince the buyer or client to patronize the firm?
7. What is advertising? What are the types of advertising media?
8. May the engineer manager use publicity in promo- ting his firm? Cite an example.
 9. In selecting a target market, what must the engineer manager do?
10. What factors must be used in selecting a target market?
Case 11. BUGTAG CHEMICAL CORPORATION: Help

Samuel Bugarin and Antonio Tagorda were classmates at the Chemical Engineering
Department of De la Salle University. After passing the board examinations in 1981, Engineer
Bugarin applied for a job in a chemical manufacturing company. He first worked as an assistant
in the quality control unit. Later, he became chief of the unit. He handled various jobs in the
production department. Because of his good performance, he was promoted to production
manager in 1993.

Engineer Tagorda got a job in 1982 as production planner of Reliance Chemical

Company. In 1990, he was assigned as assistant production manager. When the company's
marketing manager resigned in 1991, he was transferred to the marketing department and was
named as the new marketing manager. His main function was to market the company's
products consisting of synthetic resins, aluminum paste, adhesives, plasticizers, calcium sulfate,
etc. When he assumed his post as marketing manager, the company is already serving a group
of loyal customers. The increasing requirements of these customers also meant additional
orders for the company's products. The company's sales increased even if the number of its
customers did not.

In a class reunion held in April 1997, Samuel and Antonio met and they conversed for
more than three hours. Samuel mentioned that he had started organizing his own chemical
manufacturing firm and he wanted Antonio to join him. Antonio agreed and in a subsequent
meeting decided to divide the work between the two of them. Samuel was to take care of
production and Antonio would handle marketing. They decided to invite an experienced finance
officer and a high school classmate, Edgardo Abuan. He became the company’s finance
manager.

The company was registered as a stock corporation and the capital contribution of the
stockholders were as follows:

Name of the Stockholder Amount of Capital Contribution

1. Samuel Bugarin ₱ 30,000,000

2. Antonio Tagorda 15,000,000
3. Edgardo Abuan 3,000,000
4. Jesus Ualat 1,000,000
5. Rosario Mariano 1,000,000
6. Ausberto Taguinod 1,000,000
7. Francisco Bundoc 1,000,000
 8. Amparo Paragas 1,000,000
9. Andres Nicolas 1,000,000
Total ₱ 54,000,000

The three agreed to produce caustic soda liquid, hydrochloric acid, soda ash, sodium
sulphate, sodium tripolyphoshate, and sulfuric acid. The construction of the company's plant
has already begun in Dasmariñas, Cavite. The company has been named the Bugtag Chemical
Corporation.

Samuel has already started organizing the production department by hiring a production
planner. Antonio is still considering what steps to take in organizing his department. One of his
problems is the lack of information regarding the nature of the market the company must tap.
Also, Antonio is aware of the utmost importance of providing the production department with a
demand forecast for the company's products.
12 MANAGING THE FINANCE FUNCTION

 What the Finance Function Is

 The Determination of Fund Requirements
 Sources of Funds
 The Best Source of Financing
 The Firm’s Financial Health
 Risk Management and Inurance
 Chapter 12

MANAGING THE FINANCE FUNCTION

Engineering firms need funds to finance their operations. To be assured of continuous
supply of funds, there is a need to manage properly the finance function. When funds are made
available in right amounts at the right time, the engineering organization may be expected to
function properly. When funds are not enough to finance planned activities, the risk of failure to
achieve objectives becomes apparent.

The engineer manager must understand that the finance function is a very important
management concern. This is true because without adequate funds it will be difficult, if not
impossible to proceed with the production of products or services, the distribution ofoutput,
research and development, and others.

WHAT THE FINANCE FUNCTION IS

The finance function is an important management responsibility that deals with the
“procurement and administration of funds with the view of achieving the Objectives of
business.”If the engineer manager is running the firm as a whole, he must be concerned with
the determination of the amount offunds required, when they are needed, how to procure
them, and how to effectively and efficiently use them.

In the performance of his duties, the engineer manager, at whatever management level
he is, must do his share in the achievement of the financial objectives of the company.

The finance function is one of the three basic management functions. The other two are
production and marketing.
Figure 12.1 The Finance Function: A Process Flow

DETERMINATION short-term
OF FUND
REQUIREMENTS long-term

short-term
PROCUREMENT
OF FUNDS long-term

short-term
EFFECTIVE AND long-term
EFFICIENT USE
OF FUNDS

THE DETERMINATION OF FUND REQUIREMENTS

Any organization, including the engineering firm, will need funds for the following
specific requirements:

1. to finance daily operations

2. to finance the firm's credit services
3. to finance the purchase of inventory
4. to finance the purchase of major assets

Financing Daily Operations

The day-to-day operations ofthe engineering firm will require funds to take care
ofexpenses as they come. Money must be made available for the payment of the following:

1. wages and salaries

2. rent
3. taxes
 4. power and light
5. marketing expenses like those for advertising, entertainment, travel expenses, telephone
and telegraph, stationery and printing, postage, etc.
6. administrative expenses like those for auditing, legal, services, etc.
Any delay in the settlement of the foregoing expenses may disrupt the effective flow of
work in the company. It may also erode the public’s confidence in the ability of the company to
operate on a long-term basis. Creditors, for instance, may withhold the extension of credit to
the company.

Financing the Firm's Credit Services

It is oftentimes unavoidable for firms to extend credit to customers. If the engineering
firm manufactures products, sales terms vary from cash to 90-day credit extensions to
customers. Construction firms will have to finance the construction of government projects that
will be paid many months later.

When a new chemical manufacturing firm finds difficulty in convincing distributors to

carry their products, a credit extension may solve the problem. A new problem, however, will be
created, i.e., how the credit arrangement will be financed.

Financing the Purchase of Inventory

The maintenance of adequate inventory is crucial to many firms. Raw materials,
supplies, and parts are needed to be kept in storage so they will be available when needed.
Many firms cannot cope with delays in the availability of the required material inputs in the
production process, so these must be kept ready whenever required.

The purchase of adequate inventory, however, will require sufficient funding and this
must be secured.

Sometimes, inventories unnecessarily tie-up large amount of funds. The engineer

manager must devise some means to make sure this situation does not happen.

Financing the Purchase of Major Asset

Companies, at times, need to purchase major assets. When top management decides on
expansion, there will be a need to make investments in capital assets like land, plant, and
equipment.

It is obvious that the financing of the purchase of major assets must come from long-
term sources.
THE SOURCES OF FUNDS
To finance its various activities, the engineering firm will have to make use of its cash
inflows coming from various sources, namely:

1. Cash sales. Cash is derived when the firm sells its products or services.
2. Collection of Accounts Receivables. Some engineering firms extend credit to customers.
When these are settled, cash is made available.
3. Loans and Credits. When other sources of financing are not enough, the firm will have to
resort to borrowing.
4. Sale of assets. Cash is sometimes obtained from the sale of the company's assets.
5. Ownership contribution. When cash is not enough, the firm may tap its owners to
provide more money.
6. Advances from customers. Sometimes, customers are required to pay cash advances on
orders made. This helps the firm in financing its production activities.

Short-Term Sources of Funds

Loans and credits may be classified as short-term, medium-term, or long-term. Short-
term sources of funds are those with repayment schedules of less than one year. Collaterals are
sometimes required by short-term creditors.

Advantages of Short-Term Credits. When the engineering firm avails of short-term

credits, the following advantages may be derived:

1. They are easier to obtain. Creditors maintain the view that the risk involved in short-
term lending is also short-term. Thus, short-term credits are made easily available to
qualified borrowers.
2. Short-term financing is often less costly. Since short-term financing is favored by
creditors, they make it available at less cost.
3. Short-term financing offers flexibility to the borrower. After the borrower has settled his
short-term debt, he may consider other means of financing, if he still requires it. Long-
term financing, in contrast, eliminates this option. He is stuck with the long-term funds
even if he no longer requires it.
Disadvantages of Short-Term Credits. Short-term financing has also some disadvantages.
They are as follows:

1. Short-term credits mature more frequently. This may place the engineering firm in a
tight position more often than necessary. When the frequency of the firm's cash inflows
are more than twelve months apart, the firm could be in serious trouble meeting its
short-term obligations.
2. Short-term debts may, at times, be more costly than long-term debts. When short-term
debts are used to finance long-term expenditures, the frequent renewals, adjustment of
terms, and shop- ping for new sources may prove to be more costly.
Supplies of Short-Term Funds. Short-term financing is provided by the following:

1. trade creditors
2. commercial banks
3. commercial paper houses
4. finance companies
5. factors, and
6. insurance companies.
Figure 12.2 The Firm’s Finances and Cash Flow

CUSTOMERS

LONG-TERM ASSETS LONG-TERM FINANCING

Production Long-term debt
equipment Common stock
Land Retained earnings
Buildings

SALES

ACCOUNTS
RECEIVABLE
INVENTORY

Marketable
CASH Securities

Supplies
Materials
Taxes SHORT- TERM
Salaries FUND RESOURCES
Wages Commercial
Rent banks
Insurance Commercial
paper houses
Finance
companies
Factors
Insurance
companies
 Trade creditors refer to suppliers extending credit to a buyer for use in manufacturing,
processing, or reselling goods for profit. The instruments used in trade credit consist of the
following: (1) open-book credit, (2) trade acceptance, and (3) promissory notes.

The open-book credit is unsecured and permits the customer to pay for goods delivered
to him in a specified number of days. For financially weak engineering firms, the open-book
credit is a very useful source of financing.

The trade acceptance is a time draft drawn by a seller upon a purchase payable to the
seller as payee, and accepted by the purchaser as evidence that the goods shipped are
satisfactory and that the price is due and payable. Under the terms granted in the trade
acceptance, the seller allows the buyer to pay within a certain number of days. The
arrangement provides the buyer some relief in financing his short-term requirements.

A promissory note is an unconditional promise in writing made by one person to

another, signed by the maker, engaging to pay, on demand or at a fixed or deter- minable future
time, a certain sum of money to, or to the order of, a specified person or to bearer.

Commercial banks are institutions which individuals or firms may tap as source of short-
term financing. Commercial banks grant two types of short-term loans: (1) those which require
collateral, and (2) those which do not require collateral. Examples of commercial banks granting
short- term loans are City Trust, Premier Bank, and Land Bank

Commercial paper houses are those that help business firms in borrowing funds from
the money market. Under this scheme, the business firm in need of funds issues a commercial
paper, which is a short-term promissory note, generally unsecured, and issued by large,
established firms. The commercial paper is sold to investors through the commercial paper
house.

Business finance companies are financial institutions that finance inventory and
equipment of almost all types and sizes of business firms. Examples of finance companies in the
Philippines are Philacor Credit Corporation and Consolidated Orix Leasing and Finance
Corporation.

Factors are institutions that buy the accounts receivables of firms, assuming complete
accounting and collection responsibilities. Engineering firms which maintain sizable amounts of
accounts receivable may avail of the services of factors when they are in dire need of cash.
 Insurance companies are also possible sources of short-term funds. Industry reports
indicate that insurance companies in the Philippines regularly make investments in short-term
commercial papers and promissory notes.

Long-Term Sources of Funds

There are instances when the engineering firm will have to tap the long-term sources of
funds. An example is when expenditures for capital assets become necessary. After the amount
required is determined, a decision has to be made on the type of source to be used.

Long-term sources of funds are classified as follows:

1. long-term debts
2. common stocks, and
3. retained earnings.
Long-term debts are sub-classified into term loans and bonds.

Term Loans. A term loan is a “commercial or industrial loan from a commercial bank,
commonly used for plant and equipment, working capital, or debt repayment.” Term loans have
maturities of 2 to 30 years.

The advantages of term loans as a long-term source of funds are as follows:

1. Funds can be generated more quickly than other long-term sources.

2. They are flexible, i.e., they can be easily tailored to the needs of the borrower.
3. The cost ofissuanceis low compared to other long- term sources.
Bonds. A bond is a certificate of indebtedness issued by a corporation to a lender. It is a
marketable security that the firm sells to raise funds. Since the ownership of bonds can be
transferred to another person, investors are attracted to buy them.

The type of bonds are shown in Figure 12.3.

Common Stocks. The third source of long-term funds consists of the issuance of common
stocks. Since common stocks represent ownership of corporations, many investors are placing
their money in them.

When properly utilized, common stocks can be cheaper and more stable sources of long-
term funds. Unlike bonds and term loans which must be repaid at a certain date, common
stocks do not have maturity and repayment dates.

Retained Earnings. Retained earnings refer to “corporate earnings not paid out as
dividends.” This simply means that whatever earnings that are due to the stock- holders of a
corporation are reinvested. Because these retained earnings can be used by the firm
indefinitely, they become an important source of long-term financing.
Figure 12.3 Types of Bonds

TYPE OF BOND FEATURE

1. Debentures no collateral requirement

2. Mortgage bond secured by real estate
3. Collateral trust bond secured by stocks and bonds
owned by the issuing
corporation
4. Guaranteed bond payment of interest or principal is
guaranteed by one or more
individuals or corporations
5. Subordinated debentures with an inferior claim over other
debts
6. Convertible bonds convertible into shares of
common stock
7. Bonds with warrants warrants are options which permit
the holder to buy stock of
the issuing company at a
stated price
8. Income bonds pays interest only when earned

In like manner, the sole owner of an engineering firm may decide to reinvest whatever
profits he derives from his business. The same decision may be adapted by the owners of a
partnership.

THE BEST SOURCE OF FINANCING

As there are various fund sources, the engineer manager, or whoever is in charge, must
determine which source is the best available for the firm.

To determine the best source, Schall and Haley recommends that the following factors
must be considered:

1. flexibility
 2. risk
3. income
4. control
5. timing
6. other factors like collateral values, flotation costs, speed, and exposure.

Flexibility
Some fund sources impose certain restrictions on the activities of the borrowers. An
example of a restriction is the prohibition on the issuance of additional debt instruments by the
borrower.

As some fund sources are less restrictive, the flexibility factor must be considered. In
general, however, short-term fund sources offer more flexibility than long- term sources. This is
so because after settling the debt, short-term borrowers may shift to other types of financing.
Long-term borrowers are given this opportunity only after a longer period of waiting.

Risk
When applied to the determination of fund sources, risk refers to the chance that the
company will be affected adversely when a particular source of financing is chosen.

Generally, short-term debt “subjects the borrowing firm to more risk than does financing
with long-term debt.” This happens because of two reasons:

1. short-term debts may not be renewed with the same terms as the previous one, if they
can be renewed at all.
2. since repayments are done more often, the risk of defaulting is greater.

Income
The various sources of funds, when availed of, will have their own individual effects in
the net income of the engineering firm. When the firm borrows, it must generate enough
income to cover the cost of borrowing and still be left with sufficient returns for the owners.

It is possible that the owners were enjoying higher rates of return on their investments
before borrowing was made. The reverse may happen, however, at other times. Nevertheless,
the effects on income must be considered in determining the source of funding to be used.

Control
 When new owners are taken in because of the need for additional capital, the current
group of owners may lose control of the firm. If the current owners do not want this to happen,
they must consider other means of financing.

Timing
The financial market has its ups and downs. This means that there are times when
certain means of financing provide better benefits than at other' times. The engineer manager
must, therefore, choose the best time for borrowing or selling equity.

Other Factors
There are other factors considered in determining the best source of funds. They are as
follows:

1. Collateral values: Are there assets available as collateral?

2. Flotation cost: How much will it cost to issue bonds or stocks?
3. Speed: How fast can the funds required be raised?
4. Exposure: To what extent will the firm be exposed to other parties?

THE FIRM'S FINANCIAL HEALTH

In general, the objectives of engineering firms are as follows:

1. to make profits for the owners;

2. to satisfy creditors with the repayment of loans plus interest;
3. to maintain the viability ofthe firm so that customer will be assured of a continuous
supply of products or services, employees will be assured of employment, suppliers will
be assured of a market, etc.
The foregoing objectives have better chances of achievement if the engineering firm is
financially healthy and has the capacity to be so on a long-term basis.

INDICATORS OF FINANCIAL HEALTH

The financial health of an engineering firm may be determined with the use of three
basic financial statements. These are as follows:

1. Balance sheet— also called statement of financial position;

2. Income statement — also called statement of operations;
3. Statement of changes in financial position.
To be able to determine the financial health ofa firm, the appropriate financial analysis
must be undertaken; A full discussion of financial statements and analysis 'are indicated In
Chapter 9. Examples of balance sheet and income statements are also presented in Chapter 9.
An example of a statement of changes in financial positions is shown in Figure 12.4.

RISK MANAGEMENT AND INSURANCE

The engineer manager, especially those at the top level, is entrusted with the function of
making profits for the company. This will happen if losses brought by improper management of
risks are avoided.

Risk is a very important concept that the engineer manager must be familiar with. Risks
confront people everyday. Companies are exposed to them. Newspapers report on a daily basis
the destruction of life and property. Companies that could not cope with losses are forced to
shut down, according to reports.

Fortunately, the engineer manager is not entirely helpless. He can use sound risk
management practices to avoid the threat of bankruptcy due to losses.

Risk Defined
Risk refers to the uncertainty concerning loss or injury, The engineering firm is faced
with a long list of exposure to risks, some of which are as follows:

1. fire
2. theft
Figure 12.4 A Sample Statement of Change in Financial Position

SILVER LINING ELECTRONICS CORPORATION

Statement of Change in Financial Position
for the Year Ended December 31, 1997
(₱000)

Beginning cash balance ₱ 934

Sources
Net profit from operation ₱ 692
Plus: Depreciation 600
Plus: Increase in deferred
Taxes 771
Funds from operations ₱ 2,063
Increase in accounts payable 583
 Increase in notes payable 517
Increase in accrued salaries
and wages 8
Total Sources ₱ 3,171
Uses
Increase in gross plant ₱ 1,500
Dividends 429
Increase in accounts receivable 1,229
Increase in inventory 280
Increase in prepaid expenses 23
Decrease in accrued taxes 9
Decrease in bank term loan 75
Decrease in mortgage 145
Total Uses ₱ 3,690

Sources - uses = ₱3,171 - ₱3,690 = –₱ 519

Beginning cash + (sources -uses) = ending cash ₱ 415

3. floods
4. accidents
5. nonpayment of bills by customers (bed debts)
6. disability and death
7. damage claim from other parties.

Types of Risk
Risks may be classified as either pure or speculative. Pure risk is one in which “there is
only a chance of loss.” This means that there is no way of making gains with pure risks. An
example of pure risk is the exposure to loss of the company's motor car due to theft. Pure risks
are insurable and may be covered by insurance.

Speculative risk is one in which there is a chance of either loss or gain. This type of risk is
not insurable. An example of a speculative risk is investment in common stocks. If one wants to
make gains in the common stock market, the nuances and intricacies of investments must be
learned and properly applied. Also, operating the engineering firm is a kind of speculative risk. If
profits are expected, then proper management techniques must be used.

What is Risk Management

 Risk management is “an organized strategy for protecting and conserving assets and
people.” The purpose of risk management is “to choose intelligently from among all the
available methods of dealing with risk in order to secure the economic survival of the firm.”

Risk management is designed to deal with pure risks, while the application of sound
management practices are directed towards speculative risks that are inherent and cannot be
avoided.

Methods of Dealing with Risk

There are various methods of dealing with risks. They are as follows:

1. the risk may be avoided

2. the risk may be retained
3. the hazard may be reduced
4. the losses may be reduced
5. the risk may be shifted
A person who wants to avoid the risk of losing a property like a house can do so by
simply avoiding the ownership of one. There are instances, however, when ownership cannot be
avoided like those for equipment, appliances, and materials used in the production process. In
this case, other methods of handling risk must be considered.

Risk retention is a method of handling risk wherein the management assumes the risk. A
planned risk retention, also called self-insurance, is a conscious and deliberate assumption of a
recognized risk. In this case, management decides to pay losses out of currently available funds.
Unplanned risk retention exists when management does not recognize that a risk exists and
unwisely believes that no loss could occur.

Hazards may be reduced by simply instituting appropriate measures in a variety of

business activities. An example is prohibiting unauthorized persons to enter the cashier's office.
This will reduce the hazard of theft. Another example is prohibiting company drivers from taking
alcohol or drugs while on duty. Newspaper reports on the accidental killing of three persons
including Princess Diana is a well-publicized case of drunken driving.

When losses occur in spite of preventive measures, the severity of loss may be limited by
way of reducing the concentration of exposures. Examples of efforts on loss reduction are as
follows:

1. physically separating buildings to minimize losses in case of fire;

2. using fireproof materials on interior building construction;
3. storing inventory in several locations to minimize losses in cases of fire and theft;
 4. maintaining duplicate records to reduce accounts receivable losses;
5. transporting goods in separate vehicles instead of concentrating high values in single
shipments;
6. prohibiting key employees from traveling together; and
7. limiting legal liability by forming several separate corporations.
Another method of handling risk is by shifting it to another party. Examples of risk
shifting are hedging, subcontracting, incorporation, and insurance.

Hedging refers to making commitments on both sides of transaction so the risks offset
each other.

When a contractor is confronted with a contract bigger than his company's capabilities,
he may invite subcontractors in so that some of the risks may be shifted to them.

In a corporation, a stockholder is able to make profits out of his investments but without
individual responsibility for whatever errors in decisions are made by the management. The
liability of the stockholder is limited to his capital contribution.

To shift risk to another party, a company buys insurance. When a loss occurs, the
company is reimbursed by the insurer for the loss incurred subject to the term of the insurance
policy.

Shown in Figure 12.5 is an example of insurance products sold by a company.

Figure 12.5 Examples of Insurance Products Sold by a Company

PEOPLE'S TRANS-EAST ASIA

INSURANCE CORPORATION
Mercantile Insurance Bldg.
Gen. Luna con Beaterio Sts.
Intramuros, Manila
Tel. Nos. 49-12-81 to 85
527-7611 to 15
(connecting all departments)

• FIRE Fire and Allied Perils, Business Interruption

• MARINE Hull Insurance, Shipowner's Liability

Insurance Protection and Indemnity
• CASUALTY Motorcar, Property Floater, Personal
Accident, Comprehensive General
Liability, Money, Security and Payroll,
Cash in Transit, Burglary

• ENGINEERING Contractor's All Risk, Machinery Break-down,

Contractor's Plant and Equipment
All Risks, Erector's All Risks, Boilers and Explosion,
Electronic Insurance,
Consequential Losses

• AVIATION Hull and Liabilities Insurance, Airport Operator

Liability, Hangarkeeper's Liability, Aircraft
Refueling Liability, Pilot's License Insurance,
Pilot/Crew Personal Accident Cover
• BONDS All Kinds of Bonds

QUESTIONS FOR REVIEW AND DISCUSSION

1. What is the finance function? How important is it to the engineering firm?
2. What are the specific fund requirements of firms?
3. What are the various sources of the firm's cash in-flow?
4. What is the difference between short-term and long-term sources of funds?
5. What are the suppliers of short-term funds? Describebriefly each.
6. Describe briefly the long-term sources of funds.
7. How may one determine the best source of financing?
8. How may the financial health of the company be determined?
9. What is meant by “risk?” Why must it be managed properly?
10. Describe briefly the methods of dealing with risks
Case 12. FOUR ACES CONSTRUCTION AND HARDWARE SUPPLY:

Here, There, and Everywhere

In 1964, four girls who were in their fourth year high school at St. Mary’s in Bayombong,
Nueva Viscaya, made a pact that they must be together even after college. The girls consisting
ofGloria Tadino, Rosemarie Ginez, Ligaya Sebastian, and Rosalie Chico were the brightest in the
graduating class. They parted ways in college, however.
 Gloria went on to finish a civil engineering course at the University of San Agustin.
Rosemarie got her industrial engineering course at the University of Manila. Ligaya was awarded
a diploma in sanitary engineering by National University. Rosalie graduated with a business
management degree at St. Paul College.

In 1973, the four were reunited at the birthday party of Gloria. All four were already
working and have good paying jobs. Rosemarie mentioned to her friends that maybe they
should put up a business. All agreed and within a short period, they opened a construction and
hardware supply store in Bayombong. A capital contribution of ₱ 100,000 each was placed in a
common equity fund. The store carried the name Four Aces Construction and Hardware Supply
(FACHS) and Ligaya was assigned as store manager. The operation was successful that after two
years, the firm's value was placed at ₱956,000.

A second store was opened in 1976 at nearby Solano town and was assigned to Gloria.
The operation was also a success. This prompted the four to open another store in Santiago City
under the managership of Rosemarie and a fourth one in San Jose City under the care of
Rosalie.

The company was able to maximize profits. by installing a centralized purchasing system.
As a result, volume discount and credit extensions were granted by the suppliers. The company
was able to institute an effective personnel development program.

By December 1997, FACHS' assets were valued at over ₱ 75 million. The four ladies
realized that an opportunity for expansion exists but they also understand their limitations.
They are aware that they are not getting any younger as all of them are already fifty years old. In
addition, expansion would mean additional funds will be required. Nevertheless, they thought
that it would be nice to allow the business to grow even if they are no longer capable of doing
so. As all of them are already married and have children, the idea was deemed appropriate.

As Gloria, Ligaya, Rosemarie, and Rosalie faced each other in a meeting, they hoped that
options will be brought up by anybody to help them solve their problem.